The March Rally May Indeed Have Legs 34 comments
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I’ve gotta say—I was a bit surprised by the opening life of Evan Simonoff’s column in the October Financial Advisor magazine. He said “Who among us (referring to the financial advisor community) really takes this 60% rally in equity prices seriously.” He then goes on to say it's “remarkable” how many observers are convinced this rebound is for real.
Evan’s column, The Long View, which I read most months, usually provides careful analysis to its arguments. However, this month I was a bit disappointed. Simonoff cites Liz Ann Sonders throughout the article who, it turns out, is actually pretty optimistic about the big market bounce. I didn’t find much if any of the solid data I would expect from an article which looks to support an overall bearish sentiment amongst advisors. Based on what I’ve been hearing at recent financial advisor conferences around New York City, the sentiment is anything but bearish. So let’s take a look at why some advisors might actually take this rally in equity prices seriously.
Good news has outweighed bad news hand over fist since the March lows in the market. It has become increasingly evident that the big market declines from February to March were fueled by panic. Along those lines, I find the case for a W recovery (over a V recovery) minimal at best. The last W recovery was in the 1980s during the stagflation era. The Fed ran a bonkers monetary policy, raising the Fed Funds rate from 7% to 17% in the late 70s to halt inflation. It worked, but it caused a recession. The Fed then lowered rates back down to 9% to stabilize the markets but then raised them back to 19% in 1981, causing the infamous “W” shape. If you chart out the Fed Funds rate against the Dow Jones for that period, the parallels become quite clear. Most people view the Fed’s current monetary policy as accommodative whereas back then it was more ‘combative.’ Recent Fed policy decisions indicate deflation is still more of a short-term concern than inflation which I find interesting since so many traders and investors have already jumped all over the inflation plays. I suppose future inflation prospects are hard to ignore given the government’s massive spending agenda.
I look next to the ‘fear spread’ which often builds in the bond market when a double-dip scenario may be looming. But when I look at a broad range of bond market indexes I can’t help but notice dramatically narrower spreads now than we had at the beginning of the year when unprecedented default rates and depression were being priced in. The bond market has essentially priced out the possibility of a double-dip recession. Investors have jumped back into bonds—especially lower grade bonds—at such a rapid clip that many bond indexes stand to outperform the S&P 500 in 2009, an odd victory in a year where equity prices could be up 20%+. As an advisor, I’m hoping for some hint of a rate hike in the near future so bond pricing cracks and I can buy some high quality issues anywhere near par.
On the spending front, we can’t ignore the retail sales numbers which came in earlier this month. September showed a second consecutive month of ex-auto improvement. The weak dollar has done its part by bouncing exports and buoying commodity prices significantly. The housing stats have clearly been improving although one can’t help but point to the housing tax incentive for artificially floating the market. I think the program was a smart idea to help consumers and banks but I think it’s almost time to cut the plug. It all adds up to higher taxes for the wealthy in the future which I believe is an incorrect but nearly given solution at this point.
In terms of unemployment, the pace of job loss has decelerated sharply from those awful numbers earlier this year. With inventories at low levels, rebounding consumer spending, and corporate earnings strong as we’re seeing in the 3rd quarter (especially in the red-hot tech sector,) job growth should be on the horizon. On another note, I’ve heard some pretty out-of-the-box opinions lately regarding unemployment and its potential effects on the economy. Some believe we’re entering an era of naturally higher unemployment (6%+). There are various explanations for this ranging from technological innovation leading to improved efficiency, globalization, business-unfriendly tax policies, etc. The point is that many economists believe not only that the economy can sustain a healthy pace of growth with a slightly smaller but more efficient workforce but also that equity prices can and have traditionally performed just fine immediately following periods of historically high unemployment.
--
Now, let’s talk about the elephant in the room: government spending is out of control. We could approach this from various angles ranging from TARP to overly-accommodating tax incentives to ballooning entitlement spending, the new healthcare proposals, etc. The government certainly has the power to screw the improving economy they helped to create. At this point I think it’s a given that marginal tax rates will jump next year at the rate government is growing. Obama couldn’t raise taxes in the middle of the recession—history already taught him why that would have been disastrous. But once economic growth is back on track those individuals and small business owners earning over $250K should gear up for 40% or higher on the federal tax brackets. If you’re a guy like me, living in New York City, my effective tax rate after federal, state, city, social security and Medicare is already somewhere around 50%. Let’s hope those Jimmy Carter brackets aren’t on their way back into style. If you look at the data, the private sector always spends money more efficiently in the long-term. Unemployment generally rises in periods when the government's spending share of GDP rises. Let’s hope Washington is smart enough to avoid these dismal scenarios that market bears love to draw conclusions about.
