Current Rally: Are We in May 2003 or May 2008? 26 comments
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A friend asked: What do you make of this rally? Is this May 2003 (beginning of four year cyclical bull market), or May 2008 (beginning of dramatic stock market declines)?
The May 2003 rally turned into a cyclical bull because the economy started to recover, but more importantly earnings growth started to outpace GDP growth (margins expanded). Today’s rally is predicated on the fact that the US is not going out of business – which is great news, but not good enough for this to turn into a sustained cyclical bull.
Investors soon will realize that the growth prospects going forward are not 2003-2007-like. We are going through a consumer deleveraging that will depress the economic growth rate for quite awhile. I am not betting on much margin expansion for the corporate sector as a whole. Though cost cutting helps, the sales growth is not there to exert economies of scale. Also, investors are still looking at past earnings as a guide for stocks’ earnings power. The cold shower of reality is that the past has passed and should force investors to revalue their stocks.
A secular bull is out of the question as overall stocks are still too expensive, depending on what ‘E’ you use in the P/E. S&P 500 is around a P/E of 15-22, which is not cheap.
This is a stock picker’s market. Owning stocks is not good enough - you need to own the right stocks, the ones that meet Quality, Value and Growth criteria (.pdf). Though love of stocks is in the air, again, don’t fall in love with stocks. We are in an environment where being a buy and sell investor is paramount. It is important to sell the stock when it reaches its fair value level. Remember the ‘cyclical bull market giveth, the cyclical bear market taketh away’.
If you overpaid for a stock, in most cases that is because earnings power was overestimated or the margin of safety required was not high enough, or both. Don’t let anchoring drive your decision. ‘Anchoring’ is something that we all actively need to overcome (myself included), It is very natural but the very wrong thing to do. When we lose money on a stock we “anchor” (our sell price being based on what we paid for the stock), we feel the need to at least break even on our purchase as losses cause us pain.
Thus we don’t want to sell the stock at any price below our purchase even if our research leads us to believe that the company is not worth the purchase price anymore. Forget what you paid for your stocks and revalue them again.
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This article has 26 comments:
US (as well as other cash-strapped developed countries) economic recovery will mimic emerging markets' economic recoveries. It is a well-known fact that US relies more and more on cash-rich emerging economies to finance US deficits and bailout packages. If many key cash-rich emerging countries were to decide that they are too busy dealing with their own internal economic problems and want to reduce their exposure to US Dollar-denominated assets, then U.S would be at significant risk of running large fiscal deficit problems with lack of financing sources that could lead to rapid devaluation of their currencies and further reduce attractiveness for emerging countries to invest in US assets. Hence, U.S. is at high risk of being downgraded by major credit rating agencies from AAA now to one level below it; this action could potentially reduce general valuation of US Dollar-denominated assets including real-estate assets.
However, consumer confidence level (*) (a white-horse indicator in our view) is getting increasingly higher -- this is a good sign for consumer spending; if this trend continues, then US markets overall may surprisingly go higher from current level despite all the negative fundamental facts of US economy as the markets may be more flexible to forgive current bad data for much rosier data in the future (market participants become more forgiving and more forward-looking).
Also, the fact that several major financial companies have been able to raise capital via private and public markets' offerings is a real-world proof that the bullish trend has legs. Instead intelligent investors should gauge the valuation level of current level with historical valuation of bear markets in the past 100+ years --- the current S&P 500 index valuation based on capitalization weighted-core earnings and adjusted for inflation appears to be on the low side. What does it mean? It means the markets may still be undervalued and have significant upside potential from current level. Hence, we are cautiously more bullish on America in the long-term as a country that has great political system, unmatched diversity, and entrepreneurial culture with burning desire to keep innovating.
-Sovestor.com
While the economy is still sputtering, it is far from dead. The recovery of the averages recently is not yet a bull market, but a correction of an oversold condition. For stocks to fall again another 50 or 60% from here(because this is where the author might like to "revalue" them), the country's economy would have to regress back to a point where there is 30% unemployment, and we all should grow our own vegetables and hunt buffalo. It ain't gonna happen.
May 2009 -- two years after May 2007 (close to top) ... many are saying that recession could be ending, GDP figure could be up in Q3, but we'll have to wait for corporate profits to bottom, and unemployment rate to peak (probably Q1 2010).
The good news is that the May 00-02 decline was much smaller than the May 07-09 decline, so if we are lucky the May 09-10 consolidation phase will be less painful than the May 02-03 consolidation phase.
Best strategy is to stop shorting the market on every rally. Instead, use aggressive sector rotation strategy and "at the money" covered calls to buy each significant market dip as the economy and corporate profits bounce around for the next few quarters. This way, you are hedged for small decline along the way, and increasing build up long positions throughout the consolidation phase. Most of your gains from May 09-10 is going to be from call premiums and dividends, and if we are lucky, not much decline in broad index (from start to finish -- May 09 to May 10).
On May 25 12:27 PM john redmond wrote:
> If people cannot learn to sell stocks when prices move South,
> then they are doomed to lose all their money. The only great rule
> in stock investing that you need to know is to never ride a bad
> buy down.
Here is a time magazine article from that February 1975 - the first paragraph focusing on the doom and gloom of the day: tinyurl.com/pqp54f
If you didn't look at the date, you wouldn't even realize it was from 34 years ago - you'd think it was contemporary. Of course, the people then made the same mistake that folks are making today. They looked at backward looking data and lagging indicators to try to predict the future. In the end, the market rise didn't stop there - it reclaimed its previous highs within about a year later.
Simple answer: Neither.
Parallels from the past, even from the Great Depression, are of very limited value now. For while we as a nation have shot ourselves in the foot many times, we've seldom if ever shot ourselves in the head. Ignore the Debt Overhang at your peril.
