And the Number One Threat to the Market Is...
With the market in exuberant, can't lose bull-mode, we asked a group of our favorite investors, strategists, and economists a simple question: What's the No. 1 threat to the market right now?
Without further throat clearing, here are the answers we got.
A Spanish Flu
"Spain delaying (asking for a bailout) too much, unexpected signs of a slowdown in China, Middle East goes hot." -- Sebastien Galy, SocGen
Falling of the Cliff
"I'd say the Fiscal Cliff. Could cause Rating Agencies to downgrade us. Cause Sequesteration, sparking massive cuts in Defense and Job Losses. More unhappiness with Congress... and while the downgrade (in theory) is UST negative, as happened last year, you saw a huge flight of capital into Treasuries, and the stock market got crushed." -- Dave Lutz, Stifel, Nicolaus
Growth Stops
"Growth ... no final demand. QE [quantitative easing], OMT [outright monetary transactions], etc. do NOTHING to stop the global growth crunch." -- Bob Janjuah, Nomura
An Oil Crisis That Drowns Everything
"The unintended consequence of QE Googolplex is that it lays the ground work (when coupled with the potential for an Israel/Iran confrontation) for a monumental spike in oil prices.
"This has the potential of contributing to a synchronized global economic downturn in 2013 (already global manufacturing is slowing) - as the world's consumers are already bending under the pressure of rising prices for the necessities of life (e.g., food). (The "Screwflation" of the middle class is a recurring theme of mine - wages stagnating as the necessities of life rise in price).
"If I am correct we will see more civil unrest - more riots in the months and year ahead.
"This will be politically and economically destabilizing: I believe the market's lifeblood and its ultimate "fair market" valuation lie importantly with the direction of U.S. corporate profits. 3Q2012 will represent the first drop in S&P earnings in three years. But more important to investors today than the current level of profits is the future trend in profits.
"The bottom up consensus for 2013 S&P profit growth is for gains of at least ten percent, while the top down estimates are at about +5%. However, given the limited effect QE3 will have on the U.S. economy, the current modest and slowing +3.5% nominal U.S. GDP (which implies punk corporate top line sales), the threat of a fiscal cliff in the U.S. at year end, 55 year highs in corporate profit margins, declining and uncertain Chinese economic growth, a deepening recession in Europe (which will likely continue further into next year), the universal signs of a slowdown in manufacturing activity in nearly every other region in the world and the prospects for the aforementioned rise in gasoline prices -- suggest to me that an outside consensus expectation of a decline in corporate profits of as much as 5% is more likely for next year." -- Doug Kass, Seabreeze Capital
Big Trouble in Big China
"Recent signals out of Europe confirm what world-wise people have expected all along -- the aristocratic nexus of government officials, wealthy landholding "rentiers" and other bankers and credit market participants would find a way to preserve the status quo as best they could. In this case, they will do so through a combination of leniency, debt restructurings and printing. This became obvious to all over the last three months.
China is a very different animal, a lie wrapped in a deception cloaked in a propaganda program dragged by an idle cement mixer. There is no roadmap, there is no precedent and there are no rules. Every ongoing datapoint has the government's fingerprints all over it before we get to see it. Economic targets issued by Beijing are treated as though they are actually orders by the millions of government officials in charge carrying them out.
The central planners are well aware that a majority of the time China has lost control of her people historically, it has been as a result of food cost inflation -- and so they remain optimistic they can stoke internal consumer appetites without overstimulating and driving inflation higher.