My bottom line is that we could move higher from here. I believe pre-Lehman equity pricing (S&P 1200) is a fair target and I believe, pending more positive economic data, that we can get back there by the end of Q1, 2010.
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This article has 34 comments:
It's just annoying that the analysts do not seem to recognize that a decent rise in consumer relates indexes (confidence, housings etc) cannot move so much before the employment gets traction. So we have these questionable growth forecasts for indexes that cannot move so much today. With evident effects on the markets.
I believe that's exactly the opposite: government spending share of GDP generally rises in periods in which unemployment surge due to layoffs in the private sector. In fact the unemployment rises first, and then the government spending. This is obviously because this spending goes to cover part of the lost jobs.
With that said, I need more bulls like you out there making your case so I can continue to short this market back down to 666 as we complete the 2nd leg of the V ..........or W to others.
That is where you lost me. The first half of the rally was explained by rising markets "despite" the horrific news. Then, after the fear dissipated, the second half of the rally was explained by the news being less horrific than expected. At no point has good news outweighed bad by any objective standard.
From unemployment to consumer spending and housing, you are just not seeing the same data I am. Slowing losses are still losses. Consumer spending increases from previously dismal numbers are still dismal. And housing is just not good if you look at the figures with any attention to detail (shadow inventory, rising foreclosures in previously less troubled markets, pending resets on option ARMs, etc.)
Just wait and see what happens this holiday season. That will expose the real state of the economy, I think, and end the party. It is undeniable that the Fed's monetary policy has forced money to chase returns, but even that will end as there is a rush to the exits in order to preserve the gains that were made. I think S&P 800 is more likely than 1200 for the end of Q1 2010. I think a better guess is probably 900 give or take. But I just don't see these legs you speak of. Maybe it's the phantom pain of the recently amputated economy.
We are still waiting for some economically sound good news although they have been saying that will be forthcoming for months now. So far they have given us housing tax rebates on summer cyclical buying and cash for clunkers which kills the resale value and demand for used cars in replacement for shiny boost GDP cars. Apparently the government likes destroying your asset value just to get spending up for a quarter.
Sure the market can go up from here if only the government can drop the value of the dollar another 10% and spend even more money it doesn't have on programs that make no economic sense at all. We should not be rooting for this though.
But as my avatar says, "A=A".
Its getting annoying, all the cheerleading for green shoots that are WAY late and microscopic. Time for some serious substance from the national leaders. All these games are getting us nowhere.
or thinks that Paul Volcker was appointed by Ronald Reagan to cure the "stagflation of the 80s"
anyway, it's not impossible that the S and P will get to 1200 in the near term. I hope so ...but... the 70th anniversary of Black Tuesday is tomorrow and I'll be ready to sell more and buy yet more inverse etfs yet again.
...."Based on what I’ve been hearing at recent financial advisor conferences around New York City, the sentiment is anything but bearish. "
kid, salesmen are never bearish.
Either you have an identical twin or you are following yourself around.
I suggest you look for a better mentor.
Youth is no excuse for ignorance....this market is not moving on fundamentals, it's dog eat dog to not be the last one in...or out.
The best line I have read for a long time!
(I had to register just to say that :)
On Oct 28 10:18 PM Dialectical Materialist wrote:
> Wow. Really?
> From unemployment to consumer spending and housing, you are just
> not seeing the same data I am. Slowing losses are still losses.
> Consumer spending increases from previously dismal numbers are still
> dismal. And housing is just not good if you look at the figures
> with any attention to detail (shadow inventory, rising foreclosures
> in previously less troubled markets, pending resets on option ARMs,
> etc.)
>
> Just wait and see what happens this holiday season. That will expose
> the real state of the economy, I think, and end the party. It is
> undeniable that the Fed's monetary policy has forced money to chase
> returns, but even that will end as there is a rush to the exits in
> order to preserve the gains that were made. I think S&P 800
> is more likely than 1200 for the end of Q1 2010. I think a better
> guess is probably 900 give or take. But I just don't see these legs
> you speak of. Maybe it's the phantom pain of the recently amputated
> economy.
On Oct 28 06:38 PM untrusting investor wrote:
> Well, one hope you guys are buying the dips now based on your continuing
> bull beliefs, as it has worked so far since March. There is lots
> of selling now by the momentum guys exiting as fast as they can,
> so you should be able to get some great deals, if you believe the
> stuff you have written. Meanwhile the rest of the folks will wait
> for much lower prices to buy anything.
