Bull Vs Bear: Part 2 The Bull Case

In the first part of this two part series I looked at the bear case through the end of the year. I will now look at the bull case:
  • Cash M&A and Buybacks-Many companies have a lot of cash on their balance sheet and the corporate bond market is practically begging them to take more. This has led to a pickup in share buyback and M&A activity. This has the potential to be a massive plus for the overall market. Just the Potash and Genzyme deal would likely amount to $70 billion of cash entering the market. M&A is like a fever. When CEOs see other CEOs getting new toys and they want one too.
  • Sentiment- Longer term sentiment measures are quite negative, which likely means that most people already acted on their bearishness. Should sentiment somehow turn positive their is a long way to go before people become fully invested. Most importantly hedge funds have de-risked leaving limited room for them to sell and a lot of room for them to buy. They move their allocations quicker and in larger steps than any other group so I believe they are the most important group to follow even though they are not the largest. For instance, mutual funds represent a larger group but their cash allocations change at a glacial pace. 
  • Seasonality- While seasonality is negative for the next few weeks it will be very positive through the end of the year. 
  • Gridlock- Many view a Republican victory as a win for business. That could be the spark needed to turn sentiment.

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