Dorfman: Invest For The 2nd Stage Of The Bull Market
From Jan. 19 through Feb. 4, the Standard & Poor’s 500 Index, a decent gauge of the overall U.S. stock market, dropped about 8 percent.
Among the reasons sparking the decline were President Barack Obama’s proposed tax on banks and a congressional deadlock on health-care legislation. Some stock-market pundits take the drop as a sign that the stock surge that began March 9, 2009, is over, or almost over.
I believe the rally will continue. The recent slump, in my view, was normal. The U.S. stock market historically has averaged at least three declines a year of 5 percent or more, and one fall of 10 percent or more, according to Ned Davis Research Inc. I think the rally will resume and run — with unpleasant interruptions, to be sure — through most of 2010, and possibly longer.
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Evidence of Recovery
Look at the fourth-quarter tally of the gross domestic product. It rose at a 5.7 percent annualized pace, the strongest reading since the third quarter of 2003.
Or consider the Conference Board’s index of leading economic indicators. It has risen nine months in a row, from April through December.
Auto sales are gaining, home prices have firmed in many cities, and technology orders are improving. All in all, the evidence points to an enduring recovery, in my view.
If the economy is indeed recovering, it would be shocking for the stock market’s advance to stop abruptly. There has been a historical pattern, and the market seems to be following it. A terrible event such as a major terrorist act could, of course, cause markets to abruptly change direction.
Second-Stage Bull
During most bull markets, the first 40 percent or so of stock market gains occur in a spurt before an economic recovery begins. This time, that would be the period from March through, say, September.
The remaining 60 percent of the gains usually occur more gradually and haltingly during the next year or two, as the economic recovery unfolds.
- “Buy Stocks Now To Ride Second Stage of Bull Market”, John Dorfman, Bloomberg, February 8
If you’re a bull, this is a buying opportunity. It will be interesting to see how prevalent this view is.
World’s Biggest Economic Sophist On Why Deficits Don’t Matter
These days it’s hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit. The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.
Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.
So why the sudden ubiquity of deficit scare stories? It isn’t being driven by any actual news. It has been obvious for at least a year that the U.S. government would face an extended period of large deficits, and projections of those deficits haven’t changed much since last summer. Yet the drumbeat of dire fiscal warnings has grown vastly louder.
To me — and I’m not alone in this — the sudden outbreak of deficit hysteria brings back memories of the groupthink that took hold during the run-up to the Iraq war. Now, as then, dubious allegations, not backed by hard evidence, are being reported as if they have been established beyond a shadow of a doubt. Now, as then, much of the political and media establishments have bought into the notion that we must take drastic action quickly, even though there hasn’t been any new information to justify this sudden urgency. Now, as then, those who challenge the prevailing narrative, no matter how strong their case and no matter how solid their background, are being marginalized.
And fear-mongering on the deficit may end up doing as much harm as the fear-mongering on weapons of mass destruction.
- Paul Krugman, “Fiscal Scare Tactics”, The New York Times, February 5
This is a classic Krugman piece and why I love reading him so much. The guy attacks people concerned with the deficits as pure rhetoriticians while making no arguments to support his claim that the long term deficit is not that big of a problem. He criticizes them as rhetoriticians while relying entirely on rhetoric himself! That’s why he is the premiere economic sophist today. He always does this.
What is the argumentative strategy? Compare the current concern with budget deficits to concerns about Saddam’s WMDs back in 2003. Of course, there were no WMDs and that whole episode is a sorry one. The basic fallacy here is called false analogy. It’s so transparent as to be ridiculous. But maybe some people buy it.
Krugman concludes todays piece this way:
The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.
For the fact is that thanks to deficit hysteria, Washington now has its priorities all wrong: all the talk is about how to shave a few billion dollars off government spending, while there’s hardly any willingness to tackle mass unemployment. Policy is headed in the wrong direction — and millions of Americans will pay the price.
Indeed it does appear that many people have a hard time distinguishing cynical posturing and serious economic argument. Paul Krugman has a job for just that reason.
The End Of The Bullshit Rally
Here is an e-mail I just sent to my Dad and some friends of mine interested in the stock market:
Volume is picking up a bit in the last hour here as the major indexes hit new lows (Dow: -250, S&P: -31).
Overall now the S&P is down 85 points (7.4%) to 1065 from its closing high of 1150 on Tuesday January 19 (12 trading days). The Nasdaq is down 191 points (8.2%) over that period.
But I don’t think this is the beginning of a new bear market. Frankly, the earnings news has been too good and is suggestive of a short/intermediate term bottom in the economy (see “Paroadoxically, Big Tech Earnings Suggest Recovery”). Yes, I said the economy not the stock market. That should support the stock market to some extent.
The government’s emergency measures, all the bailouts and stimulus, have done their job in stabilizing the economy and providing an injection of adrenaline fueled growth. But the after effects of these actions might not be felt for some time. I don’t expect them to make their full impression on the market in 2010.
The top is in with some distance being put between the current levels and the tops on heavy volume. I don’t think we can move above 1150 in the S&P 500 in the next 6 months and not much higher than it during the next 12.