What is not lost on me though, is how much the ulterior motive for bearish sentiment has grown in light of the rally. I still share some bearish sentiment regarding the economy, mostly due to a seemingly inept administration, a failing congress and a “main street” too stupid to see past compensation at banks to the real causes of the crisis. Those things do give me pause. But when I hear a bear these days talking about the market, I cannot shake the feeling that many are now being purposely deceptive. Why? They've realized their thesis is wrong and that they need to get into this market now - but "not at these levels." One of the rare times Jim Cramer has been right is when he said that bulls do not have a monopoly on attempting to influence a market in a certain direction. We are all very familiar with the guys who write articles or go on tv shows and start touting certain stocks. Yeah, they probably own them! We all know to have a healthy skepticism of someone who starts plugging for a stock or sector. But what is noticeably absent from the market psyche, is how this tactic can easily be employed by bears, and has been for the past few months. Its a guerrilla tactic that the bears have hoped would eventually weaken confidence in the market. This tactic amounts to a group of 10 people surrounding a gymnast on a balancing beam shouting "you're gonna fall! you're gonna fall!". Five gold medals under his/her belt, but somehow, that gymnast will fall. That is what is going on here; and it is also why the bears have only gotten louder and more shrieking as the rally has continued on. If the gymnast hasn't fallen, you need to yell louder, start jumping up and down, flail your arms a little bit. Every now and then, though, you get a type of individual who is able to zone-out all that background noise and complete his/her maneuvers despite the heckling. That is what has been happening with the market for the past 7 months.
And that is what you all are. Hecklers. You missed the boat, and rather than sucking it up and buying on a 4% correction (there have been a few), you continue to rant and rave, slamming your shoes on the proverbial table, yelling "we will bury you" like some modern day Khrushchev. Its asinine. Give it a rest. Just a buy a dip like the rest of us normal people and cross your fingers that an S&P 1150/1200 is possible by December 31, 2009.
Oh and PS - for the record, one poster (logicalthought) made a comment about the author’s age and experience in the market not being as long as his. Last I checked, its these “experienced fund manager” types who have underperformed by 55% over the past 7 months. If that’s what ‘experience’ brings, I think I’ll have a 3rd grader handle my money in the future. Such condescending hubris is often more telling of its source, than its intended target.
Amen.
Amen also.
One thing I've noticed about many of the bears (I won't tarnish them all, some are able to express very good reasons for caution and skepticism) is that they come close to denying that the rally has taken place. They are in denial. So they invent conspiracy theories, etc., to create the illusion that the market rally has been an illusion. As you said, they should be watching their $'s rather than their theories. I forget who said it, but one of my favorite quotes is "When the facts change, I change my opinion. What do you do, sir?" Many of the people you write about haven't been able to change their doomsday opinions in the face of overwhelming facts, the most obvious of which has been that the market has gone up 60% since March.
As you said, this rally has been fun!
Pretty sure that was Keynes.
On Oct 29 01:29 PM Russell Bailyn wrote:
> Bravo DinNYC. I typically ignore the commenters because they harbor
> anger over their own dismal portfolios and take it out on anybody
> with bullish sentiment. What a good laugh I got this morning when
> I read about how young and misinformed I am (thank you folks) and
> then saw the GDP number and ensuing Dow +150. Its icing on my cake,
> and in my portfolio.
Many of us (myself included) did not miss the boat. I got on in March and early April when I saw things were ridiculously low (guessed actually because let's face it, no one KNOWS for sure). Then I got (mostly) off the boat in the summer. (Sure maybe it was too soon in hindsight, but I think it's called "taking something off the table." I still have a decent position in stocks (about 40%). I am not afraid of the rally nor hoping for a 4% correction to jump back in. But what I tell anyone who seems to be a perma bull is "Let's have this conversation next spring." Maybe you will have out performed me and the S&P will be at 1300. But if the economy catches up to the market, as I think it must eventually do, I'll be buying in at 900 and waiting for the real recovery.
And I agree that the bears have helped sustain the rally. But there is always a lot of bullish sentiment at the peak as well, so I enjoy your bullish opinion as much as you enjoy my bearish one.
Also, I've never found "crossing your fingers" to be a good investment plan, but to each his own.
On Oct 29 10:39 AM DinNYC wrote:
>
> And that is what you all are. Hecklers. You missed the boat, and
> rather than sucking it up and buying on a 4% correction (there have
> been a few), you continue to rant and rave, slamming your shoes on
> the proverbial table, yelling "we will bury you" like some modern
> day Khrushchev. Its asinine. Give it a rest. Just a buy a dip like
> the rest of us normal people and cross your fingers that an S&P
> 1150/1200 is possible by December 31, 2009.
