21 Reasons to Be Bullish

Frankly, I am having a hard time being bullish because everything feels so bad.

I was in the office on President's Day and watched the S&P 500 futures tick down to near-term support at 806, such that futures are indicating a 20 point decline at the open on Tuesday. Now, it appears the market has formed a short-term double-top, and with stocks continuing to reach lower highs, it feels like we are about to break to the downside and re-test the November lows.

Emotionally, selling feels like the right thing to do. However, cerebrally, since I have a time frame longer than my nose, there are many reasons not to sell at these levels, and to in fact buy stocks. But it is difficult not to walk away in disgust, especially after last week's action, which was just horrible.

Everyone knows why you should be bearish - the credit crunch continues, the economy is terrible and earnings estimates continue to come down. The reasons to hate stocks are very well known. So I made a list of reasons why stocks could be substantially higher within the next year or so.

• Credit spreads have improved. Credit remains tight, but spreads have come in. Over the past 50 years, the average gain to stocks has been 18% when credit spreads are falling.

click to enlarge

• Cash spreads are improving. The TED spread and swap spreads are at levels last seen before the crisis began last fall.
• Treasuries are backing up and yields are rising. The bond market has experienced a violent sell-off in the long end of the curve, while short-term T-bills - which were yielding negative returns a few months ago - have seen rising yields.
• The yield curve is steep. When the curve is this steep, it almost always signals economic expansion over the next 12 months.
• Corporations issued the highest volume of debt in January than in any month since May. In fact, debt issuance was greater than the last four months of 2008 combined.
• The dollar may be topping. Some may argue that this is because of all the debt that the Treasury will flood onto the market. However, a rising dollar has also been indicative of fear and a flight to safety. A falling dollar may indicate that fear is seeping out of the market.

• The euro/yen cross has been moving sideways for months and may be basing. The euro/yen carry trade had been popular over the past several years as investors bought higher-yielding euro-denominated bonds and financed the purchases by borrowing in lower-yielding yen. This carry trade has been seen as a proxy for risk appetite in the global capital markets. It may be signaling that investors are becoming less fearful.

• The gold/silver ratio has fallen below 70. The ratio was as high as 80 a few months ago. Both gold and silver have been rising the past few months, but silver has been rising faster than gold. From September through November, silver fell 30% to the trough whereas gold fell 10%. Silver is a thinner market but it is also an industrial metal and more exposed to the general economy than gold. Gold is a haven during crises. Silver prices rising faster than gold prices may be signaling that the economy is going to get better in the future and/or investors are less fearful about financial markets.
• Metal prices may be bottoming. Though it is still early, a bottom in stocks is sometimes presaged by a bottom in metals and commodity prices.
• Commodities may be bottoming. Oil may be putting in a bottom as well.

• Canadian stocks may be bottoming. Energy and metals comprise roughly half of the total market capitalization of the Toronto Stock Exchange. Materials stocks in Canada have been performing fairly well.

• Chinese stocks may be bottoming. Stocks in China have been acting well as of late. I am long the FXI.

• Semiconductor stocks have been outperforming and may be in the beginning of an uptrend. Semiconductors are often an early indicator of the health of the technology industry. I am long a basket of semiconductor and semiconductor equipment stocks.

• The VIX is acting like it wants to break below 40. On Thursday's intra-day reversal, the VIX closed sharply down. On Friday, when the market sold off during the last 20 minutes of the day, the VIX gave up less than half the decline of the prior session. This may be a sign that investors are getting more confident of the future.

• Asset allocation by individuals towards equities is at or near all-time lows, whereas allocations towards cash is at or near all-time highs. The public is generally positioned like this at bottoms.
• Cash levels are at multi-decade highs. There is nearly $9 trillion in cash on the sidelines currently.
• Hedge funds are heavily in cash. There are very few hedge funds that are bullish now.
• Private equity investors are sitting on their hands. After incurring large losses in their portfolios and wary of the cash crunch of their limited partners, private equity funds are doing little. It seems that everyone is waiting for a turn before investing.
• Everybody whom I talk to is negative. I have had in depth discussions with two dozen highly knowledgeable investors this month, and they are all overwhelmingly and uniformly bearish. Every. Single. One. Even those who are buying because they see value in the market are bearish on the market and the economy as a whole. I had to talk a friend and a 20-year veteran of the business off the proverbial window ledge last week.
• Reversion to the mean suggests at least a bounce. Last year was one of the worst years on record. Tremendous selling usually begets a significant rally.
• Stocks are cheap. Whether you want to measure by the 10-year moving average of earnings, Tobin's Q, or measures of book, sales and normalized earnings, stocks are inexpensive.

