Saturday, October 10, 2009

Why the Smart Money Missed the rally

There are plenty of falling knife catchers who pretend to be Einsteins now that the market has rallied to where it was after it had declined for a year straight. What those that missed this rally may forget, if they are now anointing these gurus as geniuses is that these same knife catchers were buying at the peak, buying in January 2008, buying in May 2008 and buying in August and September 2008, buying on October 14, 2008 and buying on election day 2008. I might also add that the first trading day of 2009, the Dow traded in excess of 9000 and the bulls were piling in and repeating the same mantra to the poor idiots that had listened to the Jim Cramers all the way down, stay the course.

For one thing, for many to have gotten into the market on the bottom, the volume of the trade would have had to have been well in excess of the clearing capacity of the exchanges. Instead, we have seen repeated massive volume in issues like FRE, FNM, AIG, C and GM, mostly defunct or near defunct on government life support entities. So the trading hasn't even been in these near healthy side of the market. Instead what we have seen is bears being forced out by nonsense moves more likely induced by Goldman Sachs trading computers, designed to unload acquired stock on the way up. In the meantime, Ben Bernanke created a new hallucination, green shoots for the bulls to munch on while they were being fattened for slaughter. Green shoots are things like statistical bounces in indexes. Reductions of unemployment claims to levels higher than any prior to December 2008. The suspension of mark to market allowed zombie banks to pretend they were solvent. Nonsense being sold as improvement?

The reason the smart money missed this rally is there isn't going to be a picking the bottom in this market. A point where dividends on the SPX are around 3% will never be a bottom in a deep bear market,nor a reason to hold stocks for the long run. At 2%, they are a game for fools to buy into. Where is the bottom supposed to be? Logically where there might be a chance for a 6% real rate of return. A 5% dividend would have been near SPX 400, not 666. In any case, the buy if someone was bottom fishing was in the bonds of these companies, not the stocks. This was the real claims on the assets of the companies in event of bankruptcy and the guaranteed returns were very much higher than the stocks.

So now we are sitting on the edge as the bulls proclaim victory while nothing in the private side of the economy is even operational. Trade wars and devaluations are in process around the world and several countries are on the edge of default. Foreclosure rates continue to go up, commercial properties are collapsing in value and many are headed for default and nothing in the banking system has been addressed. Bulls are now trying to entice others to come in and push up the value of their portfolios while the Wall Streeters are selling out with massive gains.

In late 2003 I put together the basis of a book I was going to call "So you think it is safe to get back in the water"? The SPX was roughly 1000 at the time and the Dow was about 10K. Just about 6 years later we are about the same price, meaning dividends have been the net result of holding the general market. Risk free treasuries would have paid the same return and 10 year treasuries about double the return of the market. Not a lot of people accumulated stock under the 900 level in 2002 or 2003, most having held on, the profit going to Goldman and others on Wall Street.

So we are getting the same bubble mania story we got last time. This time though we are looking at a zero Fed funds rate, clear evidence the world has reached an unsustainable level of debt, that even if growth returned the supplies of resources are insufficient for a long growth spurt and that the balance sheet of governments around the world have been irrepairably impaired. Add to that a series of job losses that haven't found a bottom or even showing signs a bottom is in the works and the real prospects for growth in equities is near zero.

Anyone paying attention to history knows there isn't a safe place to buy and hold stocks in this climate. Nor has there ever been a long term gain situation in holding the indexes at these prices. The limits of a bubble is how big it can get before it pops. Also, the real money generator of the economy, housing and real estate is not in a position to generate additional credit that drove the markets and consumer spending in the past. Holding equities is for people who don't know better.

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