MARKET CURRENTS
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- Saturday, February 11, 12:00 PM Contrarians start to bang the drum for a turn lower in the market after seeing a host of analysts and pundits - including Dr. Doom and Blackrock's Larry Fink - turn to the bullish side on fundamental and technical factors. Continental Capital Advisors warns that while some market watchers see investor bullishness as an indicator that stocks will move higher, it believes lopsided sentiment is the Achilles' heel for markets. Hedge fund manager Uri Landesman keeps it even simpler, noting that "just to sustain the current levels you'd need a surfeit of good news."
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However, sentiment reading notwithstanding, a more important factor favoring the market is the very thing that's been decried as missing, the lack of volume. The markets rise has happened without bandwagon-jumping money piling in; it's happened amidst doubt and criticism. These are the very best types of rises.
The very fact that actual capital flows have been so decidedly bearish, with money leaving funds and piling into bonds and cash, is actually quite bullish for equities. It provides a huge buying pool for any retracements.
It's when conditions are the opposite, with money piled into equities and out of bonds and cash, that one must be vigilant of large reversals. It's then, that the buying pool is thin and the number of prospective sellers is huge.
The fund flows for this year have been relatively flat into equities and still very strong into bonds. Sentiment really means nothing if it isn't backed up with actual investments and that clearly isn't happening with the weak volume.
The move up has been short covering and the lack of sellers.
I don't see deficits affecting the markets or economy in the short term. I think the far greater impediment to growth is the constant bashing of capitalism (banks especially) and pandering for public affirmation through myriad new regulations, mandates and entitlements, etc. In such an environment, businesses are loathe to make major new commitments and/or hire legions of full-time workers (at least domestically). Nonetheless, notwithstanding all the above, the expect the vast sea of money out there to propel the economy and markets to new highs, even if it's measured only in nominal dollars.
Not being much of a technician, or guiding my own investments on such criteria, I can't offer much of an expert opinion, although I don't see any particular reasons why usual algorithms and human behaviors don't apply, as usual.
People invest (or at least should) to make money, not affirm their politics or religion. Those that get lost on that path usually have results for which they would subsequently like to repent.
What you overlook is that corporate results and market values are measured in nominal dollars, not constant dollars. So, saying that the market is near some all-time high from years ago, when nominally-measured results are much higher, isn't instructive. Ultimately, monetary expansion causes money-supply inflation, which elevates the price of everything, share prices included.
So, measured in "constant dollars", how far is the S&P500 from the all-time top?
No idea. I don't track "real" dollars.
Instead, reference stock charts from 1982-1985, when the dollar had a startling rise against foreign currencies. The idea that equities must fall if the dollar rises is a seemingly new belief.
pay attention to bank lending - read the bank 10Q's, weekly claims -the 4 week average - the JOLTS survey
the best way to maintain your buying power is to own enterprises.
sadly by the time many of you see this is a bull market the S&P will be north of 1600 and you will be joining the buying orgasm that preludes most forming tops. sorry but it is the truth.
E
I disagree with you that this is a bull market. A true bull market is one where multiples are on a long term secular expansion. This bull is too dependent on earnings, since the trend in multiples has been down since 1999/2000. So while I agree with you that this market is one you should hold, simply because the economic news has been good enough to suggest continued earnings expansion, it's still precarious.
Since the bottom in 2009 the uptrend has been entirely due to earnings growth, but on every downside correction, more public money has fled the market. I think to get a good bull market going, one that has secular multiple expansion, we need to see the public engaged again, reversing the trend in outflows. Sure we've seen brief periods of new money entering since 2009, and we have been witnessing it for the past couple weeks, but the outflows are even faster on every downturn. I don't think the long term secular inflows will come until we see changes in Washington and the tackling of our long term growth and deficit issues, ie, more confidence that the US is on the right path.
So enjoy this upswing while it lasts, and keep an eye on Washington. But if food/energy costs get too high, which would precipitate another round of tightening in emerging markets, or on poor economic news, take protection or lighten up on riskier, more economically sensitive stocks.
One thing we've witnessed recently that is a bit more positive, is some multiple growth in some of this decades doggiest stocks - ie, wmt, msft, intc - which suggests real investors and not just the speculators are starting to get in. But it's too soon to tell whether we've yet turned the tide in multiples.
But, what does it tell you when earnings expand constantly faster than share prices, resulting in multiple compression? The more that occurs, the more the upside pressure on the market builds. Those that contest this reality constantly mention that "well, earnings just can't keep expanding." Why not? Especially why not when the government in Washington and those elsewhere continuously expand the money supply?
What is so often missed, in my opinion, is that the whole world exists only in today's nominal dollars. There is no such thing as "real" dollars. That's why multiples and share-price expectations have to be compared contemporaneously and not on some fictitious "inflation-adjusted" basis. The stock market is priced in current, and only current, dollars.
