Dear Bottarelli Research Reader,
Today, I’ll tell you about the worst market call ever.
Believe me, with Abby Joseph Cohen still making forecasts, I had a lot of material to choose from.
But today’s forecast takes the cake.
Below, I’ll share with you Abby’s positively ludicrous claim.
It’s so bad, even her own company doesn’t believe her.
In fact, this might signal the exact top for one critical sector of the U.S. economy.
Because of this, today’s newsletter focuses on how to protect yourself when this sector crashes and burns.
You gotta get a load of this…
Worst Call Ever
You and I both know that there were more than a few cheerleaders who simply couldn’t give up on tech stocks during the crash of 2000.
Jim Cramer, Henry Blodgett, Jack Grubman, and Abby Joseph Cohen were among the worst offenders. They all pitched tech shares as incredible buys long after the writing was clearly on the wall.
These days, Cramer will literally roll on the floor like a dog just to keep you watching his circus sideshow. Blodgett’s “Business Insider” blog is similarly oriented toward “infotainment,” although I will say that he buries some decently interesting stuff under a heap of gossip about Kourtney Kardashian’s sex life.
Grubman is long gone.
That only leaves Ms. Cohen around to play with other peoples’ money. She’s currently listed as Goldman Sach’ s chief equity strategist.
As such, I imagine we ought to take her comments seriously.
But, when she says stuff like this, I laugh so hard coffee starts dripping out of my nose.
In a recent interview with Squawk on the Street, Cohen claimed this…
“All you need to believe is that we will avoid another recession over the next couple of years. And that is indeed our forecast…”
She goes go on to concede that “growth has slowed somewhat,” but she feels that historically low interest rates have made equities a better investment than say, bonds, which now present a higher share of risk after generations of being perceived as safe.
“It’s hard for us to see how bonds can generate the same kind of returns going forward that they have over the last 30 years,” she said.
But equities, on the other hand “seem to be very attractively valued…the longer-term trend is to the upside.”
Frankly, I really can’t think of a more reliable sign of the top than Ms. Cohen’s perennial advice to buy at the top.
So today, I’ll lay out two reasons for you not to buy what Ms. Cohen is selling.
Reason #1: Europe in General (and Spain in Particular)
Whenever you read of a potential Spanish default, you must repeat the following mantra: Spain is not Greece.
Greece’s GDP is $301.08 billion. Greek public debt is about as hard to nail down as a blob of mercury, but I’ve read guesstimates of some $470.4 billion. We now know that Greece was not big enough to actually bankrupt Europe. But, it did drain Europe’s defensive funds. And, it revealed all too clearly the potential penalties for lending to a European country in crisis.
Unfortunately, Europe really needs those defensive funds right now, because Spain is the third largest economy in Europe after Germany and France (fourth if you include the United Kingdom). Its GDP is $1.41 trillion, and its debt might be as high as $1013.34 billion by autumn.
And guess what? Just this week, Spain officially conceded that its economy has slipped into recession (joining the UK, Netherlands, Italy, Denmark, Belgium, Ireland, Portugal, Greece, Slovenia, and the Czech Republic in that dismal club).
If Spain goes down, it will almost undoubtedly drag under the only two remaining European economies capable of attempting support – France and Germany.
How likely is it that Spain will give bond holders a major haircut?
Last week, Standard & Poor’s downgraded Spain’s debt rating by two notches from A to BBB+ (just a step or so above junk).
The next question here has to be this: Who else is holding this risky, “almost junk?”
Considering their crazy thirst for risk, the answer shouldn’t shock you. I’ll tell you who’s holding it in just a moment.
But first, let’s take a look at what’s happening here on the home front.
Reason #2: The U.S.’s “Almost Recession”
Remember when I said that Abby Joseph Cohen’s own company doesn’t see the upside she’s talking about?
On Monday, we got a peek at the latest reading of Goldman Sach’s own proprietary Current Activity Indicator (CAI), which is supposedly superior to the optimistic tripe Washington gins up.
It took a bit of digging, but I came up with an internal GS document that reveals some of the metrics that goes into CAI.
It’s supposed to draw on “24 real activity indicators.” But, the compilers whine that a lot of these figures don’t come out as often as they might like. So, when they don’t have rock solid figures, they simply add guesstimations into the formula.
Here’s a copy of the chart that’s supposed to be guiding GS experts (like Abby Joseph Cohen).
As you can see, the CAI has drifted back into negative numbers. Unfortunately for Ms. Cohen, the CAI has a reliable track record of warning of economic slow-downs and market retracements.
The last time it turned down like this was just ahead of 2011’s midyear, 19% market collapse.
Running into Burning Buildings?
So, on the one hand, we have a broad recession in Europe and a pending “slowdown” here in the States (that could easily slide into a recession).
On the other hand, we have a bunch of American investment bankers that see every burning building as a fire sale full of wonderfully discounted assets.
Just last month, I reported as to how JP Morgan’s Jamie Dimon confessed that he couldn’t resist buying up billions in distressed Spanish assets that now may be drifting toward junk status.
Now, we have Ms. Cohen telling us that she is inclined to ignore her own research department and go long U.S. shares.
I can only draw two possible conclusions: Either they’re all delusional bulls who can only make market upside forecasts, or Dimon and Cohen are lying to us about their portfolios. After all, we all know that certain Wall Street outfits have gotten caught over the past few years recommending the very same assets they were desperately unloading.
The thing is, if we take them at their word, then major American investment banks are stocked to the gills with assets that could turn toxic at any moment.
The Chart Reveals the Truth
Fortunately, I have a couple thousand well-connected Wall Street players I can query as to the truth of the matter.
Together, JPM and GS represent almost 12% of the Financial Select Sector SPDR (XLF – NYSE). And, when we look to that ETF’s chart, we see a dangerous Sell Signal Stack building up.
On the upper chart, we see the six-month rising trend broken. On the lower chart, we see accumulation switch to distribution after RSI signaled that these shares were oversold. Finally MACD has completed some 48% of the final signal in the stack, a confirming Sellers Cross.
Our target prices for the XLF are…
- Probable: $14.07 (-8.58%)
- Reasonable: $13.45 (-12.81%)
- Possible: $12.83 (-16.63%)
Let’s call that first scenario — a bounce off support at $14.07 — the very bullish setup that has Dimon and Cohen so excited.
It’s still way too early to be buying, considering that these shares will be available for a 9% discount by mid-summer.
Frankly, I don’t share their optimism. I suspect we’re on our way to the lower of the three targets, which implies a full 16% re-rating of America’s entire financial sector.
How to Play It
You have three choices here. You can take the conservative route, and look to purge banking stocks from your portfolio.
Or, you can get aggressive and purchase puts against the financial sector. My calculations indicate that a mid-dated, at-the-money XLF put might easily gain 25% to 50% in value by late summer.
Finally, you can also begin picking off the weakest players within the XLF.
Our latest projections indicate that this move could return 100% profits.
We’ll be exploring this tactic in this weekend’s issue of Bottarelli Research LEAPS.