If you think businesses will not find a way to be profitable despite high unemployment you are just crazy. If you think rich people will suddenly be okay with not being rich, you are equally crazy. The market will rise despite the sufferings of the American people at the hands of faulty economic policy. And I do not have sympathy for the American public, and american media, who were so derelict in their duty to examine the background of a presidential candidate, his ideologies, and his decision-making process. Lets all remember how angry we were with Bush over the debt he ran up and now how lackluster that outrage is with Obama. You're right to be bearish in the longterm, but not because the market is failing to show its vitality. Dont blame the market for the failures of this incompetent radical ideologue that the public elected. If you're buying in at s&p 900 in a few years, I hope you'll be able to recognize that the market did its best to offset this president with a penchant for appropriating and spending other peoples money. I'm being colorful - he's not a lunatic. But wouldn't the economic policies make more sense if he were?
The bulls have been generating wealth since March and the bears have not been. You're right that in the case of any bull run, we should have our eyes peeled for the right time to exit or cut back our positions and start thinking of the money we want to have in 10 years. That time isn’t now, and it is just silly that so many have spent so much time hand wringing. This talk has been the same the entire way up. The tune hasn’t changed. Yes, if you keep saying the same thing for a long period of time, you will eventually be right. But what if you become right at DOW 12k? But that same thesis has been put forward since Dow 7k... Contrary to that, the bulls have been running the same thesis since dow 7k up to Dow 10k (which, fingers crossed, we’ll get a glimpse of again tomorrow); and they continue to make money.
Most of us do have a thesis or belief system that does recognize a top (for the time being). It just isn’t Dow 10k. I personally believe that everything that occurred after the Lehman collapse was as much a fiction as the bears see this market rally as. Panic and fear do not represent market fundamentals. The bankruptcy of Lehman certainly had an impact, but the panic and fear caused by the rippling of this behemoths collapse caused more. And pardon my French, but that’s just stupid human BS; its the idiots who sold off their portfolios at the end of April, many of whom have become permabears because it’s the only way they can sleep at night after watching this rally. They got screwed. They got swept up in the panic that the media loves reporting on (and enhancing). I’ll admit I am very cautious around S&P 1100, and will remain cautious until the market proves itself. As I was at spx 975 and spx 1050. Personally, I have not been as bullish as I could have been. Not by a LONG shot. I am a trader, and continue to trade around core positions with a bullish sentiment, with occasional hedging when I just can’t stomach it. I think many of the bulls feel that the bearish calls of Armageddon are just hyperbolic nonsense at this point. Its a lot of “but if this happens! Or if that happens! Or if this then that happens...” Yes and Al Qaeda can bomb two more buildings tomorrow and the whole damn thing could sell off. Anything can happen. But to not invest at the beginning of an economic recovery is just ludicrous.
But as an offering of flesh to the bears, I will say I am going heavy into SIRI earnings expecting record subscriber growth, and a bullish guidance. So if you don’t like the stuff I’ve written, you can wait a few days and potentially have a big laugh on my account if Sirius tanks. LoL. No Risk No Reward.
On Oct 29 05:28 PM Dialectical Materialist wrote:
> Don't assume bears are bitter about having missed out.
>
> Many of us (myself included) did not miss the boat. I got on in March
> and early April when I saw things were ridiculously low (guessed
> actually because let's face it, no one KNOWS for sure). Then I got
> (mostly) off the boat in the summer. (Sure maybe it was too soon
> in hindsight, but I think it's called "taking something off the table."
> I still have a decent position in stocks (about 40%). I am not afraid
> of the rally nor hoping for a 4% correction to jump back in. But
> what I tell anyone who seems to be a perma bull is "Let's have this
> conversation next spring." Maybe you will have out performed me
> and the S&P will be at 1300. But if the economy catches up to
> the market, as I think it must eventually do, I'll be buying in at
> 900 and waiting for the real recovery.
>
> And I agree that the bears have helped sustain the rally. But there
> is always a lot of bullish sentiment at the peak as well, so I enjoy
> your bullish opinion as much as you enjoy my bearish one.
>
> Also, I've never found "crossing your fingers" to be a good investment
> plan, but to each his own.
