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Market Rally : Too much too early



May 10, 2009 – Comments (7) | RELATED TICKERS: OMX.DL , RT , DIN

This is what I think. The market has bounced “too much too early”. Why this a really bad thing?

 -  Since we are still deep in the middle of a recession, the market will eventually drop. While this is not a bad thing in itself, the problem is, next time when there are real sings of improvement, the market will not rise as much fast enough. The pundits being burnt once will not trust the market until they see clear signs. This will delay the speed at which we recover. Markets rising can actually help us out of the recession faster. Ironically, markets rising too much too fast can also push us into a recession. (e.g. housing market of 2002-2005 led us into this, and tech bubble of 1999-2000 led us into 2001 recession, not nine-eleven)

 - Another problem is, when the market falls again (ETA : Jun-July 2009 IMHO)  , it will fall a bit too far because we will again start hearing people say, what if this recession is like what Japan is still witnessing? What if we turn into Japan? Who knows when the recession will end, so it makes no sense to invest now.  Read this excellent article why we are still in recession.

-  Well, it will be terrible, because we will see real damage being done to the economy. You see, recession creates investing opportunities, but recession like the current one also leave permanent scars to the economy.  I don’t know the extent of the damage, but we have already witnessed damage in financial industry. (Banks going belly-up or TARP’ed). Retailers closing down. REIT’s, auto-makers, homebuilders filing for bankruptcy.  I feel there are some more companies that can file for bankruptcy. I would speculate atleast one of these: OMX, RT, RT, DIN.

So, my conclusion, its good idea to have lots of cash sitting on sidelines as there will be plenty of opportunity to get back in, and get the same or better bargains we all saw in early March 2009. I think it would be a mistake to think one can ride the same companies up that one was able to when market bottomed in March 2009. For e.g. OMX was at 2.10 on March 9th and is selling for 8.31 today. If it drops back to 2 or 3 by july 2009, it would be a mistake to re-up on OMX and conclude that it will rise back again whenever economy recovers. Its possible that it may not even survive this economic hurricane we are in.

One last point why one of the signs we saw is not really positive but actually negative. We lost a little over 500k jobs only in April. That’s less than what we lost in March, so we are recovering? Hah! Dude, we have already got over 6MIL continuing claims. Its only natural that the rate of job cuts slows down. It only means there are no more jobs that can be laid off. I will be happy when we hear jobs getting created and this 6MIL number actually drops to 5 and 4 MIL level. BTW, in the last recession (2001-2002), at its peak, we had less than 4MIL continuing claims. So we are still in pretty bad shape.


Good news is, we will come out of it and when we do, we will see a market rally like never before!!!

7 Comments – Post Your Own

#1) On May 10, 2009 at 10:29 PM, russiangambit (28.96) wrote:

I remember the end of 2002-2003 bear market, we were miserably sitting pretty much at the bottom for several months. Everybody who wanted to sell - sold, nobody wanted to be buying until they were sure the market is not going down anymore. This miserable sitting at the bottom for a few months seems to be  required for the start of a new bull market.

So, I also agree that this rally is too much, too soon. We didn't have a chance to access where we are and where we are going. Fundamentals are not there to support it. And even though the market is supposed to be forward looking, I think the market is no more than  a speculation machine. We look forward, and we guess where we are going to be, but we don't know for sure whethere what is goinf to happen. Plus, our expectations are influenced by prior experiences. So, the rise in the market by no means guarantees a recovery. Market has many false starts. Just look at IBD, I think they have had at least 4 "confirmed rallies" so far in the last 2 years.

As for  people saying that there are trillions dollars on the sidleines waiting to be invested. From what I see, regular folks haven't sold their 401Ks. They rode it all the way down. They don't have additional money to invest right now, they are worried about their jobs. So, I am not sure where the trillions are coming from, other than the stimulus package.

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#2) On May 10, 2009 at 10:35 PM, portefeuille (98.37) wrote:

Everybody who wanted to sell - sold, nobody wanted to be buying

glad they could sell with nobody buying ...

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#3) On May 10, 2009 at 10:45 PM, russiangambit (28.96) wrote:

> glad they could sell with nobody buying ...

There is always  market maker/ liquidity provider, when it comes to that.

I know, you are couning my comment as a bearish contra-indicator. I  might stop posting, just to spite the bulls. And then you'll loose access to my iron logic and infinite wisdom. Lol.

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#4) On May 10, 2009 at 11:08 PM, TMFBabo (100.00) wrote:

I'd recommend re-upping on stocks if they have strong balance sheets that can weather the storm and they're still turning profits.

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#5) On May 10, 2009 at 11:20 PM, moreDINplease (< 20) wrote:

 I would love to hear the reasoning on how and why DIN would go under. They have huge margins, been cutting and saving on costs, and people are not going to quit going out to eat. As a society we are entirely to lazy to understand that our first point of saving is limiting our consumption. Eating at home saves money. If we cared about saving money the food and beverage industry wouldn't be so large. Strong brands won't be filing. 

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#6) On May 11, 2009 at 10:46 AM, huddaman (99.24) wrote:

Regarding DIN, I simply don't like the amount of debt they are carrying. They are highly leveraged. I don't think DIN is going down because people will stop eating out. There are lots of companies which are going to do great that are in restaurant business. Its a great business to be in.

 Similar logic applied to CircuitCity. Bestbuy, radio shack all survived, but CircuitCity didnt make it. The problem was too much leverage. Same applies to banks. Too much leverage kills a bank, banking by and large is a great business.

Having said that, keep in mind, leverage can be your enemey only during recession, in boom times it can make you look like a genius. If DIN or anyone survives this recession, then they will mint money. Key is whether they can survive. Truth is, some companies will not make it. Especially if this drags longer.

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#7) On May 11, 2009 at 6:43 PM, ChrisGraley (28.71) wrote:

Someone posted  a link to this article in my blog and I couldn't agree more! A rec for you!

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