Why the Rally?
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.
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