jeez...1,250 messages have been posted since i was here last time (2 weeks or so ago). it'll take some time to wade through all of it. anyway, i thought i'd comment on the current stock market rally, which has been one of the most convincing rallies since the March 2000 top, technically speaking. we have everything from Coppock buy signals to Dow theory bull market confirmations, and bears are understandably throwing the towel left and right (a friend of mine who's a broker in Vienna phoned me a short while back to let me know that those of his customers who are short are 'scared out of their wits').
several notable former bears (Jim Stack and Barton Biggs, to name the two most prominent ones) have declared a new bull market in progress. and it is true that the bulls have arguments that have some merit - mostly of a technical nature, but they can point to the fact that LT bottoms always occur in conjunction with terrible economic news, and the economic data of late have certainly been nothing short of horrible.
many individual issues (especially low priced tech stocks and other completely shot sectors like e.g. the energy traders)) have produced very convincing looking bottoming formations and subsequently very convincing looking rallies off those lows. imo there will be at least one more opportunity to play these things from the long side after the next pullback, simply because of this technical (and in some cases like e.g. the internet stocks, also sentiment based) backdrop.
but is it safe to declare a new bull market, beyond a cyclical bull in the context of the secular bear? i think not. consider the following: twice in succession, both the AAII and the II polls bull/bear spread have hit near record highs. mutual funds have one of the lowest cash reserves to assets ratios in history. the insider sell/buy spread is likewise close to a record high. recently the small trader net long position in SnP and ND mini futures has hit previously unimaginable records of 10:1 net long (in case of the ND mini it was even more extreme, with a 23:1 ratio 3 weeks ago, now back to about 10:1). to be fair, they're slightly net short in the big contracts, and i suspect that the short covering from these positions is one of the contributors to this rally. meanwhile WS strategist equity allocations are on average only a few percentage points below an all time high, and this even (as Alan Newman has pointed out) after such extreme polyanna luminaries like Jeff Applegate and Tom Galvin with their 80 or 90% allocations have been shown the door.
all that said, one must keep in mind that especially tech stocks are probably anticipating, or reacting to, a slight cyclical upturn in the inventory cycle. since it is unknowable if this recovery could morph into something larger, the market reacts with big mark-ups just in case. it could also be argued that many (esp. tech) stocks have been truly sold out, i.e. a dearth of sellers contributed greatly to the advance. once a penny stock that formerly masqueraded as a $100 stock has taken off the mask, what else is supposed to happen, unless the company goes bankrupt? it MUST rise, simply because it can't go down much further.
the collapse in the VIX and VXN has at the same time encouraged many bears to overstay their welcome, so to speak - it proved to be a 'hook' for them, at least thus far.
however, it is in the nature of bear market rallies that they are convincing. how else will the bear manage to take the majority of players with it on the long journey to VALUE? and it seems the bond market doesn't believe what is happening. so why doesn't it? look at industrial capacity utilization for instance: it just hit a new low for the move. in short, the liquidation that has taken place to this point has not managed to dent industrial overcapacities in the least. on the contrary, considering that China has seen record investment flows it appears likely that globally capacities have even increased. at the same time China's demand for raw materials has grown by leaps and bounds, which is the main reason for the rally in the CRB index imo. check their import statistics, it is downright incredible. so corporations are still faced with a double squeeze on their margins: rising input costs coupled with a complete lack of pricing power (outside of the commodity producers). partly the rise in commodity prices can of course also be traced to the futile interventionism of the Fed, which reacts the only way it knows how, by printing a lot of money. coupled with a bout of Keynesian fiscal insanity courtesy the administration, demands are placed on resources that cannot be met without a hitch, especially after a near 20 year drought in commodity related investment. that brings us to the other thing that has kept growing, and that's the global debt mountain.
this is still the first globally synchronized economic downturn during which private sector debt has continued to grow almost vertically, especially on the consumer level. it seems to me to be inconceivable that a period of debt reconciliation as its euphemistically known can be avoided. mortgage credit growth in the US, bemoaned by that lone voice in the wilderness at prudentbear.com, remains scary. the same goes for the incredible growth in derivatives, especially those designed to hedge against an eventual reversal in the interest rate trend. we are essentially faced with the same quandary that bedevils Japan: should the Fed be successful in its 'reflation' effort , rising rates will imperil a whole host of activities that have sprung up on the back of the decline in rates to date, from government deficits (if the JGB were to yield 5% for instance, the entire tax revenue of Japan's govt. would be just enough to service the interest costs of its debt) to corporations exposure to the short end of the yield curve, to the entire credit bubble enchilada (note in this context that derivatives cease to be a 'zero sum game' when they hedge a specific risk: they only transfer the risk to someone else in the system. the German banks and insurers have just learned that lesson in the context of credit derivatives which insure against defaults). the free lunch provided by the steep yield curve (borrowing in the repo market and buying longer dated debt, esp. various asset backed debt instruments) will eventually suffer the same fate that other perceived free lunches have suffered before it.
my guess is that the stock market will have to reflect the puncturing of the consumer debt bubble at some point - concurrently with inescapable demographics that work in favor of the bear, as a bigger and bigger share of the Western world's citizenry retires (which is to say, SELLS. since the percentage of e.g. US households in the market is more or less unch. from that at the top at nearly 57%, a huge retrenchment is possible in fact).
as for the short term, i'd be carefully watching the next pullback's character: if it quickly dents the currently overly bullish sentiment and manages to hold newly established support levels, expect another stab at higher prices. but if the current complacency prevails during the pullback we could then well be on the way to the (still MIA) capitulation or disinterest bottom that sets up a more durable low.
regarding the long term picture, it may take a very long time to get there, but in the end i promise you we will see an UNDERvalued market...low (single digit) p/e's, price book at 1, price sales at 1 or lower, for the AVERAGE stock. the sine qua non for a true long term bull market to emerge is VALUE, as R. Russell never tires to point out. and the entire history of the market serves to prove this crucial fact.
as to how bad a secular bear can get, look at the Nikkei, or for that matter at the gold stocks, many of which hit 40 year lows at their Nov. 2000 bottom. so much for the WS mantra of 'stocks are for the long term'. one thing Keynes and i are in agreement on is that in the very long term, we're all dead, so when considering the long term outlook, always ask 'how long, exactly?'.
next up (i.e., tomorrow): observations on the energy market. i still hold that we are in the midst of a 'stealth' energy crisis, Iraq notwithstanding. this will create risks as well as numerous opportunities. |
