NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. 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 time delay from time to time.
Originally sent to clients March 29.
*****
The last six trading days have been characterized by a slow, mindless, grind higher. The S&P has tacked on 17 points on lackluster volume. NYSE Composite volume for the last six trading days (through Tuesday) averaged 3.7 billion shares – 19% below 2011’s average prior to that period.
Sir John Templeton famously said the time to buy is the point of “maximum pessimism”. I would suggest the current moment is closer to the point of maximum complacency.
One symbol of this was the invitation to Legg Mason’s Bill Miller to co-host CNBC’s Street Signs with Erin Burnett last Wednesday. Miller was one of the most successful investors of the great bull market beating the S&P for 15 consecutive years from 1991 through 2005 before imploding in 2007 and 2008 when his Legg Mason Value Trust (LMVTX) lost 75% from peak to trough. As a result, Miller has been a sort of “untouchable” since then. That it seemed timely to provide him with such a forum is an elegant testament to current sentiment.
Last Thursday morning, SeekingAlpha posted my “The Correction Is Not Over” on their front page. The overwhelmingly bullish sentiment of the comments caught my attention. Out of 10 or so expressing a market view, every single one disagreed with me and was bullish on the market. The following, from AndrewBaker, one of SeekingAlpha’s Top 50 commenters, is representative:
The correction we are going through is healthy: markets had got too far ahead of themselves, so with or without Libya, the Middle East, Japan, Portugal et al, we would have had a correction. This will establish a new and higher floor from where the markets will re-commence their upward move later.
Michael Ryan, UBS’s Head of Wealth Management – Americas, nicely encapsulated the bullish consensus in an interview on CNBC yesterday: the economy is improving, earnings are solid, and valuations undemanding. Policy tightening will slow growth but not jeopardize the expansion.
In a number of recent Client Notes, I have poked holes in this bullish consensus. In “Top Gun FP Client Note: Beware The Ides Of March” (originally sent March 1), I argued that stocks are not as cheap as the bulls would have you think. The mega-caps are cheap and posses all the value in the market while small caps and cyclicals are quite expensive.
In “Top Gun FP Client Note: Why Simmering Inflation Is Poised To Knock This Market Down” (February 8), I showed how rising commodity costs were squeezing company’s margins. For another recent example of this, take a look at what has happened to Nike’s (NKE) stock since it reported a 1.1% year-over-year decrease in gross margins a couple weeks ago.
Finally, I have repeatedly drawn the connection between the economy’s strength and the government’s unprecedented stimulus policies over the last couple of years (For a detailed analysis, see “Top Gun FP Client Note: The Wisdom Of George Soros”, September 22, 2009). With QE2 set to expire at the end of June, most of these policies are being unwound. The market is unconcerned, but some – such as Bill Gross who called June 30, 2011 “D-Day” (“Top Gun FP Client Note: The Charlie Sheen Market” – originally sent March 8th) – have a different perspective.
Synthesizing the various strands, I have constructed a divergent view from the bullish consensus. Ben Graham aptly said: In the short run, the market is a voting machine, but in the long run it is a weighing machine. Going forward, we will find out whose scales are more finely tuned.
NOW IS THE TIME TO INVEST WITH TOP GUN: If you have been thinking about investing with Top Gun, now is a good time to give me a call or shoot me an e-mail.
Next up are the February Jobs report to be released this morning (Friday) at 8:30am EST and the February CPI next Tuesday morning at 8:30am EST. These are the two big economic reports that economists – including those at the…
Note: To sign up to be alerted when the morning email is posted to my website, enter your name and email in the box in the right hand corner titled “New Post Announcements”. That will add you to my AWeber…
Obviously the highlight of the week is Nvidia (NVDA) earnings Wednesday afternoon. As I wrote in my last blog, NVDA is guiding the Jan quarter to $20 billion in revenue and 75% gross margins. NVDA only provides quarterly guidance and…
You are starting to see some of these things stack up. And then the question just becomes, are there enough of these things to tip the market over? – Michael Brenner, Asset Allocation Strategist, FBB Capital Partners, quoted in the…
Even a downgrade of the US credit rating by Moody’s couldn’t derail the current momentum in the stock market Monday as the S&P clawed back all of the 60 points it lost at the open plus 5. The technicals have…
Note: To sign up to be alerted when the morning email is posted to my website, enter your name and email in the box in the right hand corner titled “New Post Announcements”. That will add you to my AWeber…