Deutsche Bank In The Sweet Spot But Upside Remains On The Table

Equity strategists at Deutsche Bank updated their equity baskets yesterday, the description of economic background is "sweet":

DB is optimistic about the economic outlook DB’s economists believe we have now entered the ‘sweet spot’ for the global economy. A slowing rate of inventory reduction, ongoing fiscal stimulus, easing credit conditions and continued loose monetary policy have stimulated a faster than- expected recovery in GDP growth. As a result, over the last six months, both DB and the Street have moved from cutting GDP forecasts to raising them significantly. Despite this swifter growth, however, significant spare capacity means unemployment is still rising (albeit more slowly) and the inflation nemesis remains subdued. Policy action is likely to remain accommodative therefore. DB expects the Federal Reserve to keep rates low until unemployment has clearly turned, so rates should remain unchanged until at least late 2010. In Europe, we expect the ECB to start raising rates in H2 2010.
The current ‘sweet spot’ could persist for six to nine months or longer The sustainability of current conditions remains the unanswered question. It’s likely that by H2 2010, fiscal stimulus and an end to de-stocking will be weaker drivers of yoy growth. By that time, a pick-up in private demand will likely be necessary to drive sustained economic recovery. Visibility remains low on this eventuality. However, if economic data continues to generally surprise on the upside, the likelihood of such a scenario increases. If correct, further upgrades to consensus earnings estimates are likely. We do recognise, however, that there are significant top-down risks. If higher inflation causes central banks to tighten monetary policy sooner than expected or if the recent economic improvement proves to be a false dawn, then a fall in the value of our equity baskets is likely.

Who should care about sustainability, if "the upside remains on table"? Equity buyers prefer "the upside" rather than sustainability concerns?

Well, the strategists at HSBC see the US economic surprise rolling over:

Read the following sentence twice. It is a cardinal error in investing to confuse the cyclical with the secular. Evidence of a cyclical upturn in the developed world shouldn’t be confused with structural health. And there are three signs that the cyclical recovery might be running out of puff.

Click on chart to enlarge, courtesy of HSBC. I would say that J.P.Morgan had a similar call on economy, but remained optimistic on blind bull running ...

Technology freaks should have all eyes open and bet on Windows-7 release, according to equity strategists at Deutsche Bank:

In recent weeks there have been a number of supporting instances of newsflow that further fuels our view that the Windows-7 release will drive a powerful upgrade cycle impacting the software, semis and hardware technology sectors. These data-points have included;
Micron Technology; flagged on 30th September that the “bit content per box” would grow in 2010 riding on the Win-7 release which is particularly encouraging for the memory segment of the semis market. Further, AMD, Broadcom and Marvell flagged order stability which generally reads well for the PC market.
Microsoft flagged in late September that Ford, Continental Airlines, Starwood and Intel have all announced intentions to upgrade to Win-7. Specific details of planned upgrades were not released but this paves the way for the beginning of the corporate upgrade cycle to commence.
Intel in earlier September indicated that corporate PC demand is likely to rise in 2010 driven by an ageing installed base and the release of Windows 7.
Finally, checks by DB US IT hardware analyst Chris Whitmore (“PC cycle to turn” – 22nd September) indicated that Q309 was tracking better than expected. These checks, coupled with the view that macro-recovery in 2010 will help drive PC replacement, encouraged an upgrade to PC expectations for 2010 – from 0% growth to +10% growth year-on-year.

Because Vista is such a disaster? I am also announcing my right to upgrade free of charge, because of mal-investment in Vista!

No wonder that there is an explosion of USD debasement fears, and weaker hands grasping for gold ... to keep the rally alive one needs to expose the "asset reflation", if economic surprise fails? I do not like conspiracy theories!