Moment with Mehrotra - November 2011

Last month, I wrote:
The market wants to believe that Europe should resolve its problems shortly. I have my doubts. The markets have been celebrating the news that there is a plan to come up with a plan about something real. I have been saying that I expect a rally at the end of the year so this may be it. That said, I see significant resistance around the 200-day moving average of about 1275 for the S&P 500 Index.

I remain skeptical that Europe will resolve their problems in the near future. I believe that European sovereign debt issue is here to stay, unless the European Central Bank goes on a major reflation theme. Now with Italy on the forefront of the Euro mess, the European Financial Stability Facility just does not have enough fire-power to clean up the fiasco without a printing press backing them up. Moreover, I also expect that Greece will have no option but to default and possibly exit the Euro. The near future will be a test of the political wills of European officials, as we see how far these politicians will go to save face. I have been indicating that here in the U.S. the Fed will resort to QE3 (Quantitative Easing) sooner or later. They may not call it that, but they will do something that effectively amounts to a quantitative easing. And when it happens, I may call it QE 4, 5 or 6, since it may be a coordinated easing this time. Japan has every incentive to go along with it. Europe should be implementing an easing plan now but they somehow enjoy kicking the coconut down the road (we did not have cans in India). The resident Fed has already demonstrated its willingness to participate by doing it (QE) twice already.

Equity valuations are cheap by historical comparison. Price to Earnings ratios appear reasonable, but can become expensive in the near future if earnings growth starts to weaken. I expect to see this development over the next couple of quarters.

The views represented in this commentary are solely the opinions of Shashi Mehrotra, Chartered Financial Analyst and Chief Investment Officer of Legend Advisory Corporation. The views expressed are not intended to predict or depict the performance of any particular investment. These views are as of October 25, 2011 and are subject to change at any time, without notice, based on market or other conditions.

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