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Why the Rally?

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March 09, 2010 – Comments (26)

This rally makes as much sense to me as the oil and uranium rallies.  In other words, they did not make sense and I considered them bubbles just as I consider this latest rally as taking the market into bubble range.

So, one of the theories I have is that people are chasing yield, they aren't getting anything, or practically anything with deposits so people are looking to the market as an alternative.

We also have this massive aging population and with that a lot of money to invest.  As people get older they have simply had more time to accumulate wealth.  It has to be invested somewhere.

People's past experience is that there is a bust and then a rally.  When I talk to people they really have little concept of how big government deficits are, how much tax revenues have declined and how much the over building of the past several years needs to be absorbed before jobs in the industries that boomed during the over building years will recover.  People past experience is that recoveries come.  The debt overhang and the over building over the past few years is absolutely massive compared to other recessions.  And this time this over building frenzy happened around the world and governments around the world are buried in unsustainable debt.  I do not see people all that concerned about it or having much appreciation the degree to which this will affect their future.

People do not see the degree to which the econony has been held up by government spending or thought aheads as to what it means when the unsustainable level of government spending stops.  It has to stop.

Those are some of the reasons I can thing of for what I see as market insanity.

And for those that are critical about missing a rally, well, I chose to stay out of the oil and uranium rallies as well.  I do not particularly care if I miss a rally that imho can turn on you so fast, it wipes out years of hard work at building wealth.  I have been there, done that and it is not something I care to repeat.  The market does not price itself reasonably and it is why people can fund undervalued stocks and also why there can be so many bubbles.

Naked Capitalism has a guest post that has 6 theories on why the market has rallied.  I have not read it yet, but I wonder how many match my own thoughts.

The first reason goes to popular media.  I do have to say that I mostly stay away from popular media, but I have had co-workers made statements with a belief that the economy is recovering.  The last newspaper I read was glowing about the economy. 

The second reason is "temporary juice."  This reason sounds like the gamblers.  They know there is no foundation, but they are playing the market on the sentiment and I would suspect have one hand on the exit button at all times.  I suspect the temporary juice people have done well and will lose less in a crash.

Some people believe policy will cause massive inflation, which would make the market go up.  

Here is one I was unaware of, during after hours there is buying that is pushing prices up in the low volume environment.  Here's a quote from a link in the 6 theories article:

Anyone looking at their 401(k) portfolio performance since the end of August will undoubtedly be very happy (and extremely surprised), as the market has climbed steadily higher despite i) increasingly declining trading volume and ii) consistent and material withdrawals from domestic equity mutual funds.

Furthermore, if anyone was merely looking at the trading action in regular hours, one would think there was absolutely no profit made since early September. The reason for that: all the upside since September 14th has come exclusively from after hours action.

Every single day, minimal volume pushes the futures index higher. Good news, bad news, it don’t matter to the Goldman S&P and Russell 1000 futures desk: they just lift every micro offer, giving the impression that the market is unstoppable, often leapfrogging each other as the latest viagra’ed GDP or unemployment rumor is spread.

Come morning, it is time for the HFT brigade to come in and scalp their trillions of pennies while leaving the market unchanged, then at 4pm handing it off again to leveraged futures manipulation and dark pools. In a nutshell, this is the secret of the past quarter’s phenomenal market performance.

 At this time I am not interested in checking this out further, but wow, if this is happening intentionally.  If so, that would be one of the hidden factors that makes commone sense into mush, much like how Greenspan's stepping down the interest rates over 20 years screwed anyone practising sound investment principles for home buying.  But wow, what a way to shore up insolvent balance sheets...

Then there is fed futures, which seems like the same kind of thing as the quote.

The last reason is that values on balance sheets are overvalued making the stocks look better then they really are.  I think there is probably a lot of truth in this one.

Well, this was an interesting exercise for myself, thinking about why I think the market is rallying and then reading someone else's assessment.

