Commentary to Support Both Bulls and Bears

If You're Bullish...

According to Mark Hulbert at Marketwatch.com, Trimtabs says we have been in a recession for six months and could be turning up out of it...

Let's start with the bad news: Not only is the economy in a recession, according to TrimTabs, it has been in one for six months now. The only reason that this isn't more widely recognized is that it takes months, if not years, for the government to officially confirm that a recession has started.

Now the good economic news from TrimTabs: There is a distinct possibility that the economy has already emerged from the recession, or is about to.

[...]

According to an econometric model that TrimTabs has devised based on the Treasury's withholding data, Schnapp is estimating that the U.S. economy added 48,000 jobs in March. That's not spectacular job growth, to be sure, but better than the diminution in total employment that TrimTabs believes occurred in previous months.

Schnapp hastened to add that we should not expect this job growth to show up in the employment numbers that will be released this Friday by the government's Bureau of Labor Statistics. That's because, she said, the bureau uses a "backward-looking methodology (that) usually misses economic turning points."

In fact, Schnapp is predicting that the bureau on Friday will report that the economy lost between 75,000 and 100,000 jobs in March. In effect, TrimTabs is warning investors not to be overly concerned about such numbers, should the bureau report them to be this bad.

The daily tax withholding data from the Treasury Department is not the only reason that Schnapp believes we should ignore the bureau's numbers.

Another is the TrimTabs Online Job Postings Index, which the firm describes as a "proprietary measure of online job availability." According to Schnapp, this index bottomed in early January and rose 1.2% in the past four weeks. She argued that "if the economy were collapsing, this indicator would be dropping like a rock, just like it did in 2000 and 2001."

Though the Hulbert Financial Digest does not track TrimTabs, it would appear to have navigated the market's gyrations in recent years quite well. When I last wrote about its jobs growth projections, in May 2005, the firm was aggressively bullish, recommending that clients be 200% long - fully margined, in other words. That was a good time to be bullish, as we may recall. See May 2005 column

The firm turned bearish Oct. 15, within shouting distance of the market's top. They remained bearish until March 23, when the firm turned neutral, and on March 31 it became moderately bullish, recommending an equity exposure level of 50%.

What would it take for the firm to recommend a higher exposure level?

Schnapp, in an interview, indicated that one factor that would likely lead her firm to become more bullish would be a marked increase in share buyback activity among U.S. corporations.

Even absent such a turn of events, however, Schnapp is willing to say that "once panicked investors realize that their fears of a deep and prolonged recession are not materializing, U.S. stock prices could shoot up very quickly."

If You're Bearish...

If you're bearish, the current rally can simply be viewed as an unwind of the bets made by leveraged hedge funds. The following explanation comes from Contraryinvestor.com...

Before rushing to judgment about new bull markets and new cycle credit market and economic expansions based on what we may have "seen" in short term financial market movement, at least personally, we're going to need a little more corroboration. Yes, call us conservative. Yes, call us skeptical. Extremely guilty as charged. Why? First have a peek at the following table.

Now imagine for a second we could turn back the hands of time to the date of the first Fed rate cut in September of last year. Imagine further that you had suddenly and miraculously been blessed with omniscient financial market foresight that was set to expire, if you will, on Friday the 14 of March in this year. You are a hedge operator and need to structure a leveraged portfolio for this duration of time. As you already know by now, the absolute dream levered portfolio would have been long oil, gold, commodities in general, and short financials, discretionary stocks, the brokers, the GSE's and the housing related stocks. You would not have hit a home run with a portfolio like this, but rather would have been viewed on par with the second coming of the Messiah. Long the top four asset classes you see above and short the bottom five could have been close to a career maker for many an investor up until a few Friday's ago. Do you think what have been over time trends in these asset class prices escaped the notice of the levered speculating community? Do you believe those chasing short term performance would not have signed over their first born children to have participated heavily in these trends? Do you really think the ship was not meaningfully listing to one side by those who had collectively put this very trade on since the first Fed rate cut?

Before answering these questions, have a look at the next table.

We're sure you are fully aware of what we are getting at here. What occurred in the week after the Bear Stearns debacle was simply the dream levered hedge portfolio of the last six plus months being turned completely on its head. And what it clearly suggests as one potentially very meaningful driver of performance during that week was levered speculating community leverage unwinding. A leverage unwind that is not finished. As we're sure you already know, if indeed you were a levered fund either choosing or being forced to unwind a portfolio perhaps due to the heavily increased margin/collateral capital calls from the prime broker community in the wake of Bear's sudden submergence, the influence of collective levered portfolio unwinding (raising liquidity) might have looked exactly as is detailed in the table above. To delever you would have sold what you were long and bought what you were short. So although the CNBC fan club may indeed have tried to celebrate the big bear market bottom for the financial markets, what we may have indeed experienced is simply more significant major macro credit cycle reconciliation - levered investment position unwinding (the hedge and levered speculating community). Seems relatively logical, no?

And this is the very reason why we suggest meaningful reluctance in proclaiming an all healed and ready to head higher credit cycle that has all of a sudden been reborn due to the fact that a few financial stocks jumped off of their collective death beds. Although the Fed members have apparently been reannoited as miracle workers, have they really addressed and/or ameliorated THE real problem of the moment which is financial sector balance sheets still loaded with problem credits? Balance sheets now problem long and capital short. Quite unfortunately, and we simply wish along with the Street that it weren't true, a one week change in stock prices does not change balance sheet asset values, especially those values tied to real world residential real estate prices and increasingly commercial real estate values. So for now, despite the emotional and financial price roller coaster ride of recent weeks, we reserve judgment on the true character of fundamental credit market, financial market and real economic change that has taken place. We watch and learn.

Comments

[ACA]

That is an excellent and a very informative article. Please keep them coming. (personal request) any chance of including charts in your write-ups? Thanks again.