Earlie from Earlie:
This is not a market in which it is easy to stand back and take a dispassionate look at where we are, but that kind of exercise is usually worth while.
To begin with, I cannot remember a time when investors have been more thoroughly inundated with bullish commentary. From the very top of the food chain (Bush, Greenspan, Snow, et al) right on down to the dregs (N.Y. analysts, CNBS), everybody is bullish. As a consequence of this, bullish sentiment indicators have hit historic highs and bears have become a semi-extinct species once again.
But at the same time, for any who do stand back from the cacophony of daily trading, a simple question emerges which the bulls rarely consider, which is "What are the foundations underpinning this rally and to what extent are they solid?
Certainly, the bulls cannot claim that actual reported numbers sustain this rally, as across the board, Q1 numbers were miserable. For most reporting firms, revenues were largely down (or at best flat), and profits were minuscule to non-existent. Yes, most "beat analysts' expectations", but surely after close to a decade of this dreary and silly game, even the rankest bull sees through the stupidity of this arcane charade, especially given the deep wounds investors received that last time they fell for this suckers' bait. Apparently not, given the current frivolity.
And was the guidance promising? Not! I caught more than my share of the guidance and most, while couched in carefully crafted language, did not suggest that anybody could see an actual end to the current malaise. Yes, some saw "possibilities that we might be approaching some sort of stability" (wow!) and others felt that "perhaps we are seeing the last stages of the current sales implosion", nevertheless, very few CEOs or CFOs saw fit to imply that things were looking up for their firms.
Of course, early in the year, investors did start to hear about a few things that could prove troublesome if not disastrous for profits, but as few folk in the media seemed excited and even fewer analysts even deemed to mention them, issues relating to pension liabilities or massive debt levels (especially debts denominated in foreign currencies) faded as quickly as last Sunday's sermon.
So what IS driving share prices to levels not seen since the peaks of the previous manias? A number of things as it turns out.
- Many funds experienced serious losses over the last two years. Most figure that their continuing existence depends on "being there" for any near term rallies and even more of them recognize that they have a lot of "catching up" to do if they hope to attract new dough. This has turned many former conservative money managers into gunslingers or river-boat gamblers. Worse, the dependency on "mo-mo" approaches to "investing" appears to have grown. This does not bode well if/when we experience the next downturn in the market.
- Most retail investors, while bloodied, have not thrown in the towel. As is usually the case with bear market rallies, J6P is once again being lured back in (inevitably just as the whole thing "tops out").
- The Iraq war is "behind us" (sure it is) and the US economy will now "bounce back". Oil prices will plunge, which will be good for all global economies (so why are oil futures trading at $30 per B.?).
- Liquidity is knee deep..... everywhere. Greenspan has the presses rolling 24/7 and it rarely pays to bet against the Fed.
- Above all else, investors believe that it is a certainty that the US economy will regain traction in H2 and growth will once again return.
One could go on and on. The point to note is that with respect to much of the above, "Hope" rather than discernible facts provide most of the underpinning to the bullish case. And while many may not recognize it, "hope" represents a significant part of the Fed's liquidity strategy..... the "hope" that either corporations or consumers will soak up much of that sloshing liquidity (because if the Fed ends up "pushing on a string,.......").
On the other side of the coin, one finds some very nasty items that the bulls have decided to ignore,..... items that will have to fade away if their gleeful rush back into paper is to be rewarded.
- Above all else, lay-offs MUST subside, as with each new wave of lay-offs, the pool of legitimate consumers shrinks. Unemployment is north of 8 million in the US which is a very large number. Has anybody seen any sign that lay-offs are relenting? I have not.
- Wars are expensive and occupations also soak up beaucoup dollars. Governmental incomes have been severely hit and all levels of US government are moving irresolutely back into deep deficits. Are there enough buyers out there to soak up the new wall paper,.... er,.... "Treasuries" that are being printed up? We shall see. If not, what happens to interest rates?
- The greenback has been smacked hard and foreigners have to be reconsidering portfolio weightings. If the buck continues to take it in the teeth, how long before they decide to repatriate? If they do, things get messy and fast.
- Is the consumer starting to save, or at least pull in his horns? Evidence suggests that he is, which is an Allan Greenspan nightmare of gigantic proportions.
- Make a list of the number of sectors that are knee deep in glut conditions. Well, perhaps it would be better if we turned that around and tried to find any that are not. Where does a growth-based turn-around come from, given this basic fact?
- Commercial and industrial real estate is already in trouble and residential real estate is starting to get a bit tatty around the edges. What happens if this major faucet of liquidity injection gets turned counter-clockwise?
- It is well known that growth simply cannot return to the American economy unless corporate capital expenditures explode. Under the current circumstances this looks to be impossible, but perhaps I am missing something.
Check out any mode of goods or people transport. Trucks, auto, ships and airplanes..... no matter where one looks, the numbers are down and not rebounding. These numbers have to move up dramatically if the current stock prices are to remain viable and there is no evidence that this is happening or even possible.
Summing up, I can't see the tangible underpinnings that must be present to sustain a rally of this sort, hence gravity is likely to reassert itself at some point in time and with a vengeance. Unfortunately for the markets, the "pillows" that typically slow the violent descents, (those nasty "shorts"), have been largely blown away. The probability that the next descent will be very steep is significant.
Best, Earlie |
