As the market continues to trade sideways in August, investors like Doug Kass, Jim Cramer, and Warren Buffett are loudly voicing their opinions on the future direction of this market. Kass went so far as to say that the market has reached a top for the year. Little does he know, he’s just fulfilling my article from back in May that 2009 would be the year of premature top calls. Add Kass to the list. Sorry buddy, I don’t think that’s a list you want to be on. As all of us gather information and make our own market projections, there are a few points of perspective that I would like to throw into the mix.
1-Don’t be fooled by the Geithner bottom. Too many investors are getting nervous about the steep climb we have been on since the March lows. If you remember, the March lows were an anomaly caused by the lack of decision making from Washington. The market was anticipating an imminent solution to the financial crisis but in early March, Treasury Secretary Tim Geithner offered up no such solution. The market tanked. I’m not using those levels as a barometer for how far this market has come. Instead, I’m looking at the massive drop we’ve encountered since 2007. I’m using the Dow 9,034 level that we began the year at. From that perspective, we haven’t had much of a run at all. Are we better off than we were at the beginning of the year? You better believe it. Financial armageddon is in the rearview mirror and we are seeing profitability return to AIG, Fannie (FNM), and Freddie (FRE). Housing has hit a bottom. The rate of decline of economic data is showing improvement. We’re even seeing positive moves upward in durable goods, consumer confidence, housing, etc. In my opinion, a move back below Dow 8,000 represents the re-emergence of a systematic threat to our financial system. Highly unlikely. Whereas a move up to Dow 11,000 represents an orderly recovery that is slowly underway. Highly likely.
2-Buffett’s inflation concerns are legitimate but under control. Ever since the Reagan administration tamed inflation in the early 1980’s, the Federal Reserve has done a wonderful job of controlling it. There is no doubt that the mechanism of rising interest rates does its job to curb inflationary pressures. Fed Chairman Ben Bernanke was slow to lower interest rates in the early stages of this recession because of his own emphasis on inflation. You can be sure he will rise to the occasion when economic conditions warrant. Buffett invested through the 1970’s and will be scarred for life with respect to his constant worry regarding inflation just as we will all be scarred for life with respect to the recent credit crisis. Once you have been burned you will always fear a repeat. Inflation is a legitimate cause for concern because it could derail an economic recovery but I am putting my money on Bernanke that he will do the right thing at the right time.
3-The Government made some wise investments. All of this talk about deficits and debt should be tempered by the fact that the government owns a 78.9% stake in the skyrocketing AIG, an approximate 36% stake in Citigroup (C), an approximate 6% stake in Bank of America (BAC), 79.9% stakes in Fannie Mae (FNM) and Freddie Mac (FRE), 61% stake in General Motors and an 8% stake in Chrysler. It looks like all bailout funds will eventually be repaid with interest.
4-Comparable mania is coming. U.S. consumers have been preparing for the worst since Lehman collapsed last September. We are about to embark upon the one year anniversary of that event and we finally get to compare corporate earnings performance on a year over year basis with the crisis environment of late 2008 and early 2009. The comparisons will only get easier as time goes on and should do wonders for investor confidence. This whole system is built upon a foundation of confidence. Confidence is coming back. Look at the return of speculative investors in the financial sector. These investors are moving from one distressed bank stock to the next. Last year they were shorting them, this year they’re buying them.
We are in the very early stages of recovery. The data isn’t perfect. Don’t expect to see a pretty picture when observing an economic bottom. It’s ugly and it’s supposed to be (employment). But it’s a great time to invest. I won’t be ready to pronounce full recovery mode until the Dow tops 11,000 where it is still 3,000 points below the 2007 highs. Perspective means a lot in this business where so many get lost in the daily minutia. Do you want to be a buyer or a seller in the early stages of recovery? That question is easy to answer if you don’t get distracted by the premature top calls.
Disclosure: Long AIG, BAC and C