Here Comes the Bull

That was the original title for today's column but they changed it so it would not be like Here Comes the Bride. I had Here Comes the Judge a la Laugh-In in mind but even more importantly it was a play on words. No, I have not turned bullish. But since my 875 target was blown out I have stepped aside to rethink and figure out the market's real message here.

It's not "if" the market will correct but "when" and from how high up. I thought 875 was the place but clearly it was too low.

Before you call me the permabear that blew it, keep in mind that I set the 875 target in March the day after the big 6% rally. The S&P was barely above 700.

So JPMorgan (JPM) does not need more capital. Bank of America (BAC) does - but is that the real news? It seems like everyone has jumped on the bandwagon of the return to a healthy financial system already and have forgotten that toxic assets and home inventories are still problems.

History tells us that bear markets do not turn on a dime. Is it different this time? It is never different. People will get overly enthused too early and get slammed as the first correction sets in. Then we can finally see the decks cleared - and for the sign of the times - delevered.

Vive la short squeeze!

Comments

[Tom Colangelo:]

Yes, the recession is slowing down but what happens next is being ignored by most non-professional investors as they continue to buy into the rally while the pros are SELLING into the rally.

Here's why:

RECOVERY WILL TAKE 6-10 YEARS,,,NOT THIS FALL, AS PLANNED BY BERNANKE:

LARGE JOB LOSSES
The economy needs to create 125,000 jobs each month, just to absorb the number of new entrants into the labor market.
If job growth were to average 325,000 per month in coming years, it would still take four years to replace all the jobs lost in this recession, so far. That, so far, is very important.

Underemployment, which combines the unemployed, with involuntary part time workers and discouraged workers, reached 15.6%.

Changes in temporary jobs lead job growth / decline in the overall labor market by 6 to 10 months. In March, employers cut 71,700 temporary workers.

CONSUMER DEBT DEFAULTING
The American Bankers Association reported that 3.22% of consumer loans were delinquent at the end of 2008. That is the highest level since the ABA began tracking overall loan delinquency rates in the mid1970's.

And that was before 2 million jobs were lost in the first quarter. An average of 5,945 bankruptcy petitions were filed each day in March, up 9% from February and 38% from a year ago.

PRIME MORTGAGE DEFAULTS RISING
According to the American Bankers Association, 5.06% of prime borrowers have missed at least one mortgage payment. This represents 1.8 million mortgages. Delinquency rate for sub prime mortgages is up to 21.9%, it only accounts for 1.2 million mortgages. More job losses mean more prime borrower delinquencies.

The banks will not pay decent dividends until they are through absorbing the loan losses over the next 3-4 years. Why invest now?

May 07 08:54 AM

[Maxe Paul:]

My estimate is we will rally up to the long term moving average, around the 1000 level, at this level we will be visiting mass overbought territory. Its always a big move from being massively oversold to massively overbought.

Here is some technical analysis reports for your viewing pleasure!

breakpointtrades.com/c...

breakpointtrades.com/c...

May 07 09:51 AM

[robert.b.fe...:]

If you didn't buy on the last dip when the zomby banks were at thier lowest you may be a little late. Wells Fargo (WFC) looked good at $9 not so much now. As for dividends your point is well taken they will remain low to nonexistant for some time to come but they will return one day for those with enough patience. All of the noise about buy and hold being dead is just that. Noise. I agree with the author that this market seems to be irrational at the moment. There seems to be money coming in from the side lines but why? Some of it is no doubt because the institutional investors were long in cash and had to put it to work in April. Speculation on stimulous money coming in may have some influence as well. However I can't see difinitavly what is giving this rally legs.


