Will the Recent Rally Extend? 10 comments
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Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (March 16th):
...I think the answer to that question is “yes” because of the upcoming sequence of events. To be sure, investors should gain much more clarity this week as the TALF (Term Asset-backed Securities Loan Facility) is ramped-up in earnest, which might just lead to a rebound in the velocity of money.
Next are the potential changes in the uptick rule and suspension / softening of mark-to-market regulations on impaired assets. Then there are the G20 meetings that could provide more positive surprises. Finally, U.S. retail sales (ex autos) rose a stronger than expected +0.7% in February, suggesting that the U.S. consumer might be stabilizing. And that sequence, ladies and gentlemen, could be the “carrot in front of the horse” that keeps this rally going.
Whether it turns out to be just a bear market rally, or something more, remains to be seen. But, if the DJIA (7223.98) and the D-J Transportation Average (2419.90) can trade above their January 6, 2009 closing reaction “highs” of 9015.10 and 3717.26, respectively, it would be the first Dow Theory “buy signal” of the new millennium. In the interim, we remain “long” indexes in the trading account and are selectively recommending stocks for the investment account.
As for the economy, while the economic “roots” are clearly mangled, they are not totally severed in my opinion. In fact, in my presentations over the past three weeks I have asked the question, “What if Mr. Bernanke is much closer to healing the economy than anyone thinks?”
The argument goes like this: Last summer the growth in the nation’s monetary base went vertical. Since money is the oil that makes the “economic engine” run, the huge increase in the money supply is just what the doctor ordered; but, there is a time lag between when it is implemented and when it is impactful in the economy. Mr. Bernanke has also given us hugely negative “real” interest rates (inflation-adjusted interest rates). Hereto, however, there is a time lag.
Lastly, money is coming out of zero yielding money markets funds and flowing into bank CDs (reintermediation). This is extremely positive since banks lend with their deposits and not with their equity. Again, there is a time lag before reintermediation becomes impactful in the economy. I then pose the question, “What if all of these time lags come together at once and instead of people talking about the worst economy since the great depression (which is untrue by the way), we morph into an economic recovery that is stronger than most expect?” While I am not per se predicting a strong economic recovery, I do find the argument interesting since almost nobody believes it can happen.
In conclusion, as the astute GaveKal organization asks:
So could the U.S. consumer, buoyed by lower energy prices (putting $400bn back in his pocket), lower taxes ($300bn coming his way) and lower mortgage rates ($200bn coming his way) finally be finding a footing? And, if so, what will rebound first? Global trade? Commodities? Cyclical? Tech sales? Putting all of the above together, it seems to us that the most important development is the introduction of the TALF [this] week. If this new program provides a floor to the velocity of money, then the rally could very well continue into the spring given the cheap valuations and the unprecedented amount of wealth destruction we have witnessed in the past six months.
The call for this week: I have been traveling for the past three weeks, punctuated by last week’s Raymond James Institutional Conference, which was attended by some 700 portfolio managers with more than 300 companies presenting. While I was locked-up in the “war room” approving research from said company presentations for most of the week, I did manage to see some of the presentations. Of particular interest were Republic Services (RSG) and Digital Reality (DLR), both of which have 4% dividend yields. I also found this speculative idea from our restaurant analyst, Bryan Elliott, intriguing. To wit:
The four ‘scorched earth’ likely survivors for a package (in case I'm wrong on one of them) are: Ruth’s Hospitality Group (RUTH); Morton’s (MRT); Carrols (TAST); and O’Charley’s (CHUX). Each company has high leverage but at very manageable levels if cash flow remains anywhere near the current run rate, strong brands with very long-term histories, recently restructured credit agreements, and large private equity ownership so the ultimate backstop is they can get equity to retire debt as a last resort.
The last option of private equity only becomes necessary in a true soft depression scenario (e.g., if total restaurant demand goes from the current down 3-5% to something like down 15% quickly). Once valuations normalize, these are likely $5-7 stocks, and perhaps $10+, as each has $1.00 EPS power and sustained expansion potential in an economic recovery.
As for the overall stock market, while it is still too early to tell if this is a bear market rally or something more, we do agree with our friends at the must have “thechartstore.com” organization in that, “While our sense is that the rally has more to go on the upside in the weeks to come, we feel it is still too early to say the final bottom has been put in place.”
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This article has 10 comments:
>come together at once and instead
>of people talking about the worst economy
>since the great depression (which is untrue by the way),
>we morph into an economic recovery that is
>stronger than most expect?” While I am not per se
>predicting a strong economic recovery, I do find the
>argument interesting since almost nobody believes
>it can happen.
I totally believe it can happen. With the past as our guide and the potential confluence of efforts that Jeff describes, the economy's move to the upside will take the majority by surprise. Jeff describes the classic "tipping point." When it's reached the results can be what most firefighters call a completely unexpected "backdraft."
mast-economy.blogspot....
seekingalpha.com/artic...
These operational profits will still be used to offset losses in the books of finance cos. Anyway, we'll learn more very soon when first quarter results are published.
No matter what you think of the fundamentals, there is an army of traders waiting on the sidelines. Their powder is dry and they are looking for new places to put their money.
Habits learned over more than one generation don't die that easily. Whether these habits can sustain a reasonably long rally, in the face of unfavorable economic data, remains to be seen.
We've had our FEAR in the momentum lows back in Oct/Nov, and we have now ground out our PRICE lows with much lower volatility as expressed by VIX in the March timeframe - this dual low structure was seen in many market bottoms, and most recently in October 2002 - March 2003. MOMENTUM low, then 6 months later PRICE low.
Anyone who thinks GREED won't come surging back again for many years, or ever, is in for a surprise... markets have been, are, and will always be bipolar, and will always suffer from a particularly unique but predictable alzheimers syndrome.
So here's the thing - the short side is as historically over-"invested" as it has ever been in maybe 40 years, the long side of the market is just as historically divested, and cash and all its short cousins is piled to the roof.
Taking that thought further, there are in fact 4 separate legs of the "short" trade here, what I have come to call cumulatively the "Armageddon trade" that was put on last Fall: short stocks/double short via ultra ETF's, long Treasuries, long volatility via VIX options, long cash via FDIC insured accounts, MM's, CD's etc. I might even add long gold to that mix.
Those are monstrously crowded trades. Let me repeat - monstrously crowded. Monstrously crowded trades are dangerous to the participants, because there is no one left to come in to keep the momentum going. Read all the bearish sentiment on SA if you want to understand that.
It wouldn't take much to tilt the balance and set off at least a short term squeeze of huge proportions- reintroduction of the uptick rule, re-evaluation of mark to market, something completely unseen and unknowable at this point... a "white swan event" in this black swan world. Would the FED's announcement today qualify? It sure seemed to blow a couple of the Armageddon guys out of the water.
The wise investor has proven time and time again over the years to be the one who doesn't take the crowded side of the trade, but rather the one who is early to the uncrowded side.
And in my three decades of watching the greatest show on Earth, I have never seen a more crowded short side bias in all its various iterations. Never.
I started getting long on March 6 and am building positions and trading long ultra ETF's. We've got a new game in town IMHO, and this rally will have some legs. Odds favor a pullback going into April earnings, maybe a test back to the low - mid 7,000 area from wherever we rally to, but that would be the time to swing for the fences if you haven't already.
Minor nitpick: "extend" is a verb which requires a direct object, so "Will the Recent Rally Extend" isn't a grammatical title.
But if you have to choose between grammar and making money...
:-)