Gather together small business owners, home owners and heads of families and ask them if they’re concerned about their financial position and the answer would be a deafening yes. This is in stark contrast to the relentlessly rising Wall Street.

For six months consecutive, the U.S. stock markets have steadily climbed, with a few minor interruptions, to gain almost 50% from the March lows. The S&P 500 now trades at a hair under 20 times 2009 earnings estimates and yields 2.5%. The risk free yield of the ten year treasury offers close to 4%. Buyers of the S&P 500 at the March lows were locking in a dividend yield that exceeded the ten year treasury, an opportunity which investors have not seen in more than 50 years. (In my March 8, 2009 article, http://seekingalpha.com/article/124752-has-irrational-apathy-unduly-depressed-asset-prices, I recommended buying the broad market using SPY.)

With the rain ceaselessly falling in our little town of Piedmont and the bike tuned and waiting for just a spot of sunshine, it is time to re-evaluate midyear market action.

Does the stock market reflect, in its pricing, all information available at any given time? This question has been batted about for years by the efficient market or “random walk” theorists on one side and the market timing specialists on the other. In this week’s Barron’s, Burton Malkiel, author of "A Random Walk Down Wall Street", stands firm in his belief that the individual investor is best served by buying and holding broad market exchange traded funds (ETF) such as SPY. Whereas Bill Gross in his July publication states that “the efficient market hypothesis was always dead from the get-go.” He foresees stock markets performing below average for an extended period of time allowing astute investors to beat the market's random walk.

Nothing seems to shake the market. Investors (speculators?) shrug off potential shoes in the face fearing they’ll miss the rising market. The mood has changed significantly since early March when the S&P bottomed below 680. But after a 30% rally in less than two months, stocks are now overbought and will at best pause for the next several months. Indicators and technicals from low volume to failed resistance are proof of an exhausted market. The pop-then-drop, i.e. a rally above resistance at 880 to 900 to draw in anxious investors then the pull back, is a possibility and could keep the market alive for the next week or so. Then my guess is we will see a pull back to a range of 700 to 750 on the S&P.*

SHOE SHOCK

The advantages behind ETF investing are difficult to refute. Instant diversification at low cost, proven outperformance versus highly paid mutual fund managers, and tax efficiency are just a few of the admirable qualities found in most ETFs. But another idea could even perform better in the current market environment, that is, after a large market drop.

Blue chip rebound

Monday, March 23, Petro-Canada (PCZ) and Suncor (SU) agreed to "merge" in an all stock transaction making the merged company the second largest Canadian company (by market capitalization) after Royal Bank of Canada (RY). Shareholders of Petro-Canada will receive 1.28 shares of the merged company for every Petro-Canada share held, while Suncor shareholders exchange one for one. The deal is estimated to close in the third quarter of this year.

Here’s the opportunity: Suncor’s closing price on the NYSE of $23.25 places Petro-Canada’s share value just shy of $30. Petro-Canada ended trading at $27.50, creating an arbitrage spread of about 9%. Buying shares of Petro-Canada and selling the June 30 calls (premium of $2.20) can yield a 17% return plus a dividend payment in 3 months' time, assuming Suncor shares simply remain unchanged.

The days are warm (above zero) and sunny in the little town of Piedmont where I live. The sugar maples are flowing l’eau d’erable, the snow is melting and everyone is in a generally good mood having made it over the hump of winter.

And now, nearly two weeks past the grinding market low that was followed by a sharp rally of some 15% on the S&P 500, it’s time to revisit my article of March 6, Irrational Apathy. No matter what terms are used to describe market behavior, I am in the market to make money, as I assume is every investor. Having suggested going long the market using SPY at 68, it is prudent now with SPY closing Tuesday at 78 to use stops (just below 76) to protect a fairly significant two-week rally. Yes, the March 6 article focused on the positive long term outlook for stocks. It is also necessary to be flexible in the current market environment. By placing stops to protect gains, one always runs the risk of being left behind as the market moves higher. My guess is there still will be other opportunities to buy lower with at least one more leg down.

In October 1996, a few months before then Secretary Treasury Alan Greenspan coined the infamous phrase “irrational exuberance”, the S&P 500 crossed above 700 for the first time. More than 12 years later, with the world economies having grown significantly, the S&P 500 (SPY) has crossed below 700. Mr. Greenspan, in his speech on December 5, 1996 said, “Sustained lower inflation implies less uncertainty and lower risk premiums imply higher prices of stocks”.

The very opposite conditions apply today: extreme asset deflation has lead to greater uncertainty implying greater risk premiums and significantly lower stock prices. The investor has given up all hope and has lost confidence in both corporate and government leadership. Pundits toss lower and lower numbers as if in a contest to the bottom.

Insurance companies offer “a system of protection against loss in which a number of individuals agree to pay certain sums periodically for a guarantee that they will be compensated for loss…” (stolen directly from Webster’s New World Dictionary). For shareholders of publicly traded insurers, this has historically been an extraordinarily profitable investment. But the past two years have wiped out years of accumulated gains. As a matter of fact, the largest insurers are trading below their post 911 lows as well as their demutualization values. For example, Metlife (MET) was a customer-owned mutual organization up to April 2000, at which time the company offered public shares to its policyholders valued at $14.25 per share. Last I checked, Metlife was changing hands on the NYSE under $12, some nine years later.

What’s going on? Insurers are still writing policies and collecting premiums, admittedly at a slower pace for the last year or so. But after nine or more years of steadily increasing policy writing and premium collection, shareholders are now showing a capital loss. What is going on?

Don’t look now but the largest corporate bond offering ever was just announced. Swiss pharmaceutical giant Roche (RHHBY.PK) is attempting to raise about $16 billion in several tranches to acquire the balance of outstanding Genetech (DNA) shares (44%) in a hostile bid announced earlier this month.

Every day we hear how lending has dried up, frozen, stopped along with an infinite variety of similar words. Thus an annoucement of this magnitude should be shouted from the mountain tops, not lost in a one liner that is then quickly run over by more announcements of lack of lending.

When it comes to making money there seem to be more opinions than money. This is startlingly true today after multiple trillions have been removed from world markets since the summer of 2007. (One would think there would be less interest in and more revulsion towards investing.)

I don’t intend this as a knock to the authors (bloggers) who find the world of finance an incredibly fascinating place to inhabit nor to the readers seeking to become better informed investors. On the contrary, an excess of opinions is infinitely better than the opposite. This is, of course, just one opinion.

With all the talk about creating a “bad” bank in the U.S. to place non-performing or questionable assets, it seems appropriate for an investor to scour the world in search of possible “good” banks.

No need to search too far: if you take a 90 minute scenic drive from Buffalo around the west end of Lake Ontario, you will end up in the financial capital of Canada, i.e. Toronto. The six major Canadian banks, all in various states of “good” health, can be found here. The banks in order of market capitalization are: Royal Bank of Canada (RY), Toronto Dominion Bank (TD), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM), and tied for last - Bank of Montreal (BMO) and Power Corporation of Canada (POFNF.PK).

A mentor of mine, Carl Hullick at Morgan Stanley, once told me - when the markets get tough, go to the movies.

Not the best behaviour for today’s markets; most would say downright denial. But as diversion is sometimes the best medicine, I recently took delivery from Amazon of James Jones’ novel, From Here to Eternity.