My old friend, partner, renowned economist, and all around great guy, Jeremy Klein, provided a counter point to my most recent blog “Stock Market Commentary 2/25/2011 – My Advice”
In all fairness and in the interest of thoughtful debate, it is only appropriate to publish it as its own blog.
Three other important points about the distinguished Jeremy Klein
- He is a wine connoisseur
- He is known at Goldman Sachs as “The one that got away”
- He is the winner of HFL pick the year end close on the S&P 2010
His response follows:
“To my old friend Jeremy Frommer,
As you know I hold your opinion in the highest regard, you are by far one of the wisest and talented individuals I know, that said, I am not sure I agree with your view. First, crude traded at $85 just prior to Libya. It sold off there, after Egypt calmed down and may do the same when Libya reaches a resolution assuming another major oil producing nation doesn’t fall. Ironically, you argue that consumer is worse off than people think which would imply demand for oil would decrease which would also bring crude back down below $90.
A revised reading on Q4 GDP is not all too relevant as it looks back at chunks of data 5 months old. New Home Sales was disappointing, but much of that was the snap back from the CA tax credit expiring last month. More importantly, the housing sector remains depressed which most everyone agrees with and is priced into market.
Jobless Claims has resumed its downtrend and Thursday’s print was without any seasonal adjustments, so it’s clean. Most
importantly, you ignore the University Michigan number, which now sits on 3-year highs and clearly shows that consumer sentiment is important.
I am also not sure how stocks in general have underperformed the S&P 500 when the latter is an index average.
I am not sure the market is overbought let alone leveraged overbought. The TICK information and open interest in the futures actually imply managers are very nervous and looking to hedge aggressively and quickly at the first sign of trouble. Therefore, we will continue to get sharp 1-3 day sell off such as the one on Jan 28 and this week before grinding back higher as the managers scramble to cover. The increase we have seen in open interest on these sharp down days contradicts greatly what one would expect when coming off 2 1/2 year highs such that we saw panic selling through Thursday afternoon.
Finally, what percentage would you put on Saudi Arabia falling into same malaise as Egypt, Libya, and Tunisia? I am no expert on Middle East, but given monarchy is liked much more than Gadaffi, proactively trying to reform, and the U.S. will do anything in its power to aid the nation in keeping pumps flowing, I would put it at 10%. Earnings on the SPX for 2012 are $110. I think that’s a bit of stretch and will use $105. If oil prices continue to rise, I will use $85 as an estimate as energy names (12% of index and rising) will see solid increases. I will use a 14x forward multiple for the former and a 13x for the latter given additional risk premium for geopolitical uncertainty. Using my aforementioned, yet understandably arbitrary, probabilities yield a year-end level of 1435.
Been tuning in a great deal lately, as Hedge Fund Live has become the top ten go to destinations for a real time look at the markets. I really enjoy the content.
I look forward to hearing your response.
All the Best
Jeremy Klein”
Well J. Klein, you will hear from me soon as I have quite a bit to say. For now I hope our members, readers and listeners enjoy our debate.
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