On Oct 29 10:39 AM DinNYC wrote:
> In reviewing these comments, I am seeing much of the same bearish
> sentiment that has helped this bull rally continue to surge on since
> March. I love the fact that there are so many of you alphabet soup
> bears out there worrying about "W's" when you should be focused on
> "$'s". Without you folks hiding in your home-made bunkers with tinfoil
> hats on, the bulls would be without any counterpoint; and the market
> rally might have died off due to a dearth of negative sentiment to
> balance it out. When everybody is bullish, it’s sometimes a signal
> to get out. So I encourage you guys to maintain those money market
> and savings accounts at their current levels, because the rest of
> us are really enjoying making money. Its been fun! And you do get
> a smug sense of satisfaction when you watch bears on TV making absolute
> fools of themselves every week. We bulls are not mindless drones
> drooling over this 55% rally we have had. We are smart investors.
> We buy protection - a put here, write a call there; maybe a sell
> after a nice conviction run in a particular position. We really don't
> consider ourselves cock-eyed optimists.
>
> What is not lost on me though, is how much the ulterior motive for
> bearish sentiment has grown in light of the rally. I still share
> some bearish sentiment regarding the economy, mostly due to a seemingly
> inept administration, a failing congress and a “main street” too
> stupid to see past compensation at banks to the real causes of the
> crisis. Those things do give me pause. But when I hear a bear these
> days talking about the market, I cannot shake the feeling that many
> are now being purposely deceptive. Why? They've realized their thesis
> is wrong and that they need to get into this market now - but "not
> at these levels." One of the rare times Jim Cramer has been right
> is when he said that bulls do not have a monopoly on attempting to
> influence a market in a certain direction. We are all very familiar
> with the guys who write articles or go on tv shows and start touting
> certain stocks. Yeah, they probably own them! We all know to have
> a healthy skepticism of someone who starts plugging for a stock or
> sector. But what is noticeably absent from the market psyche, is
> how this tactic can easily be employed by bears, and has been for
> the past few months. Its a guerrilla tactic that the bears have hoped
> would eventually weaken confidence in the market. This tactic amounts
> to a group of 10 people surrounding a gymnast on a balancing beam
> shouting "you're gonna fall! you're gonna fall!". Five gold medals
> under his/her belt, but somehow, that gymnast will fall. That is
> what is going on here; and it is also why the bears have only gotten
> louder and more shrieking as the rally has continued on. If the gymnast
> hasn't fallen, you need to yell louder, start jumping up and down,
> flail your arms a little bit. Every now and then, though, you get
> a type of individual who is able to zone-out all that background
> noise and complete his/her maneuvers despite the heckling. That is
> what has been happening with the market for the past 7 months.<br/>
>
> And that is what you all are. Hecklers. You missed the boat, and
> rather than sucking it up and buying on a 4% correction (there have
> been a few), you continue to rant and rave, slamming your shoes on
> the proverbial table, yelling "we will bury you" like some modern
> day Khrushchev. Its asinine. Give it a rest. Just a buy a dip like
> the rest of us normal people and cross your fingers that an S&P
> 1150/1200 is possible by December 31, 2009.
>
> Oh and PS - for the record, one poster (logicalthought) made a comment
> about the author’s age and experience in the market not being as
> long as his. Last I checked, its these “experienced fund manager”
> types who have underperformed by 55% over the past 7 months. If that’s
> what ‘experience’ brings, I think I’ll have a 3rd grader handle my
> money in the future. Such condescending hubris is often more telling
> of its source, than its intended target.
On Oct 29 07:34 PM DinNYC wrote:
>
> But as an offering of flesh to the bears, I will say I am going heavy
> into SIRI earnings expecting record subscriber growth, and a bullish
> guidance. So if you don’t like the stuff I’ve written, you can wait
> a few days and potentially have a big laugh on my account if Sirius
> tanks. LoL. No Risk No Reward.
Next, we have government subsidies such as cash for clunkers and an $8000 tax credit for new home buyers. The cash for clunkers program encouraged people to spend and take on increased debt, and the rest of the taxpayers subsidized the behavior - brilliant! It pulled demand forward and gave the auto industry better numbers than expected. What about next quarter? The same goes for the housing credit.
Banks also have millions of homes in their inventories that they have not yet even released to the open market. My point here is simple: The quality of the "good news" should be understood. The news is multi-dimentional. Just saying that car sales or home sales increased is single dimentional and fails to deliver true understanding.
While the aforementioned text may have a bearish bias, I am not suggesting the market is going one way or the other. We all have seen how good news, whether it's quality good news or not, can drive the market up. At the same time, how long can faux good news keep the market climbing? I certainly do not pretend to know, but I do know that I will read deeper than the soundbites the media choses to spoon feed me.