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That said, I covered all of my shorts in emerging markets (EEM, ADRE, EEV, EWZ), financials (GS, XLF, SKF) and commodities (FCX) during the final hour of trading today. I also covered half of my overall market shorts (SDS, QID) but am keeping the remaining half as a hedge to my longs. This is a very small position of 2-3% the overall portfolio though it is 2x leveraged. I am also keeping my US consumer discretionary shorts (JWN, TGT, BBY) which have not been hit hard in this correction and are still overvalued.
Nevertheless this is an IMPORTANT development. It marks THE END OF THE BULLSHIT RALLY.
I have been waiting for this thing to die for months now and finally it is over and I can stop listening to all the assholes talking about an economic recovery and new bull market. And I can stop listening to my Dad tell me about all his trading profits in Alcoa, Citigroup, Bank of America and the other garbage he’s been speculating in.
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What comes next?
I think we enter a more rational, stagnant, range bound, bloated market environment.
The hedgies and investment banks (GS) are unloading their longs now and over the last three weeks and are no longer committed to a higher stock market to profit from for their own books.
Now we can just work through all the stimulus and bailouts that are jacking up the economy and stock market and try to let markets and the economy sort it all out and reach some kind of equilibrium. My guess is we trade between 900 and 1100 for the next year.
At some point, there will be another big leg down. It will be comparable to the drop off the cliff in the Fall of 2008 and take the S&P to new lows (below 666). But I can’t see that until at least 2011 and it might be 2012 or later depending on how successful all the government manipulations that are sure to come in an attempt to avert such a scenario are.
For now, it’s back to farting and watching meaningless analysis on CNBC by a barrage of experts for me…..
Paradoxically, Big Tech Earnings Suggest Recovery
Our outstanding Q2 results exceeded our expectations and we believe they provide a clear indication that we are entering the second phase of the economic recovery. During the quarter we saw dramatic across the board acceleration and sequential improvement in our business in almost all areas.
- John Chambers, CEO Cisco Systems
Paradoxically, as the market sells off convincingly, earnings overall, and especially big tech earnings, suggest a recovery. I am talking specifically of recent reports from Intel (INTC) and last night’s from Cisco (CSCO).
Take a look at the revenue numbers:
Intel Cisco*
4Q 2009 $10,569 $9,815
3Q 2009 $9,389 $9,021
2Q 2009 $8,024 $8,535
1Q 2009 $7,145 $8,162
4Q 2008 $8,226 $9,089
3Q 2008 $10,217 $10,331
2Q 2008 $9,470 $10,364
1Q 2008 $9,673 $9,791
* Cisco is on a different fiscal calendar and its quarters end one month after the calendar quarters. So, for example, last night’s earnings report which I have put under 4Q 2009 actually ended January 23, 2010.
In both cases, the revenue numbers paint a consistent picture: Dramatically declining sequential revenues in the 4th quarter of 2008 and 1st quarter of 2009 followed by notably increasing sequential revenues for the last three quarters, with undeniable growth the last 6 months. That’s what a recovery would look like.
Odd then, that as the numbers start to look better, the market is selling off. However, the stock market does act this way more than you might think. More on what’s going in later posts.
Disclosure: Top Gun has no position in Intel (INTC) or Cisco (CSCO) shares but is short the Nasdaq-100 via the QQQQ.
Top Gun FP Client Note: The January Barometer
NOTE: Every week I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a 24-48 hour delay from time to time. Here is this week’s.
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A weak January bodes ill for stocks the rest of the year. According to Ned Davis Research, in years when the Dow has risen in January, the median rise for the rest of the year is 10.4%. In years when the Dow has fallen, the median rise for the next 11 months is just 0.28%.- “Stocks Hit Worst Run Since Financial Crisis”, Tom Lauricella, The Wall Street Journal, January 29, A1
| Day | Date | NYSE Composite Volume |
% Difference From Year Average |
S&P Close | % Change |
| Mon | 2/1/10 | 4,228,826,101 | -15.7% | 1,089.19 | 1.43% |
| Fri | 1/29/10 | 5,749,179,096 | 14.5% | 1,073.87 | -0.98% |
| Thu | 1/28/10 | 5,608,331,228 | 11.7% | 1,084.53 | -1.18% |
| Wed | 1/27/10 | 5,429,665,954 | 8.2% | 1,097.50 | 0.49% |
| Tue | 1/26/10 | 4,826,652,979 | -3.8% | 1,092.17 | -0.42% |
| Mon | 1/25/10 | 4,602,212,401 | -8.3% | 1,096.78 | 0.46% |
| Fri | 1/22/10 | 6,384,803,838 | 27.2% | 1,091.76 | -2.21% |
| Thu | 1/21/10 | 7,021,785,569 | 39.9% | 1,116.48 | -1.89% |
| Wed | 1/20/10 | 4,922,843,735 | -1.9% | 1,138.04 | -1.06% |
| Tue | 1/19/10 | 4,752,795,679 | -5.3% | 1,150.23 | 1.25% |
| Fri | 1/15/10 | 4,930,550,553 | -1.8% | 1,136.03 | -1.08% |
| Thu | 1/14/10 | 4,040,467,652 | -19.5% | 1,148.46 | 0.24% |
| Wed | 1/13/10 | 4,286,373,829 | -14.6% | 1,145.68 | 0.83% |
| Tue | 1/12/10 | 4,842,070,264 | -3.5% | 1,136.22 | -0.94% |
| Mon | 1/11/10 | 4,354,271,071 | -13.2% | 1,146.98 | 0.17% |
| Fri | 1/8/10 | 4,506,612,916 | -10.2% | 1,144.98 | 0.29% |
| Thu | 1/7/10 | 5,419,781,753 | 8.0% | 1,141.69 | 0.40% |
| Wed | 1/6/10 | 5,090,936,980 | 1.4% | 1,137.14 | 0.05% |
| Tue | 1/5/10 | 5,266,194,179 | 4.9% | 1,136.52 | 0.31% |
| Mon | 1/4/10 | 4,122,104,159 | -17.9% | 1,132.99 | N/A |
| AVERAGE | 5,019,322,997 |
Finally, the news has actually been strong. Earnings have been better than expected and recent GDP and ISM Manufacturing reports are the strongest since the beginning of 2003-2007 bull market. But the market won’t go higher. To me, this smells like a definite change of tone from the euphoria of last year. I don’t expect that kind of environment to return.
