Category: Articles

This rally has put me in a rather perverse situation. I’ve been on record several times saying I do not believe in it (the market rally) and it is due for a fall. I still believe I will be proven right sooner rather than later, yet at the same time, I am really enjoying the profits being made being wrong for now. It’s odd as no one like to be wrong, especially when you broadcast those opinions to the masses but having what you own and what you have purchased recently (oil (USO) & gas (UNG) options) rally huge along with the market really takes the sting out of it.

Additionally, since I do not “short”, and have not advised others to do so, there has not been monetary loss from being wrong (the most important point).

Because of all that I have made it a point to post thoughts contrary to mine here in order to give readers both side of the argument (suckers rally or bull market)and let them decide for themselves.

This morning I posted thoughts from “Davidson” contrary to mine.

Here are some supporting my thoughts.

From TechTicker:
Merrill’s economist David Rosenberg left the firm yesterday (planned for several months). And he went out swinging. David has maintained from the beginning that the recent rocket rally off the lows is just a suckers’ rally, and he reiterated that view as he walked through the doors.

Market likely to peak the end of the week [Friday]. Just as the clock is winding down on my tenure at Merrill Lynch, the equity market is winding up with an impressive near-40% rally in just nine weeks. For those that were still long the equity market back at the March 9 lows, a good ‘devil’s advocate’ exercise would be to ask yourself the question whether you would have taken the opportunity, if the offer had been presented, to have sold out your position with a 40% premium at the time. What do you think you would have said back then, as fears of financial Armageddon were setting in? We haven’t conducted a poll, but we are sure at least 90% of the longs at that point would have screamed “hit the bid!”

Are we at risk of missing the turn? Fast forward to today, and within two months optimism seems to have yet again replaced fear. Are we at risk of missing the turn? What if this is the real deal — a
new bull market? This is the question that economists, strategists and market analysts must answer.

Risk is much higher now than it was 18 weeks ago. The nine-week S&P 500 surge from 666 at the March lows to 920 as of yesterday has all but retraced the prior nine-week decline from the 2009 peak of 945 on January 6 to the lows on March 9. We believe it is appropriate to put the last nine weeks in the perspective of the previous nine weeks. To the casual observer, it really looks like nothing at all has happened this year, with the market relatively unchanged. But something very big has happened because the risk in the market, in our view, is much higher than it was the last time we were close to current market prices back in early January, for the simple reason that we believe professional investors have covered their shorts, lifted their hedges and lowered their cash positions in favor of being long the market.

Employment, output, income, sales still in a downtrend. Considering what transpired from an economic standpoint, the decline in the first nine weeks of the year was rather appropriate in the midst of the worst three-quarter performance the economy has turned in roughly 70 years. The rally of the past nine weeks appears to be rooted in green shoots. While it may be the case that the pace of economic decline is no longer as negative as it was at the peak of the post-Lehman credit contraction, the reality is that employment, output, organic personal income and retail sales are still in a fundamental downtrend.

Need to see an improvement in the first derivative. We have evidence that the consumer, after a first-quarter up-tick that was front- loaded into January, is relapsing in the current quarter despite the tax relief (didn’t we see this movie last year?). Not until improvement in the second derivative morphs into improvement in the first derivative with respect to the important economic data will it really be safe to declare what we are seeing as something more than a bear market rally, as impressive as it has been.

This is a bear market rally that may have run its course. The investing public is still holding tightly to their long-term resolve, but much of the buying power at the institutional level seems to have largely run its course, in our view. That leaves us with the opinion, as tenuous as it seems in the face of this market melt-up, that this is indeed a bear market rally and one that may well have run its course. We have “round-tripped” from the beginning of the year and there is real excitement in the air about how these last nine weeks represent evidence that the economy will begin expanding sometime in the second half of the year.

Growth pickup will likely prove transitory While it is likely that headline GDP will improve as inventory withdrawal subsides and fiscal policy stimulus kicks in, our view is that whatever growth pickup we will see will prove to be as transitory as it was in 2002, when under similar conditions the market ultimately succumbed to a very disappointing limping post-recession recovery. So yes, there may well be some improvement in the GDP data, but it is based largely on transitory factors. We strongly believe it is premature to totally rule out the end of the vicious cycle of real estate deflation – residential and now commercial – that we have been experiencing since 2007. Balance sheet compression in the household sector will continue to pressure the personal savings rate higher at the expense of discretionary consumer spending. This is a secular development, meaning that we expect it will last several more years.