On May 07 08:54 AM Tom Colangelo wrote:

> Yes, the recession is slowing down but what happens next is being
> ignored by most non-professional investors as they continue to buy
> into the rally while the pros are SELLING into the rally.
>
> Here's why:
>
> RECOVERY WILL TAKE 6-10 YEARS,,,NOT THIS FALL, AS PLANNED BY BERNANKE:
>
>
> LARGE JOB LOSSES
> The economy needs to create 125,000 jobs each month, just to absorb
> the number of new entrants into the labor market.
> If job growth were to average 325,000 per month in coming years,
> it would still take four years to replace all the jobs lost in this
> recession, so far. That, so far, is very important.
>
> Underemployment, which combines the unemployed, with involuntary
> part time workers and discouraged workers, reached 15.6%.
>
> Changes in temporary jobs lead job growth / decline in the overall
> labor market by 6 to 10 months. In March, employers cut 71,700 temporary
> workers.
>
> CONSUMER DEBT DEFAULTING
> The American Bankers Association reported that 3.22% of consumer
> loans were delinquent at the end of 2008. That is the highest level
> since the ABA began tracking overall loan delinquency rates in the
> mid1970's.
>
> And that was before 2 million jobs were lost in the first quarter.
> An average of 5,945 bankruptcy petitions were filed each day in March,
> up 9% from February and 38% from a year ago.
>
> PRIME MORTGAGE DEFAULTS RISING
> According to the American Bankers Association, 5.06% of prime borrowers
> have missed at least one mortgage payment. This represents 1.8 million
> mortgages. Delinquency rate for sub prime mortgages is up to 21.9%,
> it only accounts for 1.2 million mortgages. More job losses mean
> more prime borrower delinquencies.
>
> The banks will not pay decent dividends until they are through absorbing
> the loan losses over the next 3-4 years. Why invest now?
>

May 07 10:16 AM

[Blake Winston:]

The issue is right now everyone who got slammed last fall and in early March wants "in" sooo bad that they're calling their brokers demanding that they buy "anything" going up b/c they feel like they're missing out.

...that was verbatim what my freind at JP Morgan's trading desk told me. Many smart brokers w/ experience are cautioning their clients not to start foaming at the mouth trying to chase this.

The fundamentals have to matter at some point.

May 07 10:23 AM

[The Aft Deck:]

It's not "if" the market will correct but "when" and from how high up.
could not agree more

May 07 10:49 AM

[Sutida:]

I think there was little doubt from the conceptual stages of the stress tests that the Government would dig deep and cover the hole in the financial sector. The “what happens next” question is the real question being ignored by everyone.

What business will the banks be in?

From the state of the real estate market, it's difficult to expect any fast resurgence there. While I do agree that, yes, the problem is not getting worse but before I rush to market I would like to be convinced that things are getting better.

May 07 10:56 AM

[AndrewBaker:]

Yes, again we get a good article confirming what a lot of us believe, that the market has gotten ahead of itself and as a result the fall back will be that much worse; yet, it's still going! ... Hold on:

as I write the KBW Bank Index has turned negative on yesterday's close after being up 7.1% at the open, and the S&P 500 after going nearly 1% up at the open is now nearly 1% down.

Could this be the start of the very much needed correction?

May 07 11:23 AM

[Steven Vincent:]

I sold 50% of my long position today.

We're at the top of the trend channel on the SPX right now which should produce a pullback to the recent breakout level of 880. That will provide an excellent entry opportunity for a sustained bull run. Your stop would be at the bottom of the trend channel around 850.

The performance of small caps relative to large caps is a helpful indicator. I also like to compare the NYA to the SPX. When the NYA and RUT are outperforming the indications are for decreased risk aversion and a bullish trend. When they start to lag, like during the last week (along with NDX), it can be an indication that a pullback is in the offing. I am expecting a pullback to SPX 880 before an assault on the resistance zone around the 200 EMA at SPX 975-1000.

seekingalpha.com/insta...

May 07 11:54 AM

[Esol Esek:]

Bullish turks,

You aren't going to make the market turn bull all on your own. You obviously need it to happen, but that doesnt mean it will. There are a million factors pulling this economy and market further down..top of the list is that real estate is not coming back until 2011 at the earliest. Stop your never ending bullish comments on every single alpha article on deck.

May 07 02:58 PM

[Tom Colangelo:]

Remember the maxim below, for even though we know what should be happening (intellectually), it often takes a while to come to fruition.

The markets Irrational behavior can far outlast your liquidity when you bet against it.

For every seller who says it's time to get out of the market, there is a buyer who thinks it's time to get in.

