Abby Joseph Cohen is a Sr analyst at Goldman Sachs. She is trotted -out from time to time to be head cheerleader and hype things up.  On Thursday, CNBC TV interviewed Abby. She had the impossible job of trying to convince viewers that despite the fact that she sees the US economy slowing in the 2nd half of the year, she still sees the S&P500 index at 1250 – about 9% higher than here by the end of the year.
Here’s my view. The S&P500 either peaked at 1220 a month ago or peaks at 1225 in the next 2-3 weeks as final bits of hope spread across Europe. Then either way, I see the S&P500 dropping to 900-1000 this summer. This is where it was last June-July.
Why would this happen? :
  • there are piles of equity investors ready to hit the eject button after what’s happened in the past month.  Money flowing into bonds is massive.
  • the S&P500 is trading 25% over-priced if you use the same pricing mechanism as Benjamin Graham (the man that trained Warren Buffett).
  • same conclusion if you use the S&P-Case Shiller pricing mechanism.
  • US consumers have spent their refund checks, and have drawn down their savings rate down to the low 2% range. This source of fuel for the US economy is running on empty. Of course, if consumers continue to spend their savings  down to 0%, and if they continue to stop paying their mortgage even if they do have the money, the consumer will continue to support GDP for a few more months. But you see how risky that is and how it will end in tears.
  • the home purchase bribe is over and home prices are heading south again.
  • US gov’t hiring of census workers will help employment numbers for another month, then it will begin adding to the unemployment stats. Employment reports this summer and fall are likely to show initial claims back up in the 10% range as people begin shaking the trees again for jobs and move out of the extended and emergency unemployment claims bucket.
  • It is the month of May. If there was ever a time to “sell in May and stay away” from the stock market, it is now.
If the PIIGS countries manage to control their citizens, then perhaps the S&P500 will approach the 1225 level late this year, after a summer break / correction. If not, 900 and 800 on the S&P500 looks very possible later this year (it is 1135 now).
Then, the big variables kick in.  Later this year, the feds will need to begin some serious unwinding of their extended unemployment benefits program and begin selling some of the $1.25T in Fanny & Freddie bonds. Taxes will be raised everywhere in 2011: US cities, states, counties, nationally  – and all over Europe.  Greece will likely default sometime in 2011 or maybe 2012. You know what happens then.
It is pretty much the best time to be in gold, long short commodity, Treasurys, and short the equity market. Sorry, Abby. I don’t agree with you. But then again, my business is not trying to win investment banking / underwriting business from large corporate clients and hence I don’t need to talk things up.