Is This Rally in Its Final Innings? 23 comments
-
Font Size:
-
Print
- TweetThis
From the sublime (March 3rd) to the ridiculous (May 7th)…
On March 3rd, I wrote an article for SA titled Can You Hear the Bell Signaling a Bottom? It was my contention that, as usual, things had been overdone on the downside. I had a client call that day to ask why I was buying when “everyone knew” (or at least the talking heads on TV claimed to know) that the market was going to 3,000.
I wrote then,
Can I foretell the absolute bottom of the market? Of course not. And neither can anyone else… What I can do is study what constitutes over-valuation and what constitutes under-valuation and stair-step out when I suspect the former and back in when I suspect the latter… And I can do one more thing – I can avoid panicking when the great majority are selling everything and anything at any price so they can hide their greatly reduced dollars under the mattress.
Where do we stand 8 weeks later? As usual, things have been overdone on the upside. That’s why our clients are now about 80% in cash and boring top-quality bond index funds, about 10% in high-yielding preferreds and convertibles, and about 10% in inverse ETFs, gold, and a “skosh” in currency ETFs. (See our recent SA article, How to Protect Yourself From a Falling Dollar.)
If I am in a car that has lost both brakes and steering, and is careening down a 30% grade toward a cliff, even if the grade becomes a downgrade of only 20%, it’s still going to go over the cliff. It’s time for me to exit the vehicle.
That’s where I see investor sentiment today. We were losing jobs at a rate of 663,000 in March (there’s that 30% grade,) now we’re “only” expected to lose 491,000 in April. “Whoo-hoo! Let’s party!” is the reaction of people about to lose their money in the market. It’s still a 20% grade and the cliff is getting nearer! 491,000 more households may lose their homes or go on the dole this month. This is hardly cause for celebration. As Tevye says in Fiddler on the Roof, "It's no great shame to be poor, but it's no great honor either.” The loss of 491,000 additional jobs may be less shameful than losing 600,000, but it’s no great honor either…
It’s the same with today’s news about the bank stress tests. The 30% grade we were sliding down is that Bank of America (BAC) needs as much as another $34 billion in capital, instead of just dying gracefully like its atrocious lending decisions would have, without intervention, resulted in. But now we’re only hurtling toward the cliff on a 20% grade because, “Whoo-hoo!,” they know where they can get the $34 billion -- just convert all the previous taxpayer loans from the preferred stock we insisted upon to the ever-more-worthless watered stock they call common shares.
If tomorrow we find that “only” another 420,000 Americans lost their livelihood, is that cause for celebration? Is the imminent re-setting at higher rates of tens of billions of dollars in option ARM ninja and liar loans a reason to order another round? Are the statistics on newly vacated office buildings, retail malls, and industrial and warehouse vacancies good news because they weren’t worse? I think not.
Less-evil doings, less-bleak earnings declines, and fewer-than-predicted citizens thrown out of work is not cause to bring in the punch bowl. We have not regained steering, nor brakes. When it comes to careening off cliffs, a 20% grade will ruin your day every bit as effectively as a 30% grade.
DISCLOSURE: Uncharacteristically, about 80% in cash and top-quality bond index funds like SHY and BND, about 10% in high-yielding preferreds and convertibles, and about 10% in inverse, currency and gold ETFs like EUM, SH, SEF, GLD and CEW. Looking for banks that have run too, far, too fast, as short candidates.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 23 comments:
Paging Cetin Hakimoglu to deny reality and insist the market can continue to rally forever in 3 ... 2 ... 1 ...
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...
Things haven't made sense for a while now.
Did the Fed think markets would bid themselves up to 2007 levels and allow banks to unwind their MBS' without any kind of natural pullback?
Is Goldman inflating oil at a time when the oil traders are going to beg for more production cuts on May 29?
The employment numbers say people are still losing jobs. I grow weary of hearing the loss numbers being held up to show their less severe. Their severe on top of severe.
Everybody wants a bottom but they don't want to ask the question that will bring those green shoots, then do what has to be done to get us out of vapor lock.
The question is:
What percentage of bank's balance sheets are toxic asset and what percentage are healthy capitalization?
Next, banks revalue their toxic assets or unwind them by selling them to the govt.
Until that happens, we're in a bear market rally that's getting hyped by CNBC who like to interrupt anyone who has a logical argument to say things are not as rosy as they seem.