Chances of a re-test of the March lows are non-trivial. To reiterate, it seems to us likely that the risk in the market is actually higher today than it was back at the same price points in early January, and we say that with all deference to the stress tests (which given the less-than-dire economic scenarios, along with the changes to mark-to-market accounting, were destined to reveal healthy results). While the consensus seems gripped with the burden of trying to decide if there is too much risk to be out of the market, we actually still believe that the chances of a re-test of the March lows are non-trivial, especially if the widely touted second-half economic rebound fails to materialize…

The data flow is less relevant this cycle than in the past. This was not a manufacturing inventory cycle, which makes the data flow less relevant than in the past. Real estate values are still deflating and the unemployment rate is still climbing; these are critical variables in determining the willingness of lenders to extend credit. And as we just saw in the Fed’s Senior Loan Officer Survey, while there may be a ‘thaw’ in the financial markets, banks are still maintaining tight guidelines. In fact, the weekly Fed data are now flagging the most intense declines in bank lending to households and businesses ever recorded.

Regular readers know I lean towards Rosenberg’s analysis. For a while now I have been saying “not as bad” is not the same as “getting better”. Consider when GM (GM) sheds its dealer ranks this summer, conservative estimates say it will cost another 150K jobs just from dealership closing and almost 70k of last month’s unemployment report (the “getting better report”) was temporary census workers, not permanent jobs. Just these two alone must leave people wondering where to bottom in employment is…

Today we here the Administration raised its estimate for the federal budget for this fiscal year by $89 billion, 5%, to $1.84 trillion. The new, higher number is nearly the same as the one provided by the Congressional Budget Office. Remember that one? Early on is was criticized as being “overly pessimistic”.

On April Fool’s Day I covered the Budget issues here:

But, don’t worry, the Obama administration projected today that the U.S. economy will expand at a 3.5 percent annual rate by year-end, a rebound that would be almost twice as strong as private forecasters expect. I can’t even really comment on that. It is so devoid of any reality……..stunning.

They also expect “housing starts to reach bottom this year and to begin a robust recovery as relative housing prices stabilize,”. Right….we covered that last week here.

Finally the report also said “inflation is expected to remain subdued over the next few years.”

Call it the “Alice in Wonderland” report……

Disclosure (“none” means no position):Long Jan 11 $35 USO calls and UNG Oct. 2009 $15 & $16 calls.

so Davidson has a response and a take on the constant fretting about the “frothy” market and the upcoming sell-off they fear/predict. NOTE: I am one of those “fretters” although not shorting….just not buying

The genesis of this was a recent article in Barron’s that said in part:

HOW MUCH WOULD YOU PAY, IN ROUND NUMBERS of unmarked bills, for a quick 10% retreat in the Dow? For the kind of 10% correction that was a thing to be feared when we went a couple of years without one, but now would make it easier for an investor to buy stocks that are up 40% from their lows, stocks for which there seemed no rush to own just two months ago?

Most investors, especially those long-only pros who grapple a benchmark for a living, seem to wish for a fleeting drop of 10% or more to provide psychological cover for entry.

More staunchly bearish folks — among them those who, based on the latest exchange data, have been reloading short positions — want that 10% as a small down payment on the resumption of the bear’s dominance.

The rest of us just pray for the wisdom to know the difference should such a pullback arise.

Strategist Jason Trennert of Strategas Partners sums up a common stance: “Simple valuation analysis leads us to be skeptical about the potential of the market to rally from these levels. The problem, it seems, after spending the last week on the road and looking at recent short-interest data, is that we have a lot of company — very few of our clients believe the rally is real.”

John Roque, the technical strategist at Natixis Bleichroeder who has been in synch with the rally and the preceding collapse, detects an upside “breakout” on the chart of investor frustration, because they have doubted the rally and owned too little of the stuff that has run the most.

The blogger sentiment poll on Birinyi Associates’ Ticker Sense blog (http://www.tickersense.typepad.com) last week showed 50% bears to 33% bulls — almost as many bears as at the early-March lows. In late January, just as the market was ready to roll over hard, 65% of the bloggers were bullish.

Other sentiment indicators are leading Ned Davis Research to get behind the idea that “a monster rally could continue within this secular bear market.”

This remains a net positive for the market, the idea that investors (and financial columnists, it should be said) continue to “fight” this move. Sure, they (and we) have been fighting it with some plausible ammunition: the slipshod quality of the leading stocks, the massive speculative volumes in stock options, the spike in corporate-insider selling, the fatigued look last week of the recently indomitable Nasdaq index. These characteristics can, and would, accompany both a doomed head-fake rally and something larger, for sure.

Of this think, Davidson opines:

“This is the type of article that imparts a great deal of information without being definite. From this I get that there appears to be great concern amongst many noted investors, esp. technical types, that a correction is due and most have invested in anticipation of a correction to what appears to be obvious over zealousness by current market participants. I don’t invest trying to catch short-term dips. My time perspective is a business cycle with the goal of adding fresh capital during the down portion of a cycle and removing capital during the up portion.

Reading of the angst of traders not knowing what to over the short term leaves me in a positive frame of mind, knowing that their stance in the market will add additional buying pressure when there is additional recovery in the business cycle.

For business cycle investors this is a bullish environment.”

Disclosure (“none” means no position):