It’s Official: The Roubini Stock Rally

Thank you Nouriel Roubini!  There was weakness in equities after more dismal economic data from durable goods and new home sales had stock markets weak all day.  Well, almost all day.  Somehow stocks managed to close up positive on the day after first getting out of the red right after 2:00 PM.  This will seem against the grain, but maybe it was Nouriel Roubini, a.k.a. Dr. Doom, that helped stocks close in the black today.

Roubini coincided with bottom fishing and oversold conditions, but his few words may have locked in a positive close today.

This morning Roubini noted via Twitter, “Capex spending, only part of demand robust in Q2, is now faltering in Q3.  So Q3 growth tracks btw 0 & 0.7%. Double dip risk now above 40%” and about an hour before the close he noted, “Q3 GDP growth very likely to be below 1%; and likely to be closer to 0% than to a pathetically lousy 1%. So double dip risk is now > 40%.”

This all sounds bad on the surface.  The problem is that Roubini is always bearish and he’s never positive when he gives interviews.  That is at least the case for years now.  He successfully nailed the Great Recession long before most knew what was happening.

Here is what you need to consider:

Growth of 0.0% to 0.7%… ok this is piss poor.  No more, no less.  However, it is still growth and is still better than what some of the fresh economic data for July and August have been indicating.  Even the ‘under 1% and “likely to be below 1%; and likely to be closer to 0% than to a pathetically lousy 1%” is better than none.

Cap-ex faltering… this is not new. We have been discussing this since early August and Thomson Reuters gave a quick hit showing this trend from 139 S%P companies.

The biggie is the >40% call… Roubini is considered more bearish than he is considered even keel, by a mile.  If Roubini really wanted to scare the pants off you, he would have had to have said that the chance was over 75%.  Even a “greater than 50% chance” might have still been ok to investors today.  He didn’t get the Dr. Doom nickname from a hat-drawing contest.

Interpreting good news from Roubini is probably not as simple as reading economic data.  That does seem to be the case today.  a near-20 point DJIA rally and a near-3.5 point rally in the S&P500 probably isn’t enough to get many excited, but it’s better than what we have seen for the last four days in a row.

RGE’s Gina Sanchez and Ibrahim Gassambe wrote on August 23 to clients: “RGE estimates the S&P 500 fair value to be 1120 with an EPS of US$80, implying a 14x PE multiple as justified by our model; however, given the potential for negative GDP growth surprises, we see significant downside risk to this….”

JON C. OGG