26 Comments – Post Your Own

#1) On March 09, 2010 at 10:08 PM, mrindependent (80.08) wrote:

Based on my studies of historical S&P 500 performance, I conclude that three positive factors are pushing up the market right now:  positive momentum, accomodative federal reserve policy and the fact that stocks are cheap compared to bonds.  I agree with your thesis that investors are chasing yield because there is nowhere else to earn  a decent return.  Despite these positive factors, I find that I am very cautious.  You are right that this market must eventually deflate.  I suspect there will be more upside before reality sets in, but I expect some sort of "double dip" recession in the United States and I suspect that the second dip will wreak havoc on the stock market.  Based on the foregoing, I keep my market exposure well below 100%- but I definitely would not want to short the stock market at this time.

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#2) On March 09, 2010 at 10:11 PM, truthisntstupid (78.41) wrote:

I don't consider myself to be chasing yields, but I'll be damned if I'll let a bank tie my money up for a year or more at a time while they're paying me  $10  or less for each  $1,000.  But basically, I think your second and third paragraphs are right.  And I'm sure there are people out there  unintelligently "chasing yields"  as well as discerning dividend investors who read, study, and research.  Many people that are in the market because of banks becoming not much better than a mattress are probably value investors, too, both good ones and bad ones...Greenspan wrecked our economy.  I'm not much into macroeconomics so I can't argue it very intelligently, and I would lose an argument with anyone who knows more than I do even if I'm right.   It's just a feeling I have that after decades of banks paying 5.25%  on passbook savings accounts, now we have these absolutely ridiculously low rates on savings accounts and banks are having all these problems and the economy is being run into the ground?  And it's unrelated?  Ron Paul spoke about the damage these "artificially low interest rates"  was doing.  I think I believe him.  Meanwhile, banks quit doing right by savers at least 10 or 15 years ago.  This saver can do better.  But I do hope many people out there that feel as I do are trying their best to be intelligent about it and not just "chasing yields,"  although there are probably plenty of people that are doing that.  This is the path I've chosen:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=344638&t=01007007794901831104

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#3) On March 09, 2010 at 10:14 PM, mrindependent (80.08) wrote:

My estimate of the economy is best shown by my two new business endeavors:  (1) buying foreclosed homes and refurbishing, and (2) buying surplus industrial supplies at auctions of liquidating manufacturing plants.  I am preceding with care on the purchase of foreclosed homes because the market in Cleveland, Ohio is likely to get worse before it gets better.  But the surplus liquidation business is booming.  I buy for 2-5% of retail value and try to sell for 10-15%.  The number of plant liquidations seems to be endless.  The auctioneers must be very tired.

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#4) On March 09, 2010 at 10:52 PM, starbucks4ever (96.89) wrote:

We are almost certainly not in a bubble now. We are in an overvalued territory. That's where most stocks are (and most assets, for that matter) most of the time. So I don't see anything very unusual. As to the specific mechanism of how it happened, my hypothesis is that Geithner and Bernanke have finally struck a deal with GS and GS, after having instigated the crisis that sank Lehman and having pushed stocks relentlessly down for a year and a half, has finally promised to play nice and is keeping the promise, at least for now. But it doesn't mean the markets can't remain overvalued for the next 20 years.

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#5) On March 09, 2010 at 11:35 PM, dragonLZ (99.39) wrote:

This is what I said and posted back in July.

 

Oh, sorry, you asked why. Have no idea...

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#6) On March 09, 2010 at 11:38 PM, awallejr (81.56) wrote:

"I do not particularly care if I miss a rally that imho can turn on you so fast, it wipes out years of hard work at building wealth.  I have been there, done that and it is not something I care to repeat."

And there it is in the end.  You don't pick stocks now so not to risk your rating, nor will you pick stocks in real life because you were burned once. The bottom line for you is to be risk averse.  That is fine.  Stock market gyrations aren't for everyone.  But with great risk there can be great reward.  Simply because an investment vehicle isn't for you doesn't mean it is an "evil"  or a "bubble."

