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  • The End of the Sucker's Rally of 2009? 1 comment
    Oct 28, 2009 6:48 PM | about stocks: VTI
    After a few days of sickening declines in equities prices around the Earth, you have to ask: are we now at the end of the great sucker rally of 2009? If so, it will certainly mark the end of one of the most reviled rallies in history. Volume was light the whole while, suggesting relatively few people enjoyed the run up. And the whole while, financial celebrities offered free and indiscriminate advice to an invisible audience that the rally was nothing more than a dead cat bounce. Many became new household names, their wisdom accepted by many, and embraced with high levels of conviction by some.
     
    There are a few arguments that support the end of the sucker rally story. First, technically speaking, a bunch of the broadest equities ETFs (for example, Vanguard Total Stock Index – ticker VTI) established a price “gap” last year – an area in the price of a security where nobody would purchase it at any price. Having hit those same price areas only recently, these ETFs have stalled and, indeed, reversed. The gap, the argument goes, is technical trading resistance – a ceiling, a cap on any further gains.
     
    Perhaps, but the counter to that argument is that the short-term moving averages are still well above the long-term moving averages for ETFs like VTI, having crossed over one another merely months ago. To some market technical analysts, VTI will continue to be in a long term bullish trend until the 50 day simple or exponential moving average drops below the 200 day simple or exponential moving average. That hasn’t happened, and there is no way to guess ahead of time whether it will. Until it does, the technical story is patchy and unreliable.
     
    On a fundamental level, some experts suggest that expensive, hard-to-come-by credit, coupled with lower consumption and higher savings by the American consumer, destines equities prices to a lost decade or worse. Intuitively, that makes sense. People are buying less, so profits are lower, and thus, stock prices drop. 
     
    Yeah, well, except for the fact that during an entire decade or more of nearly free and always easy credit, negative savings and frantic levels of extreme consumption by American consumers, equities prices in the US markets are down in real terms (and far down in currency adjusted terms). In fact, cheap and available credit and over-consumption seems to hurt, not help, equities prices. So, perhaps higher interest rates, restrictive credit availability and parsimony on the part of American consumers will actually help, or at least, not hurt, equities prices. Just think, if Americans decided to invest money, rather than fritter it.  Lower credit availability equates to lower leverage, and lower leverage equates to lower systemic financial risk, and all things being equal, people pay more for assets when there’s lower systemic financial risk. The argument that lower consumption, higher savings, and less credit shall doom equities prices just doesn’t jibe with history.
     
    Another angle is the carry trade/ liquidity argument. Many respected experts argue that the flood of liquidity generated by central banks around the Earth has pretty much poured into risky assets, and so, when that liquidity is withdrawn by central banks, it will get pulled out of risky assets, and thus, cause the price for risky assets to drop. Again, an intuitive argument, except for the fact that it is focused on the volume, rather than velocity, of liquidity. And on an even more basic level, the argument is premised on a misconception of what liquidity actually IS.

    Money is not the stuff printed by a central bank. Instead, money is nothing more than a collective belief that we are better off. True, maybe some hot printing presses at the U.S. Treasury can contribute to a sense that we are better off, but probably not. Real liquidity will come when businesses and individuals simply believe in the system more, believe in their futures more, believe that investments and transactions will pay off more. THAT belief is the stuff that lifts asset prices, not pieces of paper pumped into the banking system. And that belief is, if anything, in short supply, rather than over-supply, at the moment.  The real price for assets will go up only  when this belief is increasing on average, and the printing campaign going on across the worlds’ central banks will have only a tangential impact at best. People will pay more for risky assets if they feel better about the future, and will pay less for risky assets if they don’t – and that is irrespective of the volume paper sloshing around the system. Accordingly, it does not necessarily have to follow that when this printing campaign ends (and who can say when that will be), it will trigger a wholesale regurgitation of risk onto the capital markets.
     
    So are we at the end of the great sucker’s rally? I can’t say, but at least some of the arguments suggesting that we are don’t hold water.

    Disclaimer:  The author owns long positions in VTI
    Stocks: VTI
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  • Praveen Chawla
    , contributor
    Comments (1737) | Send Message
     
    Good counter intuitive thinking. I am not sweating yet. The technical s are still looking good - the fed is in a expansionary phase (do not fight the fed), Just some late October jitters.
    28 Oct 2009, 10:23 PM Reply Like
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