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One word describes why I'm not buying into this rally...



April 03, 2009 – Comments (13)


One word describes why I'm not buying into this rally, both literally and figuratively...EARNINGS. 

Stocks can fly all over the place in the short run, but real, sustainable rallies are built upon solid earnings and the potential for growth.  I came across an interview in Kiplinger's with David Tice today that sums up this line of thinking beautifully. 

Tice, founder of the Prudent Beat mutual fund, not surprisingly is, well bearish.  Despite the fact that he is talking his book so to speak as the manager of a short fund that returned 36% in 2008, his argument on why the current rally in stocks will not stick makes sense.  Here's a portion of the interview that I find particularly relevant:

"...And the key fundamentals are?

Earnings for S&P 500 stocks were far down in 2008, and 2009 earnings aren't going to be any better.  S&P earnings will probably be below $40 per share this year [versus $65 in 2008 and $83 in 2007].  So the market's price-earnings ratio, based on 2009 estimates is 20.  That's still high, so how can you think that the market is near a bottom?

What will it take for the market to bottom?

It depends upon whether the stimulus package gets teeth, it depends on the dollar, it depends on what the Chinese decide to do.  There are a lot of moving parts here.

What do you mean by the stimulus getting teeth?

A strong stimulus package could mean the economy picks up a little bit in the short term, but I don't think it will work longer term.  The Italian finance minister recently said, "When the problem is too much debt, you can't fix the problem by assuming more debt."  The problem is we have an output gap.  We have too much capacity for existing consumer demand, and, therefore, manufacturing, retailing, and other sectors will have to downsize."

I completely agree with Tice.  He is a little more bearish on the current state of the economy and where the markets are headed than I am, but not much.  Regardless of whether the U.S. government is able to reflate this bubble once again, as it did after the Tech bubble popped, or not there is just too much debt out there on the consumer side and the government side for us to resume the same level of growth that we have experienced over the past decade.

When consumer spending accounts for 70% of an economy, we should have never let it get that far, and consumers are leveraged up to their eyeballs, eventually growth is going to stall.  The government needs to focus on building a real economy, where we actually build things that we can sell to other countries and add value rather than just consume, consume, consume, serve each other $10 double-caramel-cheesecake-whipped-soy-white-chocolate-grande-mochachinos while we consume, and give each other advice on how to move money around to make it appear to grow even though nothing really is.

The U.S. economy didn't grow nearly as rapidly as it appeared to over the past decade.  The only thing that grew was the leverage in the system.  Much of the growth that everyone thought was real was just smoke and mirrors.  Now it's time to pay, and at exactly the wrong time, when the largest generation in the history of the world is passing its peak spending years.  Not only have Baby Boomers past their peak spending years, but they have seen a tremendous percentage of their wealth, which they desperately need for retirement, evaporate.  The rebuilding of their balance sheets will only serve to accelerate their natural slowdown in spending.

I'm not an uber-bear who thinks that we're all doomed.  I'm just a realist who doesn't see where growth is going to come from over the next several years.  Growth is what Mr. Market awards high multiples for.  What sort of earnings multiple would you give a company that you knew isn't going to grow much, if at all, over the next several years?  Not much of one I assume.  Certainly not the 20 times forward earnings that the S&P is currently sitting at. 

I plan to continue to play it relatively safe with my investments.  Could I miss out on the beginning of the next amazing bear market?  Of course, we're certainly a lot closer to the bottom than we were 50% or so ago.  It is entirely possible that I'm wrong and that I will miss out on amazing capital gains over the next several years, but again I just don't see where earnings and growth are going to come from.  I have a family to take care of so I'll just stick to my corporate bonds, with solid yields of anywhere from 7% to double digits and leave the quest for growth to someone else.


