For such turnaround, the environment is likely to favor classical quantitative focus on financial statement screening (Graham and Dodd) analysis over the prior prevailing focus was on trading techniques such as pairs activity and leveraged spread based trading. In fundamentals, significant is the precipitous slash by consensus in late 2008/early 2009 to 6% operating earnings decline for the S&P 500 for 2009. We do expect further reductions in consensus earnings to keep volatility elevated into mid 2009. Still, consensus actually projecting decline is rare. Also reinforcing have been corporate confidence surveys and lowered global growth expectations. Much focus on operating efficiency by companies is to come and revenues depend on macro largesse. However, for the S&P 500 an over 35% decline in earnings from peak in 2006/7 is likely already incorporated, exceeded only by the 1929/32 decline of 75% and fifteen year recovery cycle. The global financial system is still fragile as attested by the latest IMF Global Financial Stability Report of January 28, 2009. We see the central banks as in the front line. Including our reading of the January 28,2009 FOMC, we sense the global front line of the central banks as tilting from rate reduction to focus on alternate financing- such as quantitative easing, bad bank/good bank and /or weak bank ring fencing into liquidation. Fiscal policy seems a longer term back up and deficit financed facility globally. Despite lower equity markets, currency proselytizing is not helpful, much like 1987 as internal political pressures are globally high. For even a quality driven contrarian scenario, more productive would be efforts to keep trade flows open.
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