The 'Melt-Up' Rally Continues

The low-volume, liquidity-driven, short-covering, airy, melt-up rally continued yesterday as bad news from Fannie Mae (FNM) was sold on the open and 15 down minutes was all the buyers needed to hit the bid.

It was a day when semiconductors, financials, homebuilders, oil, gold, emerging markets and pretty much near every group that should have gone up or down or sideways or all three over the past six weeks pretty much went up anyways.

Have you seen Apple (AAPL) lately?

click to enlarge

Apple is up 62% since it bottomed on February 26. The momo guys have run it as if everything is hunky-dory in consumer-land.

As an Apple-user, Apple is a great company, but such a parabolic move smacks of panic buying as risk-taking comes flooding back into the market.

But hey, no worries. Credit crisis? Stagnant economy? Pfft! Stop being a spoilsport! Its party, party, party!

One line of thinking in the unwinding of The End of the World Trade is:

Things could not have gotten any worse than Bear Stearns (BSC), the market did not go down further, thus the market is going higher.

Yesterday's market action is a remnant of The End of the World Trade.

What the market is not discounting, I believe, is The Economy Will Remain Stagnant Longer Than Everyone Thinks Trade.

And there is good reason to believe the economy is not out of the woods yet. The Fed released its quarterly Loan Officers Survey, and it certainly was not bullish.

The Federal Reserve said the share of banks making it tougher for companies and consumers to borrow approached a record after the subprime-mortgage collapse made them more reluctant to lend.

The quarterly Senior Loan Officers' Survey, published in Washington today, underscores the Fed's concern that $318 billion of credit losses and writedowns among financial firms is causing a credit crunch. The survey, conducted last month, also indicates that the Fed's interest-rate cuts and loans to banks have failed so far to defuse the threat to the six-year economic expansion. ...

Most banks increased loan rates over their cost of funds for commercial and industrial borrowing, according to the central bank's quarterly survey of senior loan officers released today in Washington. The proportion of banks raising such rates rose to a net of 70 percent compared to 45 percent in a January report. ...

"The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey," [emphasis added] today's Fed report said.

"That's, like, so yesterday's news," is what you can hear the bulls saying. After all, the market is a discounting mechanism, and all the bad stuff is behind us.

Maybe not.

On the loan survey, Citigroup (C) market strategist, Tobias Levkovich, wrote a piece about this on Tuesday morning that threw cold water on the notion that the worst is behind the economy. To paraphrase the article:

Credit standards for small business loans suggest a worse environment than in the past. Conditions for smaller businesspeople seems more dire than in prior recessions. The reliance on public company balance sheet strength misses the point of potentially weaker private company smaller business trends.

Credit leads the real economy. There is a three-quarter lag between credit standards and corporate investment, and thus companies are on the cusp of seeing their order books soften meaningfully over the next several months.

The risks seem more directed towards industrial companies. With industry margins near 20-year highs, there is considerable exposure to lower earnings guidance as fixed overhead cost absorption variances kick in.

Declines in industrial activity generally translate into earnings declines. It seems very realistic to assume that more cyclical earnings estimates face substantive downward guidance with equity market implications.

Tobias is not a perma-bear, either.

However, none of this matters right now. The market wants to go higher, so the low-volume, liquidity-driven, short-covering, airy, melt-up rally will continue.

Comments

[dig:]

panic buying in APPL? the shares have been rising because of the optimism on the next product cycle which starts shortly, not because of panic. apple's growth story is intact, and looks better than ever.

2008 May 07 08:35 AM

[the big apple:]

again, this is another analysis that completely misses the company Apple has become. Apple is no longer a computer company. It is a LIFESTYLE company. When the economy is down, Apple prevails because people want some kind of entertainment to lift depressing circumstances. People are not going to give up music and you can buy a song for $.99, quickly, legally, and easily. When the economy is strong, Apple prevails because they will sell more gadgets, which is always fun. But even more important is the fact that when you are an Apple customer, you are changing over how your whole life is organized. My suggestion to analysts - get a mac laptop, a .mac account, and an iPhone. See how easy it is to sync all your information, back it up daily, send emails, and conduct business. Buy a song on iTunes. When you see how easy it all really is, you will change your tune as to whether or not it matters whether the rest of the economy is bad. Then again, Apple is the only stock I've stayed with the past 3 years and if it wasn't for skeptical analysts, I wouldn't have been able to buy low and get a 45% return year after year. Thank you!

