Now that we have reached my S&P 1270 intermediate target (click here), do we take profits or do we get greedy? As of this writing, Thursday 10/27 at 13:00 EST, we are at S&P 1278.
Let me tell you what I'm doing. I just sold Woodward (WWD) up 9.5% so far today, Emcor (EME) up 8.8%, Barclays (BCS) up 15.5%. I also bought some more Toll Brothers (TOL) ($18.50), Wesbanco (WSBC) ($20.75), Veeco (VECO) ($26.95), Wesco (WCC) $49), Ingersoll Rand (IR) ($31.30) and Ford (F) ($12). Net, I am 85% long and looking for more opportunities to either sell or buy. The portfolio I track since August 25 is up 22.2% vs. 8.5% for the S&P. I am happy.
However, the big question is whether this is the beginning of the Stampede (click here) or the end. It matters, of course. If it is the beginning, this arbitrage exercise may prove useless - a tsunami lifts all boats. If it is the end, it will prove essential. As I stand now, I would expect 1300 as resistance and 1240 as support. For a wider range, look to 1220-1320.
Click to enlarge
The much talked-about Black Swan is Berlusconi’s government. Well, if it’s much talked about, it’s not a Black Swan by definition, and if Berlusconi falls, it may not be all that bad anyway. Remember, Draghi is now in charge of the ECB, and “Il Cavaliere” may find it more enjoyable to now ride in private, whomever the horse is. No more kissing of Gaddafi.
The stampede has been “validated” by the McLellan Advance-Decline Indicator. More often than not in the past week or so, it has read above 0.65. As of now, it is 0.81. However, it does not capture the magnitude of the move. The S&P is up 2.9%, and as I noted above, many stocks are double to triple that. Indeed, I am up 4.9% on the day. Coupled with the above targets, I will stick with the arbitrage exercise. It has worked so far. While buy and hold, in retrospect, would have worked as well, now is not time to go to the beach.
There is another “however," which is where it becomes trickier. The whole premise of my Stampede argument is not Europe. Contrary to popular belief, I see Europe as the trigger, not the source of the Stampede. Let’s rewind.
For stocks to go up, we need more buyers than sellers. The fuel is liquidity. There is ample liquidity in the financial system, a result of TARP and QEs. We all agree this liquidity should have found its way into the real economy, but force is to admit that it has not. It is still sitting as excess reserves, mainly at the Fed but also at the ECB. Why? I am often told because there are no borrowers, or because the banks do not want to lend. Sure.
But the question is, which order of magnitude are we talking about? The whole $1.7 trillion at the Fed, plus the other trillion or so at the ECB? My argument all along has been as follows. Banks have been waiting for all the skeletons to come out of the closets. In the U.S., we have opened the kimono starting in 2008. Europe has been procrastinating, whether in terms of “stress tests” or sovereign debt, but you cannot lie to everybody all the time. There may be a few other skeletons out there - CDS, commercial real estate, but by and large the biggies are now known – and more importantly, we now have your names, to include MAN Holdings.
Hence my stampede scenario. The banking system is no doubt going to use some of these excess reserves to pluck in the holes, and will start to lend again a bit more. I posit no more than a trillion, and probably half that. Again, order of magnitude. This should leave a big chunk which will find its way into financial assets, whether it’s bonds, commodities or stocks. At the current earnings yield, with less uncertainty about the economy, stocks are my favorite asset class. Remember, if it was not for politics, I would call for S&P 1600. The stampede is all about P/E decompression, you are going to be surprised.
Oh, why did I buy Ford? The Unfunded Pension Bear theme is about to reverse course.
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