Now, as I tell you all this, I think there is a fairly good chance - 60% or 70% perhaps - that the market is about to re-test the lows over the next week or two.

Even after I listed all those points above, I cannot tell you that I feel bullish.

Maybe that is a sign a bottom is near.

Disclosure: Long FXI and a basket of semiconductor and semiconductor equipment stocks.

Comments

[Marcap:]

Once again, and I repeat, one cannot use graphs and stats from past events to effectively predict events in the future. Doing so is simply a game for fools, and those who try to take advantage of them. History is history, and that is all it is.

People are losing their jobs in paramount proportions, while others are buried in debt that they cannot possibly expect to repay. Many of the world's largest banks are failing, while others are just not lending. The real estate market is crashing, and millions are at risk of losing their homes. Some of what was once the world's largest and most solid companies are failing, while governments are going against every fundamental law of capitalism, and bailing out those poorly run companies with the people's money. The Public debt is at an all-time high, surpassing any reasonable level, which could quite possibly even bankrupt America, but in the least, place an extreme burden of repayment on many future generations. Fifty million Americans do not have basic health care. America is engaged in two wars. And of course, on the Global stage, more than one-third of the world's population is living in poverty, with millions near starvation, not to mention the fact that our entire planet is in peril due to global warming, among other things.

So Is there a reason to be bullish? Not in the least. Such words are merely those of the uneducated, or else those who have their own personal agendas for making such inaccurate statements. There is no reason to be bullish on any aspect of the present economy, and there is no mechanism available today which can accurately suggest otherwise.

Feb 19 10:59 AM

[theobannion:]

I can identify w/ your last two short paragraphs, from "Even..." to "...near."

I'm often my own best contrary indicator.

Best,
SOB.

Feb 19 11:12 AM

[thotdoc:]

Einstein said, "You can't solve the problem by thinking about the problem in the same way that caused the problem."

I believe that applies here. The author is thinking like this is a normal recession....which it isn't.

It's possible that there will be bear rallys. But, there has been a fundamental change in thinking. If there hasn't then any rally will be doomed to fail.

Any crisis that does not resolve the basic problem that caused the crisis, doesn't solve the crisis. The crisis will come back.

The crisis was that the underlying idea of investment had gone awry. It became speculation...thus all the bubbles over and over,,,the 100 year floods happening every year.

Until we get back to investment as investment not investment as speculation, nothing will change.

Oneman's opinion and maybe I'm just talking to myself.

G

Feb 19 11:33 AM

[Mrudula Shah:]

Steve in Greensboro,

I agree with Mr. Toro and not you. There are 9 trillions sitting on the side lines, perhaps in the USA, and more if you account for rest of the world Especially rich arabs and Chinese). This cash is waiting to be invested and not be kept in bank accounts with extremely low interests all over the world. With treasuries becoming unattractive and bottoming of the other factors Mr. Toro just explained, the equities (believe me, especially the U.S. equities) should be under a close scrutiny by fund managers. Some of those mighty ones may be deliberately dragging down some selected otherwise financially O.K. equities and the market as a whole through "paid market manipulators" so that they can start buying and fattening their portfolios quietly and gradually and then use the same bastards to to spring up the market creating a buying fringe. These dogs always have feasted like this, and this time is no different. Remember, the money fund managers for the super rich have wide shoulders. I sense that now and have to side with Mr. Toro. If you are wise read between the lines. Thanks.

> Thanks, Toro, for the nice overview.
>
> You listed a couple of reasons to hate equities, “…the credit crunch
> continues, the economy is terrible and earnings estimates continue
> to come down…” You left out the big one. Leftists control the Executive
> and Legislative branches of the U.S. government. They have told us
> they plan to do as much as they can to destroy the U.S. economy (nationalize
> banks, nationalize healthcare, raise income taxes, impose new carbon
> taxes, implement union card-check, subsidize completely uneconomic
> green technology, redistribute generally, etc.). And within Obama’s
> first month in office, they have made quite a lot of progress toward
> that goal. Just imagine how much damage they can do in two years.
>
>
> Some of your “reasons why stocks could be substantially higher” sound
> a little ambiguous to me. I do not dispute your facts (and thanks
> for summarizing them). Just the interpretation.
> Your indicators: “Treasuries are backing up and yields are rising…The
> yield curve is steep…The dollar may be topping.”
>
> Thought: Might these three all be signs of inflation expectations,
> rather than signs of recovery? I suppose we won’t get much inflation
> until we have some sort of recovery, but my view is that we will
> have Carter-style stagflation over the next 10 years.
>
> Your indicators: “The gold/silver ratio has fallen below 70.” “Metal
> prices may be bottoming.” “Commodities may be bottoming.” “Canadian
> stocks may be bottoming.”
>
> Thought: Not only silver, but also platinum and palladium are looking
> good, too. Jim Rogers in his book “Hot Commodities” says that during
> long (18 year) cycles when equities do poorly, commodities do well.
> His argument is that we started such a cycle in 2004. If we are in
> such a cycle, wouldn’t commodity values be the first values to recover?
>
>
> I fully agree with your statement: “…I think there is a fairly good
> chance - 60% or 70% perhaps - that the market is about to re-test
> the lows over the next week or two…” I was looking for an Obama-bounce
> to get in a solid short and missed the boat. I am sure there are
> going to be other bear-market rallies over the next few years, though.
>