The fact that vast sums are piled and continue to pile up on the sidelines is likewise very bullish for the future. And, I'd have to take exception to the comments that always ensue in times such as these that there's a "generational change" and people won't do this or that until such and such. You can go back to newspaper articles of the '70's, '30's, any time and read identical sentiments. It's all baloney. What always happens is that people's fear subsides and is overwhelmed by their sense of loss, watching indices rise while they hover in cash or at 1-2%, and, finally, they move money back the other way, so not as to be left behind, and to pay the bills, too.
People's behavior and market outlook will shift cyclically, as it always does, and the early birds will make the greatest returns, the midpoint entrants will do ok, and the latecomers will arrive just in time to lose money again, be angry and talk of conspiracies. It never fails and won't this time.
I could jump on board and believe the multiple bottom is in if I saw Washington getting its act together; ie, put in place pro-growth policies which tackle both our long term employment problems and deficit issues. But not otherwise, which means the stock market will be subject to the trend in earnings growth. And it's inevitable we'll eventually see an earnings lowering recession. Where could the market be if it's again a bad one and multiples continue to contract? 1000? 900? Lower?
Could we, in the absence of earnings threatening news, move higher this year and next year build on that if Congress finally acts in the interest of this country? And the Dow makes new highs sometime next year? Sure - anything is possible.
But right now there's nothing to make me think that will happen. I own stocks but still have a significant amount of cash because I don't think near 1350 the risk/reward is all that great. And I'll continue to add on pullbacks to individual stocks as long as they appear attractive. But it's just as possible world growth is slower than the market currently expects, earnings growth is relatively flat, Congress remains dysfunctional, the big money stays out of the stock market and the market meanders near current levels.
Or in several months from now the economic stats turn worse again, Washington remains stupid, earnings projections decline and multiples continue to contact and the market sells off to 1100 or lower.
The trouble with the market now is that it's currently based on cheap money globally - which I view as a foundation made of quicksand - rather than the prospects for longer term better gdp growth in the US. I really do believe that until Washington acts in the interests of this country rather than the special interest groups that control their campaigns, it will be nearly impossible to see any sustained expansion in multiples.
We've had this discussion before and I'm growing tired of it. Best of luck.
Tired or not:
1) It's neither important nor possible to pick exact bottoms. The differential now between earnings yields and bond yields is so compelling, as to make the choice between the two easy. Cash is even worse.
2) Just remember that aggressive monetary expansion results in upward movement in nominal prices of all things, no matter how Washington computes inflation. This why neither corporate revenues nor profits will contract on a nominal basis.
3) Yes, there will be a recession out there somewhere, probably a few hundred more (although I won't be here for all of them), but so what? If one made investment only in apprehension of the next recession, one would never buy anything. I guess some don't. In reality, over time, inflation alone, moves markets relentlessly higher. Once upon a time, not even that long ago, the SPX was measured in double digits. Fighting that tide is a game for losers.
4) Your concerns about slow growth are easily alleviated by buying high-yielding securities, and the current compression in multiples makes that strategy even easier. Granted, I am a very aggressive high-yield value investor, but my compounded return the last three years from dividends and interest alone is ~35%. That makes up for a whale of a lot of market stagnation, even price decline.
Tack - we had this same damn discussion in mid-May 2011. I'm not saying that I'm as concerned about the downside as I was then - I'm not - at least for the next few months. But the same logic applies.
Reveiwed that article from last May. As it turned out, if the author kept his short positions he did well. However, it should be noted that the economy has continued to grow in all sectors in each and every quarter since the market side of that prediction, which -- at least in my opinion -- only turned out to be correct because of other factors: Japan earthquake, hysteria over possible U.S. default (truly nuts) and the subsequent downgrade of U.S. debt (which also was without real effect).
So, as we sit here now, yes, we could get in a major swoon, but only if some new major uncharted events pop up on the radar. That's always possible, but nearly impossible to plan for, as an investor unless one wishes to assume a bearish stance and hope for unknown calamity.
The nervous nellies have mostly run for cover. That's why there's massive overloading of cash, bonds and gold. It's when everybody's euphoric about markets, like 2007 or 2000, that you get major nosedives, not when everybody's already in disbelief.
My real advice: You don't stand in front of a moving train, even if you think it is going to derail. The price slope has been steadily up since mid-December, so it should be easy to spot a turnaround, but it won't be a single day no matter how bad that day is. Wait for definitive price confirmation of any change of direction, don't stick your neck out on prophecy.
Greece, on the other hand, is a currency user and must pay back it's euros (or not) because Greece does not have it's own sovereign money supply.
We should see a pullback in the coming week with another move higher into March that sets the stage for a major top this year.
There are a number of contrarian indicators that I use that are flashing warning signs outside of the ones listed above.
Investors should be utilizing stop loss orders to protect gains.
What are you contrarian about?
If they cannot answer that question then they are not a contrarian investor.