On May 25 03:51 PM Sovestor.com wrote:
> Let's think on a bigger picture:
> US (as well as other cash-strapped developed countries) economic
> recovery will mimic emerging markets' economic recoveries. It is
> a well-known fact that US relies more and more on cash-rich emerging
> economies to finance US deficits and bailout packages. If many key
> cash-rich emerging countries were to decide that they are too busy
> dealing with their own internal economic problems and want to reduce
> their exposure to US Dollar-denominated assets, then U.S would be
> at significant risk of running large fiscal deficit problems with
> lack of financing sources that could lead to rapid devaluation of
> their currencies and further reduce attractiveness for emerging countries
> to invest in US assets. Hence, U.S. is at high risk of being downgraded
> by major credit rating agencies from AAA now to one level below it;
> this action could potentially reduce general valuation of US Dollar-denominated
> assets including real-estate assets.
>
> However, consumer confidence level (*) (a white-horse indicator in
> our view) is getting increasingly higher -- this is a good sign for
> consumer spending; if this trend continues, then US markets overall
> may surprisingly go higher from current level despite all the negative
> fundamental facts of US economy as the markets may be more flexible
> to forgive current bad data for much rosier data in the future (market
> participants become more forgiving and more forward-looking).
>
> Also, the fact that several major financial companies have been able
> to raise capital via private and public markets' offerings is a real-world
> proof that the bullish trend has legs. Instead intelligent investors
> should gauge the valuation level of current level with historical
> valuation of bear markets in the past 100+ years --- the current
> S&P 500 index valuation based on capitalization weighted-core
> earnings and adjusted for inflation appears to be on the low side.
> What does it mean? It means the markets may still be undervalued
> and have significant upside potential from current level. Hence,
> we are cautiously more bullish on America in the long-term as a country
> that has great political system, unmatched diversity, and entrepreneurial
> culture with burning desire to keep innovating.
>
> -Sovestor.com
If you think "all" real estate issues are behind us, then you can expect consolidation this year and a new bull market next year. If not.....
I think its fairly likely that the strongest companies in many sectors, might well take advantage of the weaker competitors, and either buy them whole, or cherry-pick assets via the bankruptcy route.
The tech sector, and the oil producing sector are 2 areas that spring to mind. Even in the financial and automotive sectors, hardly bastions of health, there ARE attractive assets going cheap (in the financials, think asset management arms, and as far as automotive goes, does anyone doubt that the Jeep franchise is a valuable one?....not just in the US, but globally?).
This fellow is talking about P/E ratios being too high... he was probably buying in 2007... He does make a living at this I assume... I mean he is writing for seeking alpha after all.
No one should doubt that this is an historic time to buy equities of all types... there are values to be had everywhere... If you have cash to spare and two to five years to sink it... go for it...
I would focus on buying anything that fills a need in an emerging market (South America, India, China) and you'll be doing just fine. Cell Phones, Materials and Energy.
Just a hunch
There's a HUGE difference between "buying equities of all types" and a focused play on emerging markets, and commodities, don'tcha think?
On May 26 01:03 AM AlphaZedder wrote:
> I'm beginning to think that most contributors to this site are going
> short on everything and inventing theories to "anchor" themselves.
>
>
> This fellow is talking about P/E ratios being too high... he was
> probably buying in 2007... He does make a living at this I assume...
> I mean he is writing for seeking alpha after all.
>
> No one should doubt that this is an historic time to buy equities
> of all types... there are values to be had everywhere... If you have
> cash to spare and two to five years to sink it... go for it... <br/>
>
> I would focus on buying anything that fills a need in an emerging
> market (South America, India, China) and you'll be doing just fine.
> Cell Phones, Materials and Energy.
>
> Just a hunch
- We have hit the bottom, the economy will slowly return to normal
- Markets tend to rise 6 to 9 months before the end of a recession. End of recession could be Q1 2010 and still respect that rule.
- The many/most investors on the side lines will nicely help fuel this bull.
- Consumer confidence is returning, nothing crazy yet but this trend will just continue.
- This in turn returns our economy to previous levels
- A little dose of Inflation (5-10%) keeps this bull well fueled. Anecdotally, just the prospect of inflation is making that 0.9% financing rate offered by BMW look very attractive.
- With a little push by inflation, houses return to 2008 price level by 2013. Helping further make the bull look a little "exuberance".
- Emerging markets resume/expand their 2007 growth levels turning this bull into "Yellow Jacket", wink PBR fans
- Once the bull is raging for few years start to watch for the early signs of the next bubble burst.
Of course I would not bet the bank on this scenario but some skin in the game could prove to be very profitable in the next 6 to 9 months.
To your point though... the fact that I would focus on certain sectors does not contradict the fact that there are values to be had in each sector...
Everyone agrees that the lead out to this recession will be in materials services and commodities to developing markets --
www.wealthalchemist.co.../
"Now, this turn coming up - I think it's just like the fourth turn at Monaco. No, I've never been here before."
"This is just like the chicane at Silverstone, I think, but I've never been here before."
"I'm telling you, listen to me, I know this road we've never seen is unquestionably exactly like..."
Ooops, one tire in the grass again - tug it back on! Nice. <grin>
--rq
Check out my new piece: Trendless Consolidation Will Give Way to Major Move seekingalpha.com/artic...
We're in agreement on that point. ;-)
On May 26 07:33 AM AlphaZedder wrote:
> Old Trader... yeah there is a diff as you've noticed... nicely done.
>
>
> To your point though... the fact that I would focus on certain sectors
> does not contradict the fact that there are values to be had in each
> sector...
>
> Everyone agrees that the lead out to this recession will be in materials
> services and commodities to developing markets --
theburningplatform.com...