Bowling Ball Bounce for Markets

 |  Includes: ICF, PFF, XLF
by: Herb Morgan

The last seven sessions have seen stocks surge from extremely oversold levels. The technical indicators pointed one and all to an impending rally. Even generally pessimistic analysts called for a bear market rally. It’s comforting to see Financial Stocks leading the charge. The I-Shares S&P Preferred Stock Index (NYSEARCA:PFF) comprised primarily of financial issues is up 62% from its low print of $14.10 on March 6th. The Financial Select Sectors Spider (NYSEARCA:XLF) has shot up 56% from its March 6th bottom of $5.88. It looks as though we have come far from the nationalization speak of just two weeks ago. I don’t know if it’s “real” or simply a bowling ball bounce. Frankly speaking I’m a bit tired of the financial news media selecting guests based on their ability to spew extreme and absolute clairvoyance about the direction of markets. Responsible money managers in my view have reasoned opinions and make tactical decisions on the margin to manifest those views in client portfolios.

Economic Data

In February economic data seemed universally bad and markets responded in kind. Just a few of the brutal disappointments:

Data Metric Consensus Actual Date Released

  • January Dom. Vehicle Sales 7.7M 6.8M February 3
  • January Nonfarm Payrolls -524k -598k February 6
  • December Consumer Credit -3.5B -6.6B February 6
  • February Consumer Sentiment 61.0 56.2 February 13
  • February NY State Mfg -22.0 -34.7 February 17
  • January Housing Starts 530k 466k February 18
  • January Existing Home Sales 4.80 4.49M February 25
  • Durable Good M/M Change -2.5% -5.2% February 26
  • Q4 2008 GDP Annualized -5.4% -6.2% February 27

To be fair, several indicators offered positive surprises:

Data Metric Consensus Actual Date Released

  • ISM Mfg Index 32.6 35.6 February 2
  • December Pers. Income -.4% -.2% February 2
  • ISM Services Index 39.0 42.9 February 4
  • January Retail Sales -.8% 1.0% February 12

The four “positive” surprises in February were simply less negative. Both ISM numbers still show contraction as did personal income. Retail Sales were positive but indicate only a monthly change from an absolutely harsh fourth quarter. February also contained a big slug of poor S&P 500 Earnings (NYSEARCA:SPY) coupled with plenty of downward guidance.

So have things fared any better in March?

Data Metric Consensus Actual Date Released

  • January Personal Income -.2% .4% March 2
  • ISM Mfg Index 33.8 35.8 March 2
  • February Motor Vehicles 6.2M 6.4M March 3
  • January Pend Home Sales 85.1 80.4 March 3
  • February Non Farm Payrolls -648k -651k March 6

The big equity rally began in the week after March 6th. A week which contained little in the way of economic data releases. We had seemingly choreographed statements by the nation’s private sector banking chiefs that January and February were good months. Also helping things along was FASB Chairman Bob Herz finally being forced to understand the urgency in providing new guidance on mark-to-market accounting. More importantly, providing said guidance before the end of this quarter.

This week’s economic data is still poor with one bright print in Housing Starts:

Data Metric Consensus Actual Date Released

  • March NY State Mfg -32.0 -38.2 March 16
  • Feb. Industrial Production -1.2% -1.4% March 16
  • Feb. Housing Starts 450k 583k March 17

The Fed’s announcement Wednesday that it will substantially expand its balance sheet by buying longer dated Treasuries, expanding its agency debt acquisition and growing its purchase of mortgage backed securities is a sign of just how weak this economy is. The committee also unanimously agreed to keep the fed funds target at nil for an “extended period.”

The question for investors should not be whether or not the economic and earnings data is bad. It is awful. The question is whether or not one believes the massive and globally coordinated fiscal and monetary policy measures will return economic growth, and how quickly.

My view is the final results will be about 15% fiscal policy driven and 85% monetary policy. That’s pretty good news because I view about 80% of the Obama stimulus package as a thinly veiled attempt to expand the scope and reach of government. On the other hand the Fed is having success and seems to be implementing its strategy in a calm and measured fashion.

The Fed’s actions in expanding Discount and Primary Dealer lending have worked. The Asset Backed Commercial Paper lending program has worked and now has minimal credit outstanding. The Commercial Paper Funding facility has been a success. Guaranteeing loans related to Bear Stearns and AIG looks like a strong investment. TSLF and TAF also are moving smoothly. The MMIFF has been a perfect success. Now the Fed is getting really serious! PPIF which admittedly is still too vague is a $1 Trillion dollar program as is TALF which was kicked off yesterday with Citigroup’s (NYSE:C) $3 billion debt sale. OK, here come the Jekyll Island conspiracy theorists! The bottom line is the Fed is not only making a profit on its programs (which is remanded to the US Treasury) but the Fed will in all likelihood interrupt the negative feedback loop associated with the credit crisis, thereby restoring economic growth.

For those excessively worried about inflation, I recommend Real Estate Investment Trusts via I-Shares Cohen & Steers Realty Majors (NYSEARCA:ICF) or direct ownership of Real Estate via the use of debt. Remember, inflation is a stealth tax that redistributes wealth from lenders to borrowers.

Since I don’t claim to know for certain which way the markets will move in the next days, weeks or months I likely won’t be invited on financial television this week. My best reasoned opinion is still that October 10 was the internal low which was retested on November 21 and again on March 6th. We will get into earnings season here in a few weeks and the numbers won’t be great, nor will the first quarter GDP print surprise to the upside. Despite that, I think equity prices are still recovering from fears of financial system insolvency and can drift higher on the reality of a very severe recession. Housing will soon show signs of stabilization, weekly jobless claims will begin to level off and even drift somewhat lower. Deal making and a return of the consumer will eventually ignite a sustained stock market rally.