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well one bull is officially perplexed

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May 08, 2009 – Comments (8)

I've always maintained, and continue to maintain, that I have no idea where the stock market will go in the short term.  But in 2009, if your time horizon is long, stocks were cheap and likely to make you money.

Like most everybody else, this recent rally has caught me off guard.  I am in awe of how far and how fast the market has gone, and in the last few weeks how it hasn't really taken a big step back.  I hold the opinion that the market would reach 1000 quicker if we took a big step back to the 875 level or whatever.  Establish long, buy and hold positions at low prices rather than ride-the-momentum positions at progressively higher prices.  To stabilize the market for a new bull run we need secure positions that intend to stay for a few months or a few years, not trading positions meant to be exited in a few days or weeks.  I can see a scenario where a severe down day occurs in the near future, and I keep making money on my long positions and I keep getting burned on my hedges. 

I can see the case for someone arguing that stocks are still really cheap.  The S&P is still down 40% from its recent highs, its still at a 6 year low.  The Dow is still down almost 40% from its recent-year highs, and is still down for the year.  One could argue that the beginning of the year pessimism and worry were higher than they are today and use that as a reason to believe it could run a bit more.  And IMO all of those arguments are very reasonable

But just like stocks can't go down every day forever, and the wild negative trend of mid feb through early march isn't sustainable, nor is the not quite wildly negative, but still very negative trend of early january through mid feb, ... but stocks cannot go up every day forever either.  Somethings got to happen between here and good times and S&P 1200.  Maybe we'll flatten for a time, maybe we'll have another big leg down, maybe we'll just see some choppy trade. 

Now, those hesitant comments made, I don't think we will ever see S&P 600s again, at least not in this crisis and hopefully not in any future one.  So many things had to happen for that to occur.

1.  Mutual funds at all time high cash positions.  Are they going to get scared out again?  They are underperforming now for every $$$ of cash they hold so that gives them motivation to get back in.  And are they going to jerk out the gains they've made recently?

2.  Hedge funds were at an all time high short position, per Doug Kass on thestreet.com   Are the hedge funds going to jump out of longs en masse again and short like crazy?  Shares to borrow are getting harder to find and harder to find, evidence that a truly catastrophic outcome is likely is lessening all the time, and I just don't think a massive wave of shorting like that is probable

3.  Uptick rule, scrutiny on naked shorting, etc., will have at least some positive effect.  These were not in effect when the S&P reached the 600s

4.  The belief that the banking system was going to fall completely apart to a shocking extent was a big part of how the S&P got to 670.  I just don't think that level of pessimism is going to be seen again.  THAT ALONE ensures that we don't visit the 600s again. 

5.  Some companys, one by one, get clear of the probable or possible BK box.  Ashland Chemical was priced for at least a decent probability of BK, so was DOW Chemical, so was TCK, so was XL.  One by one these companies get into positions where its just really not likely that they will go BK.  Every company that gets to a position where its not likely to be driven to its previous lows is one less point the S&P can drop (well assuming they are S&P members of course).

6.  Fund collapses and redemptions played a role in some of the big crashes, ... is money going to crash out of funds at a rate as high as it did in November and February again?

 

Too many things would have to line up to get us back to the 600's on the S&P for that to really have a substantial probability.  All bubbles eventually pop, including negativity bubbles.  In 2001 there were still people buying falling tech names on the assumption that they had to go back up, there are still people shorting stocks at S&P 800 this year on the same logic. 

So, I am confident that the bottom is in and we won't re-test the pervious lows of this bear market.  But something has got to happen between here and S&P 1200. 

And that something will represent a really good money making opportunity for us all if we can figure out what it was.

8 Comments – Post Your Own

#1) On May 08, 2009 at 4:50 PM, awallejr (82.72) wrote:

If you recall this time last year, oil was rising and market for the most part did too.  This rally during next 2 months will be an energy/commodity driven one I submit.  Now what happens come July+ is the issue.  Wouldn't surprise me if that is your correction period.  Also how the reporting of 2nd Q GDP and more clarity on where 3rd and 4th Q GDP will be impactful.

I think we saw the lows at least this year in March. Octobers,however, always scare me. But it is hard to know for subsequent years simply because the risk that any Governmental led economic improvement can only but be temporary at best. The private sector needs to eventually take the lead again, but the changing demographics may hinder that.  So, bottom line, who knows. 

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#2) On May 08, 2009 at 4:56 PM, russiangambit (29.49) wrote:

> I can see the case for someone arguing that stocks are still really cheap.  The S&P is still down 40% from its recent highs, its still at a 6 year low.  The Dow is still down almost 40% from its recent-year highs, and is still down for the year.  One could argue that the beginning of the year pessimism and worry were higher than they are today and use that as a reason to believe it could run a bit more.  And IMO all of those arguments are very reasonable

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But where are the profits during that same time? Are they down by 40% or more? How about the major banks, that have no profts, just losses. How long it will take them to grow into their current pricess. They current P/Es are infinity since they have no earnings. Isn't hat a bit high?

 

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#3) On May 08, 2009 at 5:06 PM, dividendhound (< 20) wrote:

We'll have to see where it goes.  I can't imagine that the next quarter's earnings are going to be good enough to send it much higher, but who knows.  Probably will correct before then, although I guess I put myself in the camp that doesn't think it will be a completely horrendous correction, but my short term prediction abilities suck. 