Feb 19 11:35 AM

[Bar Lock:]

Very good summary of market conditions and indicators. Although I think it is way too soon for the average investor to get back into the market, the $9 trillion in cash sitting on the sidelines is impressive! Who wouldn't like to get back into the market just ahead of that wave?

Feb 19 12:02 PM

[Marcap:]

"There is nearly $9 trillion in cash on the sidelines currently."

Okay, so let me try and understand this correctly...

If companies have combined cash reserves of $9 trillion ($9,000,000,000,000), but the banks are insolvent, and the government has to borrow (or print) money to finance bailouts and other expenditures, where exactly is that $9 trillion in cash? i.e. Who is actually holding on to all that money?

Feb 19 12:45 PM

[curecell:]

Toro, you are smart man...the scaring chickens are still on the side, some of the brave ones will start buying.

Feb 19 01:10 PM

[secmaven:]

Cash on what "sidelines"? That "cash" is invested in commercial paper, t Bills, CD's etc. etc. If it is pulled from these uses the economy suffers and the stocks that attract this cash will be dogs.

Feb 19 02:30 PM

[Alex Trias:]

Years ago, when the Dow tipped down to the levels it is now at, it launched a massive and multi-year rally. So, a failure to rally off these support levels suggests they are, in fact, not support. And if these levels are not support, then it stands to reason they are perhaps resistance, in which case, the markets will fall further - probably by a very considerable amount, and then rebound towards 7,500 before selling off again, reaching lows that are difficult to forecast at this time - although I'd toss Dow 3,000 out there as a reference point.

And we have not rallied off 7,500. Instead, we've broken through this area with relative ease, and established that it is not the technical support area it once was back at the bottom of the last great bear market. If it is not support, it is resistance, and that implies another massive leg lower in the broad equities markets.

A trader would conclude that the US equities markets are likely to crash here, and will position himself accordingly. If enough traders think along the lines I describe, we could test 3,000 or so as the next support area for the Dow Jones.

Or perhaps traders will place their bets on a new leg lower, and get completely blown out of the water. That happens eventually, and when it does, traders with any money left change camps and start betting long, which raises equity prices and which inspires long term investors such as yourself to bring more capital into the market. Those are the moments where bull markets are born, but there is no way to tell whether we are at such a moment or not because we don't have a time machine.

Don't let the metrics you cite in your article fool you. Changes in trends are, by definition, unpredictable. And evidence is always ambiguous - trust me, I'm a lawyer. For instance, a falling VIX may not be so much an indication that the market doesn't expect volatility, so much as an indication of growing investor apathy and despair.

I know, apathy and despair give birth to bull markets. Which is fine if you think like an investor playing by yesterday's rules. Traders, though, normally don't give a hoot about these rules. They like technical analysis, and technically speaking, we're poised for collapse along the lines of what we saw last October.

There is only one good justification for owning equities now, and that is you are not smarter than the market, and don't know more than the market does. Without an edge on the market, you'd be a fool to try and time it. And if you can't time it, you hold a percentage of your portfolio in equities based on how old you are, and keep the rest in other asset categories.

What if you get burned? Answer: sometimes you will. Accept the possibility of bankruptcy, just as you accept the possibility that you'll get hit by a bus.

Can you avoid getting burned? Answer: nope.

What about by holding cash? Answer: nope. Lost opportunities for gain are the economic equivalent of any other form of realized loss - it's only human psychology that makes us feel otherwise.

Can you use technical analysis to time in and out? Answer: maybe, but since trends eventually change, you're just as apt to get burned if you short stocks as you are by taking long positions. Were the truth otherwise, other traders would have arbitraged whatever percieved edge you've got on predicting the future out of the marketplace already.

Here's the bottom line: if you're like me, you invest in equities not because you're bullish or bearish, but because you are willing to be rational about the human condition.