Junk Phase Of The Rally Over?
Without having a strong opinion on the market’s direction, I do feel confident that the “buy anything” phase of the so-called recovery is decidedly behind us.
- “‘Wait, Why Am I In AIG Again?’… The Buy Anything Phase Is Over”, The Reformed Broker, January 31
Blistering GDP and ISM Manufacturing Reports
From the looks of the latest GDP and ISM Manufacturing reports, you’d be a fool not to believe the economy is in a V-shaped recovery.
On Friday, The Commerce Department reported that 4th quarter advanced real GDP grew at a 5.7% annual rate. That’s up from a 2.2% increase in the 3rd quarter.
This morning, The Insitute for Supply Management reported that their manufacturing survey for January came it at a 5 1/2 year high of 58.4.
Can we believe them? What are these numbers actually measuring? Why isn’t the market responding better to these blistering economic reports?
Top Gun FP Client Note: The Fear Beneath The Surface
The market’s still a little stunned and shaky after the last three days of last week.- Art Cashin, Floor Trader, UBS
| Day | Date | NYSE Composite Volume |
% Difference From Year Average |
| Tue | 1/26/10 | 4,826,652,979 | -2.7% |
| Mon | 1/25/10 | 4,602,212,401 | -7.2% |
| Fri | 1/22/10 | 6,384,803,838 | 28.7% |
| Thu | 1/21/10 | 7,021,785,569 | 41.5% |
| Wed | 1/20/10 | 4,922,843,735 | -0.8% |
| Tue | 1/19/10 | 4,752,795,679 | -4.2% |
| Fri | 1/15/10 | 4,930,550,553 | -0.6% |
| Thu | 1/14/10 | 4,040,467,652 | -18.5% |
| Wed | 1/13/10 | 4,286,373,829 | -13.6% |
| Tue | 1/12/10 | 4,842,070,264 | -2.4% |
| Mon | 1/11/10 | 4,354,271,071 | -12.2% |
| Fri | 1/8/10 | 4,506,612,916 | -9.2% |
| Thu | 1/7/10 | 5,419,781,753 | 9.3% |
| Wed | 1/6/10 | 5,090,936,980 | 2.6% |
| Tue | 1/5/10 | 5,266,194,179 | 6.2% |
| Mon | 1/4/10 | 4,122,104,159 | -16.9% |
| AVERAGE | 4,960,653,597 |
Stuyvesant Town And Peter Cooper Village Partners Turn Keys Over To Lenders
It’s the poster child for the entire housing bubble. There’ll be some other spectacular blowups, but this will be at the top of the pecking order.
- Daniel Alpert, Managing Partner, Westwood Capital
The fact that they have given the keys back is going to have a chilling effect. This was such an enormous transaction that it looks like most, if not all, of the equity is going to be wiped out.
- Keven Lindemann, Director of Real Estate, SNL Financial
On Monday, Tishman Speyer and Blackrock, which led a group of investors in the $5.4 billion 2006 acquisition of one of the largest apartment complexes in Manhattan, Stuyvesant Town and Peter Cooper Village, turned over the keys to their lenders. This after defaulting on $4.4 billion in loans on January 8. A long list of equity investors and mortage lenders will probably be completely wiped out.
Source: “Wide Fallout in Failed Deal for Stuyvesant Town”, The New York Times, January 26, A1
For more see: “The Pain Still To Come In Commercial Real Estate And Private Equity”, Top Gun Financial, September 9, 2008.
Top Gun FP Client Note: Neither Here Nor There
NOTE: Every week I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a 24-48 hour delay from time to time. Here is this week’s.
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Does ripe fruit never fall? Or do the boughsHang always heavy in that perfect sky?- Wallace Stevens “Sunday Morning”, quoted in “Green Shoots, Weak Roots”, John Hussman, Weekly Market Comment, January 11, 2010The test of a first rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.- F. Scott Fitzgerald