I think a lot of people are scavenging stuff they've had their eye on for a while, willing to accept some downside, scaling in, etc.

I will be interested in seeing whether there is a boom in M&A soon.  That would be positive for the economy, at least in the short term.  Still a lot of beaten down companies - it is a good chance for financially strong companies to pick up assets at a discount.

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#4) On May 08, 2009 at 5:17 PM, rofgile (99.33) wrote:

P/Es that are infinity are fine - as those are only a snapshot in time.

For instance - MTW currently has a P/E of infinity as they took a markdown for goodwill this quarter (-$5.00/share ouch!).  

But this, and *some* of the bank losses are one time charges.

I firmly expect MTW to have positive earnings in the next years - so I currently find it very undervalued.

 

People are investing based on the future.  We went from an uncertain future where many thought that the worst case scenario of Alstryworld was an actual possibility.  The way things were going in October-November last year, and the January-Feb this year - no one had a certainty of what would happen.  Would all the banks crash or some money market fall apart - would all lending stop - would banks get nationalized??  These were the news headlines of the time.

Now, our news headlines show decreasing job losses (though still huge and hurting lots of people) - but there is a trend towards an end of the recession.  Manufacturing has been picking up a bit, as well as consumer spending.  Banks aren't getting nationalized.

All this information together has put in the bottom.  We all know (except for Alstry-gnomes) that the economy isn't going to complete collapse into flames, banks will still be around a year from now, nationalization isn't happening - and there are still people spending money.  

Now it's a matter of (or was a matter of) figuring out what the best deals are and investing long term in companies that will weather the storm and leave the storm with less competition than they went in.

 

However - the bears have me more and more convinced that we should get one more correction to shake out all the people who are just trading, not investing long term.  My guesses-> oil prices go up again to $90, gas gets more expensive.  Or, the stress test wasn't stressful enough and banks need $200 billion and doubt comes back.  Or,  GM explodes and doesn't do bankruptcy well...

 

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#5) On May 08, 2009 at 7:54 PM, nuf2bdangrus (< 20) wrote:

The market is pricing itself for a V shaped recovery.  Money wants to go to work.  But skittish fingers pull triggers quickly.  Bull markets aren't born of violent upswings in which we pack.

 

There is too much air underneath these charts.

 

Every pullback gets bought violently as the perception is all is well.  But I can't see earnings growth to support these prices.  Current PE for SPY is 29, which ain't happening unless we have incredible growth.

 

Growing unemployment will likely dubdue the consumer...there is huge excess capacity in our economy, especially in retail and casual dining.

 

Every bit of bad news is greeted by a rally....but the time will come when too many longs come to the party.....and they will be shaken violently.  The rubber band stretches both ways.

 

 

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#6) On May 08, 2009 at 10:17 PM, awallejr (82.72) wrote:

Keep that bear talk going heheh.  Once everyone turns bullish it is over.  As for S&P, p/e numbers are all over the place as to what it really is.  It isn't that every bit of bad news is greeted with a rally, it is that the market is looking passed the past and pricing in the potential good news that we see.

Unemployment will be a big drag and hopefully the governmental increase in job creation will stop the bleeding and eventually help turn the tide for private sector to start creating jobs.

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#7) On May 08, 2009 at 10:28 PM, automaticaev (58.65) wrote:

government increase in jobs is sick its discusting.  Government needs to reduce jobs.  They pay themselves a lot of money from taking from people who make 20k a year its fucking repulsive its stealing and it makes me sick.

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#8) On May 09, 2009 at 12:55 AM, checklist34 (99.73) wrote:

thanks for the thoughts everybody.

Awall, I think your thoughts on energy/commodity are pretty darn good.  My energy stocks have lagged this monster move while my other holdings have gone nuts.  Thats a real project of mine here - to dig into oil and energy stocks that are cheaper than they deserve to be.  Thats a darn good thought.  I'd offer that the recent "green shoots" in the economy have nothing to do with gov't stimulus, the stimulus hasn't even happened yet for the most part.  We have never needed the stimulus, and the one we got wasn't that great.

 

Gambit:  rofgile covers this pretty well.  A stock dips to a loss one time due to a big charge (This environment is both causing big charges to have to taken, and encouraing companies that dn't necessarily need to take the charge to do so because frankly there's nothing left to lose in the share price).  Additionally some losses are M2M on-paper losses that won't be realized, and the market absolutely positively SHOULD NOT be priced at a p/e of XXX at all times.  IT SHOULD expand in PE during recessions in anticipation of future earnings.  etc., etc.  Lastly, what is the p/e of the S&P?  What is it if you throw out one time charges that aren't cash?  If you throw out on paper losses that may be marked back up?  If you throw out AIG?

 

Ragingsam:  a boom in M&A might really get interesting....  :)  All power to the guy with cash during a crash, I once heard someone say that. 

 

dangrus:  yeah, alot of this rally is money that got scared out coming back in.  They heard stories of their neighbor buying 100,000 shares of AIG and selling for 1.80 a month later and paying off his house, of clowns like me doubling their money so far, and they want in.  And thats why I thik longs should WANT A MEANINGFUL PULLBACK at some point.  It'll help us get to 1200 quicker if we get one, as it will let more people in at low prices, establish more long term, stable, secure long positions rather than trading positions, etc.

 

awall again:  lol

 

automaticaev:  I don't think people making 20k are paying all that much to the gov't, and they may well be, on average, turning a profit from it.

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