SI's Consensus Watch Blog

CONSENSUS SENTIMENT: POSITIVE (Bear Market Indicator)

Institutional investors still expect stocks to rise by between 5 percent and 10 percent by
year-end even as fears of a recession grow more prominent, according to a Citigroup client survey.

While those expected returns do not vary greatly from predictions in earlier surveys in May and January, the catalyst for them apparently has, Citigroup's chief U.S. equity strategist, Tobias Levkovich.

"One must assume that the current driver behind the anticipation of stock price gains may be a bit different now with projected lower interest rates being seen as a boost to equity market valuation multiples versus better earnings growth," Levkovich said.

Citigroup itself is maintaining its previous targets for the S&P 500 of 1,600 by the end of 2007 and 1,725 by mid-2008. The index was trading at 1,477 early on Tuesday and is up 4.1
percent year to date.

Despite that overall bullishness for stocks, the survey found that about 2 out of 3 of these investors, do believe that the benchmark Standard & Poor's 500 <.SPX> index
has marked its low point for the year.

The index's low point for the year, 1363.98, was set back in mid-March in a sell-off that began with a big drop in Chinese stocks. It threatened that level again last month, touching 1370.60 on Aug. 16 as worries about large numbers of subprime mortgage defaults prompted a global credit market squeeze.

A clear change from earlier in the year is that investors' principal worry has shifted from terrorism and geopolitics back in January to the slumping housing market now, the Citi report
said.

Recession, too, is now a main concern. It ranked third on the list of top-10 concerns in the August survey as opposed to sixth in January's survey.

"In particular, almost 38 percent perceive that the chances of a recession are better than 40 percent," Levkovich noted. The great majority of investors, nearly 90 percent, now expect the U.S. Federal Reserve to lower benchmark interest rates by year-end and through 2008.

Close to 30 percent expect the fed funds rate, currently at 5.25 percent, to end the year at 5 percent, while more than 35 percent see it at 4.75 percent by the end of 2007. What's more,
25 percent expect the rate to go as low as 4 percent by mid-2008.

Consensus Watch’s Take: The Institutional Consensus has determined that we are at bottom and that now is the time to buys stocks. I am kind of in agreement in that yes I think it is good time to slowly build up positions in stocks that are still creating tangible economic profit and are on sale. I don’t agree that we are at a bottom as there is much more pain and adjustment in the global credit and asset markets to go. We are just in the early days and there will be some economic pains. This adjustment as bad as it is and will be, is a necessary adjustment and will be long-run positive for stocks.

AKR