To answer the title question, not quite; but now that bullishness on the economy is so widespread and CEOs are at multi-year levels of optimism on the economy while not buying the stocks of their own companies, yours truly has largely exited the stock market except for bond equivalents such as MCD and FPL.
Regular EBR readers know that the view since the blog began in late December 2008 was that the general stock market was for gamblers. After the bottom was seen, some specific buy suggestions were made. These included stocks that have gone to all-time highs, such as (symbols only) NPK, ROST, and TEVA. For patient income-oriented buy and hold investors (not traders), MCD was suggested and remains in the portfolio of yours truly in increased quantities given improved fundamentals (see below).
The stock market as measured by SPY has now more or less filled the gap set when it collapsed last September and October. It has outperformed the long T-bond this year by a massive amount. Its long-term chart is churning. Bloomberg has a headline today that CEO confidence has reached a 5-year high. The ECRI growth rate of its economic indicators has reached a new record (reflecting the bungee jump moves up and down in these indicators), and in most weeks it refers to improvement in the housing market as the main mover.
Yet now we see increasing evidence that the housing market is being kept alive by FHA making loans by the bucketful with limited care being given to each loan, even though they are more or less free of a significant down-payment, with increasing default rates. Bubble financing redux. With mortgage rates rock-bottom and the dollar down, can things look better in housing land? Yes they can, but probably only in the high end, where there are no government subsidies and where it would appear that sellers are continuing to ask too much.
I wrote this winter that panic was not appropriate, the world was still turning, and the economy was continuing to fill the basic needs of the populace. What remains still lacking is transparency on our financial situation. The large financial institutions are faith-based. For publicly-traded companies to be completely opaque as to what assets they own is unfair.
Businesses are still not doing much hiring, though layoffs have decreased. Corporate profits are rebounding, which makes sense given that the Feds have to put the $1.8 T deficit to work. Call it privatizing the profits and socializing the costs. The earnings from above-normal deficit spending get a P/E of about one in my world.
Stocks are normally valued by the asset values of the companies, financial strength, dividend-paying capability, takeover value, and also by earnings. The same magical thinking that allows a new President who is a war President to date and has ended no war, solved no Middle East conflict, brought no peace to any part of Africa etc. to be deemed worthy of the Nobel Peace Prize is used to justify stock prices by talking only about P/E's, even if the earnings derive from no tangible asset base.
The sense here is that Treasuries are so hated and too many people missed the breakout in gold (if they care about gold at all) to provide a strong feeling that their bull markets have ended, though for me Treasuries are primarily trading vehicles given that we are probably in an up part of the economic cycle that has been discounted and perhaps then some by equities and given the extraordinary efforts of the government to sell debt to benefit private companies and some individuals.
Until common stocks have better valuations not only regarding P/E's but re dividends and price to tangible equity, they remain subject to large moves down. It was valuation and not earnings that broke the falls in stock prices in 1932-3 and in the early 1980s and that allowed the massive bull market from 1942-65 despite 5 recessions in that time. The stock market rally since March has now moved toward (but not to) the upper part of its long-term inflation-adjusted trading range, which uptrend itself is not guaranteed to continue. When McDonald's stock goes absolutely nowhere despite an earnings yield of about 7%, a current dividend yield of about 4%, record earnings, rising earnings estimates for 2009 and 2010, and has tremendous international diversification, but Macy's with negligible tangible book value and highly variable and uncertain earnings has tripled in only 7 months, market risk appears very high.
CIT quadrupled from its August low, and has been cut in half in only 10 days on no real fundamental news. I like the risk-reward in well-timed purchases (and sales) of Treasuries, gold and MCD much better than the kind of speculation that ownership in Macy's (M) represents, and I don't give a second's thought to the investment merits of CIT or AIG. That said, any market can go anywhere, especially a low-volume one. So, shorting this market is also quite risky.
The above is a lengthy way of saying that a pause that, should it occur, I hope refreshes has a good chance of being close at hand for the stock averages.
Copyright (C) Long Lake LLC 2009
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