Investment houses are on the sidelines.
The public will take yet another haircut until the above steps are taken. Greed keeps deluding the public into believeing this next rally is the sideline money coming in.
Smart money isn't going anywhere near this market till fundamentals are sound. Smart money knows the powers that be - will and do lie to the public to sway public sentiment.
Hey Public - see Dodge - there's your green shoots for you.
I posted the comment below a few days ago, and immediately got four "thumbs down" from people who would rather ride the train than think for themselves:
" ... while you say "The financial crisis has been 'fixed' ", I suggest instead that we have successfully moved from financial "meltdown" territory to merely a bad situation -- weak lending and poor earnings by financial institutions, with few exceptions. We're not yet half way out of these woods.
When you say, "I see no compelling reason why news [equity] letter reports would suddenly turn bearish", it seems to be simply a case of being overbought. In their rush to jump on many stock bargains made available by the huge a year-long decline, investors have gotten ahead of earnings and the economic recovery still ahead. Further, may eventually come to grips with the possibility of a very slow recovery rate of growth for a prolonged period, given the cost of the bailout that will somehow extract payment. Last, many equity holders were badly burned by the depth of the market decline. They may be ready to take recent profits off the table for now. I still think there are stock bargains out there, but this is not necessarily the time to jump in with both feet. "
Not that much as changed in a few days!
--R
On May 07 11:56 AM Steven Vincent wrote:
...> 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.
USB E, G, and J; BBT A, PMB P, MSDXP, PNC L, PNH, PNU, SIVBO, VLY A, MTB A, PVTBP, and the slew of WFC preferreds to include WFC J, FWF, WSF, BWF, and GWF and some of their Wachovia preferreds like WB B, C and D, and insurers WRB A, KTN, KVW, KVF and KVN.
On May 07 12:13 PM William James wrote:
> Very good article, thank you for sharing it. I would appreciate
hearing your thoughts about specific preferreds you are following.
Best regards, and good luck to all,
Joe
On May 07 01:35 PM Jasper M wrote:
> Good article. Nice work, thanks for sharing.
We are heading down to retest the lows.
On May 07 01:27 PM Joseph L. Shaefer wrote:
> I'm willing to do so, Mr. James, but there are over 50 on our "watch
> screen," so I'll just list a few. Plus, as a Registered Advisor,
> I provide the caveat that I don't know your, or any other reader's
> specific financial situation, so I do not and will not recommend
> these but merely offer my analysis that I have found them interesting
> enough to consider for those clients whose financial situation we
> are fully aware of. Please note that we have purchased virtually
> all of these, but sold them in the past week or have current orders
> to do so. We plan to buy many of these back if/when we reach the
> next bottom of the "W" that I believe we'll see this year. (I see
> us somewhere near the top of the middle of that W today.) They include:
>
> USB E, G, and J; BBT A, PMB P, MSDXP, PNC L, PNH, PNU, SIVBO, VLY
> A, MTB A, PVTBP, and the slew of WFC preferreds to include WFC J,
> FWF, WSF, BWF, and GWF and some of their Wachovia preferreds like
> WB B, C and D, and insurers WRB A, KTN, KVW, KVF and KVN.
>
Maybe we can turn it into a drinking game. Every time Cetin says or writes "surging", everyone mus drink.
P.S. It's spelled Wal-Mart, NOT WALLMART!!
P.S.S. Looks like you should visit the old waxing salon...
On May 07 12:57 PM Cetin Hakimoglu wrote:
> But the market keeps surging anyway because the jobs being lost are
> considered to be economically beneficent. The service sector (fast
> food, wallmart door greeter, nail & waxing salon, legal, healthcare)
> and high tech (facebook, apple, google, web 2.0, cisco) are growth
> industries because they create value and profit for employers. This
> is capitalism & free markets at work.
>
> ----------------------...
> That’s where I see investor sentiment today. We were losing jobs
> at a rate of 663,000 in March (there’s that 30% grade,) now we’re
> “only” expected to lose 491,000 in April. “Whoo-hoo! Let’s party!”
> is the reaction of people about to lose their money in the market.
> It’s still a 20% grade and the cliff is getting nearer! 491,000 more
> households may lose their homes or go on the dole this month. This
> is hardly cause for celebration. As Tevye says in Fiddler on the
> Roof, "It's no great shame to be poor, but it's no great honor either.”