Now if this passed year was a result of blind euphoria you might have an argument, but as others have said eslewhere this rally has never gotten "respect" despite the fact that it has been one of the greatest in our lifetimes.  While I would agree that we aren't going to see a 60% increase this year in the S&P, that doesn't mean you can't earn a respectable 10% (more than what you would see from a bank) or find that next AAPL or MSFT or GOOG. 

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#7) On March 09, 2010 at 11:38 PM, dragonLZ (99.39) wrote:

Sorry, I didn't mean that first link to be to my portfolio page.

It was supposed to show this:

Pitch by: dragonlz 7/15/09 1:05 PM     Reply | Report this post

The new bull market has begun (the trickiest but the biggest ever).

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#8) On March 10, 2010 at 12:20 AM, Tastylunch (29.28) wrote:

Dwot

I think john Hussman of Hussman  funds has the best answer. it's simple and elegant

http://www.hussmanfunds.com/rsi/econsurprises.htm

simply put it's just the old wall street expectations game. Expectations for 2009 were too low, just as expectations for 2008 were far  too high. And both were wrong by an unsually large margin

the question now becomes is are the expectations for 2010 and 2011 wrong? and if so by how much and in which direction?

 

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#9) On March 10, 2010 at 12:39 AM, awallejr (81.56) wrote:

I am not sure I agree with that Tasty.  2008 wasn't about expectations as much as a true financial crisis.  It continued into 2009 more from panic than anything.  We really were facing that abyss.  Once we realized that we weren't facing an immediate (I say immediate since I am sure some might think "yet to come") 2nd Great Depression, the market turned.  This turn really wasn't from expectations either since many kept and still keep questioning it.

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#10) On March 10, 2010 at 12:43 AM, simplemts (< 20) wrote:

Well put Tasty.  I read that as well and am in complete agreement with him. 

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#11) On March 10, 2010 at 1:55 AM, dwot (44.44) wrote:

awallejr, I don't pick stocks now because I have not been inclined to put the time into it and have chosen to do other things, like buy a house, and put in a suite.  My rental income is making 5% on the capital I put into the house and I also live in the house for free, in a self contained suite whereas before I was renting and had a roommate.  If you add in what I would have to pay for rent if I had not bought the house and put in a suite, it is more like making 10-11% on my home investment.  Additionally, the money I am no longer paying in rent was after tax dollars. 

As for picking stocks in real life, I was burned around the year 2000.  I have made about 500% on my investments since I was burned and I simply want to keep it.  I have made many investments since being burned.  I don't see much foundation in the market so I took a different investment path.  It isn't a make you rich massively fast path, but it is a much safer path that protects captial.

I do not have the same time or ability to monitor stocks with my current job as I did prior to the fall of 2008.  To be honest, I didn't trust the market when I was in it before, but I had the time to monitor it and exit quickly if I saw the need.  

Tastylunch, I saw a post this week that had a graph showing how expectations had been lowered by businesses over the past couple decade.  It seems people do not assess whether expectations are anything to celebrate, just whether they are met or exceeded.  It seems a stock with low expectations that beats them and is only performing marginally will rally just for beating anemic expectations.

Truthisntstupid, the house I bought builds income.  I have been thinking about what I will do with it when I leave the north.  Will I keep it for income?  It might be an idea to start looking at dividend stocks for retirement.  Actually, you have just helped me to formulate my investment plan moving forward.  I still do not trust what the economic corrections that must come will do to various businesses, and I have little trust that I would catch companies in serious trouble, but I think over the next few years may be a very good time to pick up dividend stocks, but not before high unemployment and declining wages give them a good squeeze. 

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#12) On March 10, 2010 at 2:07 AM, Tastylunch (29.28) wrote:

Exactly right!

that's how the voting machine aspect of Wall Street works in my experience. Of course the weighing machine still wins out in the long run, but over a year or two you can have large countertrend moves driven by the crowd.

dang 500% that's pretty dang good Dwot.