Feb 19 05:27 PM

[naidle:]

I hope Canadian stocks aren't bottoming yet. Many of the great names still have relatively high P/E's and lower than ideal yields.

We still have a ways to fall if we expect to mimic the '70s fallout which many compare this to. Back then you wouldn't go after a company unless their P/E was a respectable 10 or lower with dividend yields around 6%.

If that's true then another fall is likely.

Feb 19 05:40 PM

[Marcap:]

What many investors appear to forget these days, is that there are only two ways to actually make money from ownership of a company's shares. The first is though payment of a dividend, and the second is through the sale of those shares for more than was paid for them.

Betting against (or with) the markets, such as short selling, or the buying or selling of puts, calls, etc is nothing more than pure speculation...just like betting on the next roll of the dice, turn of the cards, or pull of the slot machine, in a local casino. Many try and use charts and stats of pass events to try and forecast the future, just as some casino players do. Sadly however, more often than not, like the casino player, the speculator loses.

Nonetheless, as I am sure most serious investors have come to realize, is that with very few exceptions, dividends are either no longer paid, or if they are, they are of such a low amount that they simply do not justify the risk of investing in those companies, especially when some stock prices are so overly inflated.

So that leaves the buying and selling of shares the only remaining way to gain a reasonable return on one's investment. The problem with that however is that with few exceptions, balance sheets today are no longer an accurate reflection of a company's true value. Instead they are padded with fluff in the form of Goodwill and other intangibles which in most cases, add no real value to the company's book value, but instead are often placed there with their sole purpose of deceiving the gullible into believing that the company is worth far more than it really is. But then, sooner or later, that realization will show itself, the stock price will fall, and the investor once again will lose.

I think that it is long past time that we all woke up to these facts, and went back to perhaps those late 70's and early 80's, where there was some real value in stocks that more closely matched their trading prices. And yes, that would mean a DOW much lower than it now is. Now I'm sure that some may not like the idea of that. They will accuse me of being negative, and some may even show a little name calling and so on. Nonetheless, I am convinced that this will eventually happen to the markets despite some people's argument to the contrary. Most people are finally waking up to the dishonesty of companies, and the brokers who try and sell their shares for far more than they are actually worth.

The bottom line is that I believe the DOW's drop from 14,000 to 7,500 is only the beginning, and that it still has a long way to go, before it falls to the point where reality is more accurately portrayed.

On Feb 19 05:40 PM naidle wrote:

> I hope Canadian stocks aren't bottoming yet. Many of the great names
> still have relatively high P/E's and lower than ideal yields.
>
> We still have a ways to fall if we expect to mimic the '70s fallout
> which many compare this to. Back then you wouldn't go after a company
> unless their P/E was a respectable 10 or lower with dividend yields
> around 6%.
>
> If that's true then another fall is likely.

Feb 19 07:11 PM

[Steve in Gr...:]

Dear mruyog,

Thanks for your reasoned response to my post. We agree that the cash will come out. We disagree about where it will go. I believe it cannot go to U.S. equities. It will go to commodities or maybe Asian equities.

The former flagship of global capitalism is being destroyed by leftist politicians. The Chinese and Russians are warning Obama about socialism. He will not listen. Too bad for the world, the U.S. is being led by a crook.

Feb 19 08:24 PM

[James H. Wang:]

You say you want to avoid being emotional, but ultimately, trying to be bullish because it feels better to be bullish is also "being emotional."

I don't disagree that those indicators might be showing that we're "on our way up." Unfortunately, there are far more leading indicators--ones that are normally used (CPI, inventory investment, unemployment claims, etc.), instead of the ones you hand-picked, that show that we're still in quite a bit of trouble.

Global demand might be falling slower now, but it certainly hasn't shown signs of actually going UP. Besides that, we've had plenty of these "signs of the economy bottoming out" all the way down.

The fact of the matter is, just like during the dot-com bubble, our gains were illusory. We aren't going to make illusory wealth come back, and become "real wealth" just because we wish it will.

Maybe I'm wrong. I hope I am. But it doesn't seem like it objectively if you look at a broader set than 21 "favorable" indicators. Right now, how it "feels" is very much like what it "is."


And last note: Gold to silver ratio is all well and good... but have you taken a glance at where GOLD ITSELF is right now, by historical standards, not just by comparison to another rapidly gaining precious metal?

Feb 19 08:34 PM

[Moon Kil Woong:]

Here's a few real reasons to be bullish:

1) People don't want the market to contract further and loose their job.
2) Brokers may be bullish to get at least some commission off their remaining clients. Funny how always bullish they tend to be.
3) Someone has been too dumb to have sold yet and is still long in this market.
4) Maybe as a banker you got a lot of big bonuses doing a cruddy job and don't know where to invest it before you get the next bailout windfall bonus.
5) You may need the market to rise a bit so you can short it again.

