THIS BULL MARKET HAS THREE LEGS
Cooperman’s bullish outlook is based on three basic beliefs:
1. The U.S. economy is indeed improving. Jeff Immelt of GE is talking about it. Warren Buffett, watching the data from many Berkshire subsidiaries, is also talking about it. Analyst and company surveys are also showing positive signs.
2. The debt problem with the U.S. government and the Federal Reserve is not as bad as most people think. The U.S. government is entering a gigantic carry trade, taking money at very low cost from the scared public and lending it to toxic credits with potential high yield.
3. President Obama will, albeit reluctantly, move to the center in response to the message of the mid-term elections. Government policies will become more friendly toward businesses.
ATTRACTIVE EQUITY VALUATIONS
Equity valuation is also attractive in an absolute sense and relative to interest rates, inflation, and private market value. Continued positive and broad-based earnings surprises, sourced in cost cutting and revenue growth.
SUPPORT FOR THE EURO
Cooperman believes that European Central Bank (ECB) and euro-zone governments will be successful in stabilizing euro-zone capital markets. They simply can’t afford to let the euro falter and cause further instability in global financial markets.
THE THIRD YEAR OF THE PRESIDENTIAL CYCLE
In addition to supporting an extension of all of the Bush income-tax cuts, the president is now suggesting the opportunity for a lower corporate tax rate and is reviewing the constraint on economic growth from various government regulations. History has showed very strong equity-market returns in the third year of the Presidential cycle. The market return has averaged 18.3% in the third year of the presidential cycle since 1948.
INFLATION UNDER CONTROL
Inflation will remain in a sweet-spot with little likelihood of either deflation or problematically accelerating inflation. Treasury-bond market could stay in this range-bound which, in turn, keeps mortgage and corporate-bond-interest rates well contained, benign, and supportive of PEs.
There is a sizable investor liquidity. Individual and institutional investors are still under-investment in equities.
CHINA’S SHOWING SIGNS OF A SOFT LANDING
Economic data and metrics which indicate China has successfully engineered a soft landing to its economy rather than the feared hard landing. Preemptive monetary policy tightening in 2010, with more to come in 2011, has protected the Chinese economy from overheating.
PENT-UP DEMAIND IN CONSUMER, BUSINESS AND HOUSING SECTORS
There are pent-up demands in the consumer sector and people will start buying things as confidence increase. The consumer balance sheet has been improving. Businesses have also built up a pent-up demand for capital expenditures. With increasing business confidence, corporate America will start making capital investments again. There is also pent-up demand in residential investment.
OTHER POSITIVE DEVELOPMENTS
• Better employment conditions are expected.
• Relaxed bank lending standards
• Service sector improvement
• Good money growth and excess liquidity
• Strong M&A activity
POTENTIAL RISKS FOR THE EQUITY MARKET
Cooperman listed the following factors as the potential threats to economic recovery:
• An economy double dip could happen owing to weak home prices and/or the higher energy costs. Based on Cooperman’s calculation, an oil price of $135 could be “problematic.”
• Inflation expectations could worsen and monetary policy could become tighter than expected.
• When QE2 ends, there could be disruptive effects on the Treasury bond market/stock market.
• Sovereign credit risks in Europe could rise if European Central Banks fails to provide the right response.
• Washington fails to address the budget deficit issues in the U.S.
• An overheated China economy could crash into a hard-landing, potentially threatening global economic growth.
• Uncertainties caused by private sector deleveraging and public sector leveraging.
• Heightened global regulation on financial markets could cause uncertainty in capital-markets.
• Differences in currency policy between the U.S. and China could derail the continuing significant reliance of the U.S. on Chinese capital.
• Capital controls imposed by emerging economies to stem the rise in their currencies and protect against asset bubbles could backfire and cause economic instability.
COOPERMAN’S STOCK PICKS
During his lecture at Baruch College, Leon Cooperman also provided a list of favorite stocks:
• Baxter International Inc. (BAX)
• Cisco Systems Inc. (CSCO)
• Coca-Cola Co. (KO)
• Home Depot Inc. (HD)
• International Business Machines (IBM)
• Johnson & Johnson (JNJ)
• McDonald's Corp. (MCD)
• Microsoft Corp. (MSFT)
• Target Corp. (TGT)
• Travelers Cos. Inc. (TRV)
This list shows that Cooperman currently favors quality large cap stocks with a blend of value and growth characteristics.
Brian Zen, PhD, CFA, is founder of Zenway Group, a New York-based investment advisory firm that provides family wealth creation coaching programs and tutoring services to children and their parents. Through newsletters, family learning parties, face-to-face tutoring and online classes, Zenway-certified Financial Tutors teaches children the craft of investing and helps their parents to grow family wealth. Dr. Zen appreciates your questions and feedbacks at: info (at) zenway.com.