The Stock Market Needs Lubrication and a Reality Check

Another catalyst in this rally has been a resurgence of the “whisper” number. It’s provided pundits and fund managers plenty of yodeling room thanks in no small part to analyst estimates being ratcheted down too much. Keep in mind it was less than one year ago that analysts estimates were too high. So, like any sensible analyst who wants to remain gainfully employed, it's better to low-ball than get your head ripped off.

However, when it comes to value and earnings quality, these two vital pieces of the puzzle remain MIA. Until we see evidence of top-line growth (more paying customers), this rally is based on not much more than cost-cutting to bolster the bottom-line.

That said, it is understandable that fund managers have been chasing performance, especially after the pummeling they received this past two years. Then what?

What other threats lurk about? There’s plenty, but 10 plus percent unemployment isn’t exactly a consumer confidence builder. Lagging indicator or not, the market is pricing in too much optimism regarding payrolls. In addition, all the bank and lender bailouts (TARP, TALP...HELP!) assumed we would not exceed 10%.

While we believe the dollar is likely due for a technical bounce, it’s hard to make a case that it’s undervalued. We’re printing too much of the stuff for that to happen.

If you want a flight to safety, why not consider inflation linked securities. One CEF we own is the Western / Claymore Inflation Linked Securities (WIA). It’s a closed-end fund, with about 85% of portfolio in TIPS. The fund is leveraged (22.04%), but average credit quality is AA+. Expense ratio is about 1.21%, but it currently trades at a 5% discount to NAV and distribution rate is presently 3.69%. Another plus: it pays monthly.
Author's Disclosure: Long WIA

Comments

[gambitrader]

I would consider an allocation of gold in any investors portfolio, not just as a hedge against inflation, but as a hedge against depreciation of ones currency.

2009 Nov 23 06:18 AM

[Julian Ivan-Alexander]

"Forget about high beta stocks like AAPL?"

That's absurd - AAPL represents a huge tell on consumer sentiment, consumer purchasing preferences, and the true state of the economy.. in other words the majority of people who have work, have houses they can afford, and loans/credit thy can afford are still shopping at their favourite, and relatively expensive, gadget company - Apple.
That doesn't detract from the fact there's a huge problem with the unemployed, foreclosures, and the tragedy of vast numbers of people consigned to being financial pariahs until they can rejoin the workforce, but the vast majority of people are quite well off, and continue to spend. The consumer is way stronger than people believe because those who spend the most are continuing to spend, and those who couldn't afford to spend much are those most affected by this downturn. Hence the bewildering strength in the upper-end retail sector which is so confusing analysts who can't think outside of the box.
IT spending by business is another matter, and indeed some stocks may have run ahead of themselves. But there are two economies here: that occupied by the majority - the driver of the US economy - the financially strong consumer, and that occupied by belt-tightening corporations and unemployed poorer families who are not that important to the broader economy in any event as they are not big spenders or consumers in any event.
Until this divide is truly recognised and modelled into earnings forecasts and economic predicitions, unpalatable though it may be for many to discuss, we will continue to hear how bad things are, how much worse they should be, whilst all the time watching with our own eyes the stores full of people seemingly oblivious to the what keeps being called the worst depression in history.

2009 Nov 23 06:49 AM

[NoGambler]

Talking about the overall "Market" makes no sense anymore.

As Julian says, it is necessary to segment revenue sources. The poor will always be with us, and so will the monied. That is why I am long on Apple. It is innovating, while companies like IBM do not.

The only other US company I have money in is Dell, because altho its corporate sales prospects seem bleak compared to HP, I see it as a turnaround as Michael puts through some major changes in management philosophy.

91% of my money is overseas because America is in decline. The politicians in Brazil are more honest than what we have here. Face it -- the "Market" today is global and this global market is what men like me think about. It is no longer what domestic stocks analysts like Cramer or Jason prefer to talk about as they advance their own interests.

2009 Nov 23 09:28 AM

[Old Trader]

I'm not certain that I agree with Julian Ivan. Granted, there ARE those who are still "wealthy" (albeit somewhat less so than a couple of years ago), and are capable of spending up a storm, if they chose to do so, but I keep hearing/seeing things that indicate they're also pulling back, although out of worry/prudence, rather than need.

Over the weekend, Bloomberg TV had a segment about high end restaurants in London and NYC that had slashed prices on their expensive wines (several hundred dollars a bottle, and up) to boost sales, and liquidate inventory (no pun intended).

2009 Nov 23 07:45 PM