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#13) On March 10, 2010 at 9:03 AM, floridabuilder2 (99.26) wrote:

I would say the market is overvalued and not a bubble.  Just looking at homebuilder stocks they are overvalued, but will be positioned for high long term returns.  If homebuilders traded like the SPY, then the SPY is 30% overvalued because that is about the median overvaluation of builder stocks. 

So much fat and waste has been cut out of builder stocks and deflation has caused their COGS to go through the absolute floor beyond what many thought was possible.

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#14) On March 10, 2010 at 1:37 PM, alexxlea (59.20) wrote:

So um, everyone seems to care about the short-term returns...

 

Does no one seem to notice the long-term damage being inflicted in order to shore up our good feelings at the moment?

?????

You might not care that every bank in the world is undercapitalized and underwater, but where is all of your money stored? Under your bed? What? I mean honestly, you think when the second run happens, you'll be able to just go to a bank or go online and withdraw? Nope, they'll freeze it. But it'll be too late by then anyways,  In the months following that inevitable (I said inevitable, for a reason, because it's going to happen, I am as sure of that as I am sure the sun will not explode in the next 2 years) event everyone will wonder what the hell is going on.

 

Oh, and your reason for any given market being up? They want to trade it up so they can exit the ship. You can buy the ship at a low price, but you're giving them the money to buy the liferafts they need to leave.

 

I might be a LITTLE more concerned about all of this because I'm 22 and what is going on in the world disturbs me to no end, because people like me are actually going to have to continue living and dealing with the consequences of a world that has been completely ravaged and plundered by the time I'm half as old as some of the people here. I care not as much about my own ability to "protect" my wealth as I do care about the fact that the entirity of western civilization has been derailed to feed this sick beast that is consuming everything in its path.

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#15) On March 10, 2010 at 1:56 PM, Tacomatight (73.49) wrote:

I've been using this site since around March of last year. dwot, you have dogmatically said the same thing since then. 'This rally is phoney-baloney.'  You and all the other "top fool" doomsayers...

You missed out out on the greatest rally of our lifetime and continue to do so. I agree, I think rentals are a better focus for you.

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#16) On March 10, 2010 at 3:06 PM, outoffocus (23.08) wrote:

I might be a LITTLE more concerned about all of this because I'm 22 and what is going on in the world disturbs me to no end, because people like me are actually going to have to continue living and dealing with the consequences of a world that has been completely ravaged and plundered by the time I'm half as old as some of the people here. I care not as much about my own ability to "protect" my wealth as I do care about the fact that the entirity of western civilization has been derailed to feed this sick beast that is consuming everything in its path.

Talk about the voice of a generation.  I feel the exact same way.  Somehow our generation will have to be the one that gets us out of this mess but from what I've seen from the rest of my generation I dont feel very confident of that happening anytime soon.

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#17) On March 10, 2010 at 6:11 PM, awallejr (81.56) wrote:

Well Dwot if you are more concerned about wealth preservation at your present stage in life, that is perfectly fine.  But dissing a viable investment avenue (stocks) accordingly doesn't necessarily follow.  While you got burned during a true bubble (dot com bubble) I am going to presume that 500% you made wasn't from bank CDs.

Stocks today are nowhere near the bubble status they were back then.  And in fact what caused one of the greatest stock crashes in history was because of a bubble in different asset classes (real estate and banking industry).  overall stock PEs today are at a mild average of 17ish, with plenty still below that.  Big deal.  This market is still going higher, not at last year's pace, but higher nevertheless and it has nothing to do with being a bubble.  You can participate or watch, whichever suits your risk appetite.

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#18) On March 10, 2010 at 8:07 PM, truthisntstupid (78.41) wrote:

......how hard it is to screw this up.......

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=346141&t=01007007794901831104

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#19) On March 10, 2010 at 8:36 PM, Tastylunch (29.28) wrote:

I love it, everyone hates on Dwot now. God forbid anyone remembers she helped save my butt and countless others in 2008.

because clearly 2009 is all that matters.