Feb 19 10:47 PM

[mr freddo:]

Thanks for the optimistic report. My sense of dread related to the market is itself another bullish signal. Market bottoms are supposed to look just like this. Panic, fear, capitulation. Throwing in the towel and running for the exits. Every fiber of my being says that we are headed for Dow 5000.

The economic signals from around the world are so bad right now that I don't see any hope of recovery this year or next. Averting disaster will be about the best we can hope for.

Feb 19 11:40 PM

[valinho:]

Dear Steve in Greensboro:
Get off the koolaid. If you believe what you wrote You have my sympathy for your delusional disease, but there are other blogs more appropriate for your specific case.


On Feb 19 08:24 PM Steve in Greensboro wrote:

> Dear mruyog,
>
> Thanks for your reasoned response to my post. We agree that the
> cash will come out. We disagree about where it will go. I believe
> it cannot go to U.S. equities. It will go to commodities or maybe
> Asian equities.
>
> The former flagship of global capitalism is being destroyed by leftist
> politicians. The Chinese and Russians are warning Obama about socialism.
> He will not listen. Too bad for the world, the U.S. is being led
> by a crook.

Feb 19 11:55 PM

[turn off th...:]

OK, just do what everyone else is doing then. If the majority were right, the majority would be rich!

On Feb 19 05:43 AM donzelion wrote:

> I have the opposite problem. I've been waiting for stocks to retest
> November lows so I could start buying the ETFs I unloaded during
> January's short term highs.
>
> Maybe I'm just ignorant, but I'd never heard of the TED spread until
> last Autumn. Seeing something "come back into norm" that nobody ever
> mentioned ought to be in a norm before strikes me as...well, confusing,
> to say the least.
>
> I'm not a fan of thinking that it's fitting to be bullish because
> everyone else is bearish - contrarianism is not about looking at
> what everyone is doing, and then doing the opposite (try doing that
> driving down the freeway) - it's about looking at what everyone is
> thinking/saying, then finding something they've overlooked, and letting
> that thing guide you in a different direction. (As for me, I lack
> enough insight to be a real contrarian. So I just buy broad ETFs
> when the market goes down.)

Feb 21 09:56 AM

[User 361751:]

The $9 trillion is all the personal and corporate checking, savings, money market accounts in banks and investment firms. It is enough to buy 80-85% of the entire S&P 500...the M1 mulitplier just went positive meaning banks are starting to use some new money.


On Feb 19 12:45 PM Marcap wrote:

> "There is nearly $9 trillion in cash on the sidelines currently."
>
>
> Okay, so let me try and understand this correctly...
>
> If companies have combined cash reserves of $9 trillion ($9,000,000,000,000),
> but the banks are insolvent, and the government has to borrow (or
> print) money to finance bailouts and other expenditures, where exactly
> is that $9 trillion in cash? i.e. Who is actually holding on to all
> that money?

Feb 21 11:10 PM

[User 361751:]

wrong. That cash is all deposits that is not being used to loan in CP market. You can only participate in that if you invest in CP dummy. All the money is just earning less than 1%


On Feb 19 02:30 PM secmaven wrote:

> Cash on what "sidelines"? That "cash" is invested in commercial
> paper, t Bills, CD's etc. etc. If it is pulled from these uses
> the economy suffers and the stocks that attract this cash will be
> dogs.

Feb 21 11:14 PM

[Marcap:]

Technically I agree with you. That is the way it is suppose to be. But since many of the banks and investment firms are now insolvent, what does that really say for the actual security of that $9 Trillion dollars deposited with them?

After all, the banks are only required to place 10% of its deposits on reserve. So if you or I deposit $10 Million dollars with ABC bank, and it goes under, we are only covered for up to $250,000 per account as per FDIC insurance limits, and if we are really lucky, perhaps we see part of that 10% in reserves upon actual failure of bank. The other $8.75 Million (at least) would be lost. So in other words, exactly how much of that $9 Trillion is really secure? I suspect only a very small percentage of it is, and the rest is not secure at all. And to me that spells big trouble down the road, perhaps of proportions that few can imagine.

On Feb 21 11:10 PM User 361751 wrote:

> The $9 trillion is all the personal and corporate checking, savings,
> money market accounts in banks and investment firms. It is enough
> to buy 80-85% of the entire S&P 500...the M1 mulitplier just
> went positive meaning banks are starting to use some new money.
>

Feb 22 02:16 AM