Neither knows who was right until after the deal is done.

May 07 04:37 PM

[Mrudula Shah:]

You took the words out of my mouth!! .... "Neither knows who was right until after the deal is done."


On May 07 04:37 PM Tom Colangelo wrote:

> Remember the maxim below, for even though we know what should be
> happening (intellectually), it often takes a while to come to fruition.
>
>
> The markets Irrational behavior can far outlast your liquidity when
> you bet against it.
>
> For every seller who says it's time to get out of the market, there
> is a buyer who thinks it's time to get in.
>
> Neither knows who was right until after the deal is done.

May 07 05:54 PM

[Mrudula Shah:]

One more thing; To-day's release of the stress-test results should spur the economic activity and, hence, the recovery from the recession. The testing brought up transparency to the banks' condition as Secretatry Geithner stated. Of course, there will be naysayers (primarily anti-Obamists) who will say that the tests were inappropriate and others (primarily fair-thnking economists including bankers) who think that these tests were needed and are reassuring to the financial community with regard to banks' lending ability. I am in the latter category. THEREFORE, I BELIEVE THAT THE MARKET WILL RETAIN THE CURRENT UPTREND. A lot of money will start flowing into the market and, in apparently a mad rush of getting in, it will be overbought fast, requiring a correction. However, there will remain certain good opportunities, for both short traders and long-traders, but such opportunities will become progressively harder to find.

May 07 07:00 PM

[jambo:]

Yes, a truly rosy scenario would be 5 years to never. Who is buying processed raw materials? Steel, Alum, copper, plastic nuggets? Where is it shipping to? How many start-ups? Machine shops opening or closing? If it all turned good today it will STILL take several years to ramp back up. Like having faith in anything, even the blessed Obameister, was enough to stamp paid to the years of rape-age and excess money printing. Then guys like mruyog are spewing crap calling out anti-Obamists as if he meant anti-Christs! Good luck with your uptrend sparky, but I hate to tell ya it's a lot deeper than politics. Why dont you go PRODUCE something!


On May 07 08:54 AM Tom Colangelo wrote:

> Yes, the recession is slowing down but what happens next is being
> ignored by most non-professional investors as they continue to buy
> into the rally while the pros are SELLING into the rally.
>
> Here's why:
>
> RECOVERY WILL TAKE 6-10 YEARS,,,NOT THIS FALL, AS PLANNED BY BERNANKE:
>
>
> LARGE JOB LOSSES
> The economy needs to create 125,000 jobs each month, just to absorb
> the number of new entrants into the labor market.
> If job growth were to average 325,000 per month in coming years,
> it would still take four years to replace all the jobs lost in this
> recession, so far. That, so far, is very important.
>
> Underemployment, which combines the unemployed, with involuntary
> part time workers and discouraged workers, reached 15.6%.
>
> Changes in temporary jobs lead job growth / decline in the overall
> labor market by 6 to 10 months. In March, employers cut 71,700 temporary
> workers.
>
> CONSUMER DEBT DEFAULTING
> The American Bankers Association reported that 3.22% of consumer
> loans were delinquent at the end of 2008. That is the highest level
> since the ABA began tracking overall loan delinquency rates in the
> mid1970's.
>
> And that was before 2 million jobs were lost in the first quarter.
> An average of 5,945 bankruptcy petitions were filed each day in March,
> up 9% from February and 38% from a year ago.
>
> PRIME MORTGAGE DEFAULTS RISING
> According to the American Bankers Association, 5.06% of prime borrowers
> have missed at least one mortgage payment. This represents 1.8 million
> mortgages. Delinquency rate for sub prime mortgages is up to 21.9%,
> it only accounts for 1.2 million mortgages. More job losses mean
> more prime borrower delinquencies.
>
> The banks will not pay decent dividends until they are through absorbing
> the loan losses over the next 3-4 years. Why invest now?
>

May 07 08:27 PM

[Northstar10000:]

Everyone wants to look back to what happened before. It is different now. How about Israel going on a little bombing run. It's coming and so is a violent end to this master piece of con job...

May 09 02:13 AM