"Provincial governments, on the other hand, have been funded almost entirely with the taxes from land and real estate development -- and so they yearn for a return to building despite the fact that there simply isn't any demand yet. It would be too easy to expect that simple resumption of growth-oriented policies and stimulus will turn things around so quickly -- instead, it is more likely that 7.5% GDP becomes a best-case scenario for the coming year. This will not have a salutary effect on the developed markets and corporations that are counting on a fast-growing China for the years ahead." -- Josh Brown, The Reformed Broker
Kass Is Right, It's Oil
"Big spike in oil from a crisis in the Mideast." -- David Zervos, Jefferies
No, Not Just Oil
"The DC Beltway crowd and then crude oil..." -- Jeffrey Saut, Raymond James
A Shock from Nigeria
"The scenario that worries me is a geopolitical shock that spikes oil, and does so now, such as to remind people of what happened in 1973/1974, with the Yom Kipur war, when oil went from $3 to $12. I admit to being old enough to remember it. It did so at the same time [former Fed Chair] Arthur Burns was in a very expansive Fed policy mode. In 1973-1974, what the Fed did through monetary policy was to fuel the inflation that occurred in the late 70s and became virulent.
"On the monetary policy side [today], the policy is geared to blunt the force of deflation. The position of the Fed is: We'll deal with inflation later. And that's fine... when there is no shock.
"In a shock, when policy is very stretched, it means the system has no resilience. It's like jumping on a trampoline of cement.
"My worry is, the Northern piece of Nigeria is embroiled in civil war with Islamic extremists. Nigeria is the most important oil producer in the world. Geopolitical risk in Nigeria rises every day. Everyone is ignoring it. I look at Nigeria, and I look at the risk of Islamic extremism in threatening oil production.
"My biggest fear is that we now get hit with an oil price shock... That takes Brent to $150-$160, and that takes gasoline hat to the High $4s or $5.00. That will come coincident with the expiration of the 2% payroll tax. And that plays a very important role here and is being ignored. And these idiots that we elect to represent us feel that it's okay to let a 2% tax break expire... at the same time a consumer shock is underway." -- David Kotok, Cumberland Advisors
From Treasuries to Currencies to Asset Flight
"Near term, I'm watching long term treasuries/DXY. My concern is that the Fed's very aggressive move will lead foreigners to pull out of treasuries/dollar assets over fear that the Fed is actually eager to debase the currrency to spur some growth. In a normal world, I would just watch treasuries, but with the Fed owning close to 40% of longer dated bonds and buying more (through continued Operation Twist), the problem may show up more in currencies DXY. The Fed is working so hard to suppress rates, the problem may not show up there, but should show up in the FX market." -- Peter Tchir, TF Market Advisors
The Fiscal Cliff ... and the Election
"While I don't think the election is nearly as big of a deal as some others, the fiscal cliff most certainly can derail not only the stock market but the economy more generally." -- Dan Greenhaus, BTIG
A Half-Baked Spanish Bailout
"...actually I think the risk is that Europe thinks the OMT is enough and they don't wrap up the fiscal and monetary bailout framework. [Prime Minister of Spain Mariano] Rajoy needs to be compelled to take this for the sake of the whole system.
"QE wouldn't have worked without the TARP, and without banks like Wells Fargo & Company (WFC) having it shoved down their throats. Investors needed assurance that there were no holes. They got that when these banks all bought into the plan, albeit kicking and screaming for some.
"This time - Spain needs to be dragged in. This is the path they're on - they need to buy in. Problem is, they don't want to. The PP is facing a big regional election in Galicia on October 21 and doesn't want to submit to more austerity and oversight before that.
"After that, implementation is the issue. A pan European banking supervision system doesn't just emerge from Mario Draghi's ass, you know. It will take a couple of years." -- Michael Block, Phoenix Partners Group
An Unstoppable Manufacturing Downturn
"There are sorts of 'monstrous events' of a geopolitical nature (oil spike and commodity super-spike [being] the most obvious), but what really scares me is the idea that the global manufacturing downturn just keeps on going down whatever policymakers do and we find ourselves in recession with expensive assets and no clue how to deal with it. That's how the US gets into a mess, how Europe gets right back into crisis and how the UK really gets into trouble. I think we all secretely believe that if you go on doing QE for long enough, Apple (AAPL) spends its cash pile, the capex cycle kicks in and we all live happily ever after, so we assume that even if the road is bumpy we'll be alright. But what if the deleveraging prcess is just much bigger than we think?" -- Kit Juckes, SocGen
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