> The loss of 491,000 additional jobs may be less shameful than losing
> 600,000, but it’s no great honor either…
For all the time I have been at SA, I have been reading well reasoned articles that "S&P is going to 500!", "No, 450", "New lows", "Short the market NOW". Just a week ago - "Sell in May, go away!" I’d say 4 out of 5 articles are definitely bearish. On the other side of the fence is very few like Cetin who just repeats the same mantra without ...good arguments like the other side
Well, I am that sucker who is supposed to be robbed by this market. I have been stupid enough NOT to follow the consensus of gloom. I survived March 9 and so far is up 42% YTD, just by investing and keeping my stops tight. This week I didn’t “go away” and made 30% of my profit.
I have been eager to learn, but my scientific scepticism puts this into perspective – what can I learn from these guys if it looks that they are wrong with their predictions? And still praising each other with analyses well done? Not a good sign – if a working hypothesis does not work, you do not stick to it.
I still have a lot of respect for all you, guys. I like charting and respect your knowledge – well, I analyze data at work all the time and like visualizing my analysis.
But I am confused – maybe my ignorance is bliss?
I appreciate any, even extremely negative comments. I just want to undertsand...
On May 07 06:23 PM Greyowl wrote:
> I do not want to offend anybody, but I am sure that I'll get a lot
> of negative evaluations as my impression is that I am in the theater
> of absurd.
>
> For all the time I have been at SA, I have been reading well reasoned
> articles that "S&P is going to 500!", "No, 450", "New lows",
> "Short the market NOW". Just a week ago - "Sell in May, go away!"
> I’d say 4 out of 5 articles are definitely bearish. On the other
> side of the fence is very few like Cetin who just repeats the same
> mantra without ...good arguments like the other side
>
> Well, I am that sucker who is supposed to be robbed by this market.
> I have been stupid enough NOT to follow the consensus of gloom. I
> survived March 9 and so far is up 42% YTD, just by investing and
> keeping my stops tight. This week I didn’t “go away” and made 30%
> of my profit.
>
> I have been eager to learn, but my scientific scepticism puts this
> into perspective – what can I learn from these guys if it looks that
> they are wrong with their predictions? And still praising each other
> with analyses well done? Not a good sign – if a working hypothesis
> does not work, you do not stick to it.
>
> I still have a lot of respect for all you, guys. I like charting
> and respect your knowledge – well, I analyze data at work all the
> time and like visualizing my analysis.
>
> But I am confused – maybe my ignorance is bliss?
>
> I appreciate any, even extremely negative comments. I just want
> to undertsand...
thank you. realistic view.
because of white house connections i would not bet against goldman. employee campaign donations were noticably high.
wouldn't boa be a good short candidate?
i guess commercial real estate will be adding to the dominos and the bankster problems soon enough.
from a retired smal business owners point of view the steps taken have been inthe wrong direction.
"Where do we stand 8 weeks later? As usual, things have been overdone on the upside. That’s why our clients are now about 80% in cash and boring top-quality bond index funds, about 10% in high-yielding preferreds and convertibles, and about 10% in inverse ETFs, gold, and a “skosh” in currency ETFs. (See our recent SA article, How to Protect Yourself From a Falling Dollar.)"
You never need to be long or short, sometimes the best thing to do is wait
kind of like claiming a budget surplus when there is a huge national debt?
GREAT ARTICLE!
I will add a few data points:
1. Interest rates are at Zero. That means they must rise sooner or later and that will not be good for an already weak economy.
2. P/E ratios are out-of-sight and earnings are not getting better they are just being predicted to get worse better.
www2.standardandpoors....
"425 issues (88.94% mkt val) rptd: initial good reports long gone, actuals are -18% off ests (see Energy note), and -36.1% behind last year"
That's from Standard & Poor's, updated within the last few days. Here's the CNBC translation:
"The stock market is up...BUY!"
:-)
> Great article. I agree and have noticed the same thing. Things are
> better because they're not as....bad?? My oh my.... It kind of reminds
> me of and sounds like the government calling an INCREASE that's not
> going to be as large, as a LOSS. Same type of ill-logical, sloppy
> thinking.
But on the plus side we've got interest rates with nowhere to go but up and P/E ratios with nowhere to go but down. Those two are not a good combination. The market will work lower over this year and likely for several years, given the damage down in the past year and the need for continued deleveraging.
Cetin, are you okay?