2008 May 07 08:50 AM

[windycity:]

Uncertainly all those types of optimism mark the condition of extreme buying. Collapse is following.

2008 May 07 08:59 AM

[Raymond Ter...:]

When was the last time you visited an Apple store? Before investing in the stock prior to its earnings report I visited two stores. Arm to arm traffic, sincere consumer interest in 70% of the companies products. Shoppers where buying! I didn't plan on spending a dime and wound up dropping $120.00
While a part of me agrees with your position on the potential risk of this market in an economy with uncertainties at best and inflation looming. Apple is a company that is not driven by hype, its the real deal and is in the process of taking over the PC world, Yes, if the company plays its cards right with respect to marketing, the business world will begin to cave and come to learn what the general public already knows, Apple has the superior operating platform. If they get the iPhone right, iPhone will not only exceed expectations, it will take a huge bite out of the Blackberry market. Range 200.00? to 220.00? I believe these are the most conservative in range. Apple is in the process of revolutionizing the way we use computers and cell phones, as with other companies that have driven such a revolutions, a visionary investor would not be thinking in terms of 30 to 50 % as over achieving. Crystal ball if I where a "C Level Executive" with Apple, how about if an Apple television network where to emerge in the future, the network offers interactive internet access, movies, music and access to your personal iTunes library, iPhoto, etc. Some companies see what is and ask why? others see what will never be and ask why not.

While I respect your position, I am bullish on Apple for good reason.

2008 May 07 09:01 AM

[Lawrence York:]

The market is rising on the bet that their is going to be a bailout for mortgages. Barney Frank is readying it as we speak.

2008 May 07 11:06 AM

[Jason Rines...:]

I like Apple and agree with comments that people in recession look for cheap entertainment and iPoDs and other portable music/video devices are where it's at. I remember two recessions where VCR and movie rentals went through the roof. Same with video games. Through the roof. Will people buy a lot more game systems in this economy for $500. Probably not, but $50 for hundreds of hours of entertainment playing Guitar Hero is worth scrimping on steak or taking less of drive.

Waiting for the bailout on mortgages. I'll think I'll stop paying mine too. Why bother being responsible anymore? Some captain crunch, weed and video games sounds fine to me at this point. It will take a year or more to confiscate the house but then I'll get foodstamps, housing allowance, heat, welfare check, free medical care etc. The new place will be a tad small, but that's OK, getting up at 12:00 and hanging out with friends for a few years will do wonders for my boggled mind (sarcasm off).

2008 May 07 11:35 PM

[DavidScubad...:]

Yesterday I owned 415 shares. Today I own 315. Why the sale? Because I had bought shares during the mini correction, after holding on to shares at $200. It was a nice gamble and I made a good chunk of change (or reduced my average cost, I suppose) as it climbed back up to 185. But I don't feel comfortable having $75,000 of any one stock. Maybe that means I'll never be super-rich, but I already feel a bit (or a gigabyte!) overweighted in Apple. I love the company's products. I love the company's stores. After two years as an investor, I broke down and bought my first apple product. I think the successful investment pushed me to the Mac Pro because I felt like the company made me rich. :)

2008 May 08 08:49 AM

[brewer:]

Another clueless analyst that doesn't get Apple. I'm guessing you didn't buy at $121, probably thought it would go lower. Am I about right on that? What I don't understand is how microsoft can hover below $30 for about a decade now. These guys and all their tech-nerds are in fear of Apple now. Apple used to just be hated for embarrasing them so much because Windows is a bad copy of Mac, always has been. But now, Apple has incredible momentum, and is taking their marketshare. This is only beginning in business, but Macs are so compatible, so good, that IT (in their symbiotic relationship with MS) can no longer deny workers a Mac.

Windows is merely a layer in the Mac OS. Mac OS is the OS now, Windows is just a service.

2008 May 08 08:53 AM