By Edward Harrison of Credit Writedowns
Christopher Wood, the well-noted market strategist at CLSA and writer of the classic Japan crash warning book “The Bubble Economy,” is now warning of a market correction in the West. According to CNBC India, Wood believes that the markets’ extreme upward move is increasing the chances of a major correction.
Wood is still cautious. He says there is some initial indication of a technical breakdown in the US. “The US market will be vulnerable early next year the US market. If it becomes clear, after this inventory cycle, that consumption, employment is not really recovering, then the market will go down. You will then get renewed stimulus in the US and measures trying to generate growth. The key variable in the West is government policy.” CLSA’s best case scenario is 1,200 on the S&P 500 by year-end, he added.
I agree with Wood that underlying economic demand may indeed be weak and all we may be seeing is an inventory and stimulus induced cyclical upturn (see my July post “ISM: Is this the mother of all inventory corrections?”). Of course, the worry is about the employment cycle not turning up before these measures’ positive effect wears off. This is the question for 2010. If this happens, we get a double dip and a huge market-sell off. Even if the employment situation starts to improve slowly while stimulus and the inventory cycle recede, this will lead to a muddle-through scenario, again inducing a correction. This is the heart of Van Hoisington and Lacy Hunt’s call about partial recoveries and stock market weakness.
For those of you who want to believe and want to load up on junk, there’s a clap for that too, via bear turned bull Richard Bernstein:
Richard Bernstein of Richard Bernstein Capital Management is a lot more bullish. “Right now, there is a blurring between the secular issues and the cyclical ones. There are people, including me, who are concerned about the secular issues, but we can’t ignore the fact that the economy is getting better, employment is improving. When that happens you will see a cyclical rebound.”
Just in September, Bernstein was saying America “practically invites another catastrophe.” What happened to that guy? He better be right on his bullish turn or he is going to have a lot of egg all over his face.
Source
Chances of a deeper correction are rising: Chris Wood – CNBC TV18 India






I don’t think inventory is well understood and it means different things to different participants in the market. What I see going on at the moment is a reduction in raw material inventories on the back of a dollar decline. Once hedging effects begin to lapse then this will feed through to margins or prices. Manufacturing and wholesaling inventories have declined, which is the result of improved efficiencies and is permanent, so don’t expect a big turn around in the ISM inventories data. Retailers are currently building inventories for the Christmas period and taking a bit of a gamble that the consumer will turn up. Despite manufacturers view point that retailers are holding too little stock I have a suspicion that it is the other way round.
As for the employment improvement then I think once you take seasonal and cash for clunkers effects out there is very little improvement. As for seeing more stimulus then I have some doubts, why else would the treasury have ducked round trying to extend the debt ceiling, unless they know their will be a political backlash. Anyone looking for good news should have been looking at exports from the ISM data which does suggest a bit of a pick up. The problem is that the economic pick up is likely to feed into corporate profits with any upturn in US consumer disposable income likely to be a long way down the line.