13 Comments – Post Your Own

#1) On April 03, 2009 at 1:59 PM, russiangambit (28.88) wrote:

> $10 double-caramel-cheesecake-whipped-soy-white-chocolate-grande-mochachinos

Well said -)) I haven't been to Starbucks for more than a year, probably. Are they still alive? That was one of my things, - I'll know it is the bottom when Starbucks goes bankrupt, for one.

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#2) On April 03, 2009 at 2:25 PM, 4everlost (28.88) wrote:

When I read the title I was certain your one word was going to be "debt".  Good post.

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#3) On April 03, 2009 at 2:39 PM, TMFDeej (97.68) wrote:

Thanks for reading everyone.

Debt would be a pretty good substitute for EARNINGS, 4ever.  It is the massive amount of debt that will prevent earnings growth.  Perhaps I should have said two words :).

Have a great weekend.  TGIF.


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#4) On April 03, 2009 at 2:50 PM, Bays (29.21) wrote:

Haha ,, I love the picture at the end.... Great blog...  I too am not buying into this rally... Like you said, earnings are not looking good.

I took profits this week, and so far, it looks like a bad decision on my part.  I'm thinking we are long over due for a pull back, and it may very well be a quick and steep one.  


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#5) On April 03, 2009 at 3:04 PM, bostoncelitcs (55.80) wrote:

Great cartoons.  Where is the alternative budget from Senator Mitch McConnell and the GOP leadership?

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#6) On April 03, 2009 at 5:08 PM, angusthermopylae (38.28) wrote:


I'm with you--I sold out 2 weeks ago (even wrote a post on it) to all cash, and am now looking at my former stocks totalling about 18% higher...ouch!

A week ago, I took a small position back into the market on a couple of stocks, and they've been slightly higher...but I'm still mostly cash.  It's making me doubt myself, but then I look at the underlying statistics (unemployment, inflation, manufacturing) and I think that it would be much worse with a sudden "correction" that "no one foresaw."

Does anyone else keep a good history of their sold positions to track how good/bad their decision was?  I actually keep just as detailed a record a my current portfolio.  When I see a lot of red (loss), I'm actually happy--I sold at a good time.

The last few sales showing green...ugh.

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#7) On April 03, 2009 at 7:56 PM, nuf2bdangrus (< 20) wrote:

I continue to sell and pare back positions.  I shorted GS, AMZN, and PNRA today.  I'm hurting for today, but I believe at least a correction is well overdue

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#8) On April 06, 2009 at 6:14 PM, Koudijs (< 20) wrote:

Could someone please explain the last cartoon (with the airpump) to me?

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#9) On April 06, 2009 at 8:48 PM, stills999 (< 20) wrote:

Growth will come from innovation, which is difficult to predict.   The information age is still young so there is potential for explosive growth. 

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#10) On April 06, 2009 at 11:18 PM, AirForceFool (99.89) wrote:


 The picture is depicting the G-20 summit tring to use the air pump to reinflate the global meltdown economically. They figure by possibly spending large amounts of money, they may be able to kick start the economy and keep it from deflating further. Chris


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#11) On April 07, 2009 at 4:51 AM, ronpaulite (< 20) wrote:

"I plan to continue to play it relatively safe with my investments.  Could I miss out on the beginning of the next amazing bear market? "

Do you mean 'miss out on the beginning of the next amazing BULL market?

This kind of mistake is very misleading to readers.

Nonetheless, quite a good article.


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#12) On April 07, 2009 at 6:54 AM, ceejayoh (40.73) wrote:

I'm another fool selling to take some off the table during every rally. Then I buy it back when it goes back down.  Not sure if we have even seen the bottom yet. Excellent post!

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#13) On April 07, 2009 at 7:45 AM, vaylon1701 (< 20) wrote:

I to have cashed out over the past week. Now I am just sittiing on the sidelines watching and doing a few quick trades. I don't trust this rally, it was to high to fast. Which was nice because I managed to recover all my losses over the past year, but still it gave me whiplash how fast it turned. I am expecting the same whiplash when the market heads south, again.


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