Tuesday, June 29, 2010

Too Much Optimism!

Fundamentally, one thing that drives portfolio managers and their algorithms to buy stocks is a rise in earnings estimates. (Of course, some contrarian strategies sell at a certain point after estimates rise too much.) In that vein, a fundamentally important factoid is pointed out today by the folks at Chart of the Day in the article Record Optimism Precedes U.S. Earnings Season:

As the CHART OF THE DAY shows, profit estimates have climbed 5.1 percentage points for companies in the Standard & Poor’s 500 Index since the current quarter started, according to data compiled by Bloomberg. The increase is the steepest for any quarter since at least 2004, when the weekly data begin.

The latest projection calls for S&P 500 earnings to rise 33.7 percent, up from 28.6 percent at the end of March. These figures are based on so-called bottom-up estimates, made for individual companies rather than the overall index.

This is all a bit too far too fast, coming as we are barely one year after the end of the "Great Recession" (maybe). Whether or not George Soros' Theory of Reflexivity is a true philosophic breakthrough as he would like it to be hailed, the principle that markets make their own reality has clear validity. It takes bears, or even better scared bulls, to make bear markets or major corrections, and all it will take is some combination of a decisive break below current levels of the SPY and some disappointment in earnings for the stock market to plunge.

Meanwhile, I think it is better for anyone but a pro to trade as little as possible and hold the highest-quality assets possible. In a world where official government policy is "extend and pretend", and where new money is not being overtly printed in the U. S. for now, the wheat is being separated from the chaff. Just look at the 2-year chart on JPM vs. BAC or C.

An increasingly desperate financial community wants your commissions. They can best do this by moving prices up and down, creating chart patterns that induce those who do not have supercomputers and access to the latest information (or, often, "information") to trade in response to said patterns or facts; but all that was so 2007 if you know what I mean. It's both a new era and simultaneously there is nothing new under the sun. If one understands who has been reaping large to giant cash profits the last several years and understands that strength on the charts indicates where those profits have been going (think gold and strong stocks), one may be better prepared to allocate assets intelligently as the crisis continues to play out.

We have to stay alert and watch for evidence or proof that an asset we thought was high quality is no longer that (or never was). AIG while imploding, Fannie/Freddie well before the implosion, and BP as soon as it cut the dividend are/were examples of that. Treasury securities may be that as well, and this panic into Treasuries may, especially if it grows, be a marvelous opportunity to sell if one has gotten with the program and bought.

Copyright (C) Long Lake LLC 2010

No comments:

Post a Comment