Stock Preacher

Credit Suisse Group AG switched its preference for government bonds in favor of stocks and raised its estimate for the Standard & Poor’s 500 Index by 14% to 1,050, citing improving economic indicators and earnings. Investors should increase holdings of global equities to “overweight” and reduce government bonds to “benchmark,” reversing a decision made in June, according to London-based global strategist Andrew Garthwaite. The VIX and investment- grade corporate bond spreads have returned to more “normal levels” and this will allow money market funds to buy into the stock market, Garthwaite told clients in a note today. Valuations on equities are “not expensive” and consensus estimates for earnings in the US are now being increased, something which precedes a rising stock market in the subsequent two to three months, he wrote. “Bonds no longer look attractive,” Garthwaite wrote. We expect “a positive macro surprise in the second half of the year. We believe that we are halfway through the first ‘V’ of an upward sloping W-shaped recovery, with a likely peak in the early Q-4.” Goldman Sachs Group Inc.’s David Kostin yesterday increased his estimate for the S&P 500 index, saying the benchmark for US equities will advance 15% from its June 30 level to 1,060 on Dec. 31, an increase from his prior projection of 940.

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The start of Y 2009 Q-2 earnings season begins this week and may be a Key factor for determining how much faith investors will have in an economic recovery. After a rally of as much as 40% for the S&P 500 on expectations the economy will begin to turn around by year end, analysts will hone in on companies’ projections to see if their hopes are corroborated. The light menu of economic data will help keep the spotlight on earnings releases, with bellwethers Alcoa and Chevron posting their quarterly’s. Of even more importance will be any outlook companies give for what they expect to see for the rest of the year. A large US Treasury auction could buoy the market if it shows there is good demand for government debt. Concern that the appetite for debt is waning as the government tries to fund its stimulus efforts was soothed by solid demand in last week’s record US$104B auction of Treasury securities.

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While bank stocks have been battered, it is the sector’s bonds and their spreads over government debt, that could provide early clues of an upturn. “The best news is that non-financial high-grade corporate debt has been behaving a lot better, but financial sector debt needs to be better bid,” said John Haynes, strategist at Rensburg Sheppard in London. He said a directional change in the iBoxx financial index, a benchmark for bonds from financial companies, was crucial. European financial bond prices have fallen almost 17% on average this year, the iBoxx financials index shows, suggesting investors are giving the sector a wide berth. Haynes said he was also watching the Platinum-to-Gold ratio. Platinum has a variety of industrial uses, notably in cars, while Gold is boosted by its safe-haven allure. The ratio of the two metals, in effect a ratio of economic growth expectations to investor fear, has moved decisively in the direction of fear. Platinum prices were double the level of gold in February last year, but now the ratio is close to 1 to 1.”You look at everything and try and work as you used to, said Fortis’ Gijsels. “But should have an open mind and understand that market internals have changed.”

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