You may think she's wrong, but this dismissive hatred permeating in here is undeserved.

 

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#20) On March 10, 2010 at 8:50 PM, truthisntstupid (78.41) wrote:

Tasty, I haven't posted anything hateful here.   Dwot, did I come across as saying anything mean? 

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#21) On March 10, 2010 at 8:57 PM, Tastylunch (29.28) wrote:

truthisntstupid

not you ;)

actually this is a more general rant I have more than directed at any individual, there has been a lot of anger in the last two weeks directed at formerly prominent "bears" on CAPS

(i'm sure people think I'm one, but I'm a switch hitter who just accufarms his CAPS account)

I've never understood why bulls hate bears  and short sellers so much. Without bears there can be no continued rallies.

It's like hating your colleg rival to the pointthat you wish they were bankrupt. If your  team's rival gets destoryed than who do they play?

There has to be someone who doesn't like stocks in order for there to be future buyers. :)

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#22) On March 10, 2010 at 9:15 PM, ralphmachio (25.35) wrote:

I think the rally is based on reaching the levels in the trading lane quickly, so that nothing can get in the way of winnings the insiders already assumed they had. To watch the 1 year chart, we are racing into to very top of the trading lane for financials. Once they realized they got passed the last resistance, they just charged for the top.  Question is, what happens now. no point in arguing, we will know in a couple of weeks, in my opinion. 

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#23) On March 10, 2010 at 9:36 PM, awallejr (81.56) wrote:

There's been no vitriolic criticism in this thread.  But if you make a thread expect commentary.

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#24) On March 10, 2010 at 9:48 PM, vmh104 (< 20) wrote:

I think the question itself is curious... you seem to imply that there are times when the market really does make sense... and is therefore rooted in some sort of reality... at best it only sort-of-somewhat is... it seems to me that by far the biggest factor in the market is the pressure of all the people and institutions that want to make money in it... that in itself causes a viscious cycle

My outlook on the economy in the US and EU is grim too... but despite that I can easily see scenarios where a gradual implosion of the western economies could happen in conjuction with an ever increasing stock market... e.g. inflation, multinationals benefiting more from the east than suffering in the west & US companies that supply the East (commodities etc.) 

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#25) On March 10, 2010 at 10:19 PM, dibble905 (< 20) wrote:

The problem with making sense of things is that people tend to do a bottom up approach and compare it with the fact rather than doing the opposite, which is, to take what is fact and dissect it to its finest detail. If we do the latter, things will have to make sense whether we agree with the outcome -- the fact -- or not. As soon as we attempt to come up with a guess as to what the fact SHOULD be and then realize that it is not close to what the fact is, we do one of two things: 1) we become overconfident in our abilities and deny the fact or 2) we dissect the fact and go back to the drawing board to find more variables and values that would get us closer to the fact. If we fail to become overconfident, then we will continue to do #2 until we end up with a more lengthy process of the top-down approach. 

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#26) On March 11, 2010 at 9:28 AM, dwot (44.44) wrote:

I think government actions have delayed a lot of the pain.  When I look at what should be happening from a macro perspective, well, high unemployment, stagnant and declining wages, that affects a company's pricing ability.  Sales go down and companies generally respond by absorbing more of the increased costs and not increasing prices.

Additionally, all business have fixed costs so when overall sales go down the fixed costs per item sold increases and profit margins decline.

Well, even though when you look at sales tax data it shows a horrendous picture of the economy, the hit was not nearly as hard because of government spending.  

I think governments have reached their limits on spending.  Certainly the theme this year is cuts, and cuts are people's jobs.  That affects people's ability to purchase goods and services.  I suspect the make work projects are coming to an end or serious slow down as well because the spending is unsustainable.

Longer term because of existing obligations I do not see how investments can perform as they have in the past.  The debt overhang is massive and then there is the aging population that will be a massive burden on government resources.  Either supports have to be massively reduced, or taxes have to go up, both of which tend to affect overall investments negatively.

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