Sunday, April 05, 2009

The Best Rally in Five Months!!

A number of people are starting to point out the remarkable similarities of the current rally to the last great burst in the markets way, way back in November 2008.

As I mentioned last week the mark-to-market ease by FASB gave the market one last push to make it the biggest move in since 1938. I won't make your eyes glaze over on a Monday morning by discussing the intricacies of this accounting rule, but easing mark-to-market accounting has big problems ---

1) It will probably make banks more reluctant to sell their bad assets, delaying any rebound in lending.

2) It will eventually lead to confusion about asset prices

Remember the last big rally also occurred in the vacuum of information - the last month of a quarter when companies stop publicly commenting on their business activities. When companies began reporting earnings in Jan/Feb, their comments drove the markets to new lows. I'm not suggesting that the pattern will repeat, but the early commentary from companies reporting earnings has been remarkably dire. One mid-size software company reported $18 million of license sales in Q1 2008. That number fell to $4 mil in Q1 2009. Again, one company doesn't make a trend, but it's something to watch out for in the coming weeks.
Consider this stunning chart (via that shows how the S&P 500 is still down 40% despite an 8%, 9%, 15%, 9%, 24%, 27%, and 27% rallies in the last 18 months. Skilled traders have been able to play both sides - ride the rallies, short the sell-offs - and are flourishing, buy and hold has been a painful game plan.

Also, consider the WSJ article - "It's starting to look a lot like November".
"The recent stock-market rally is turning heads. Why, there hasn't been anything like it since at least...November.

The Dow Jones Industrial Average has bounced 22.5% in 19 trading days, the best such stretch since 1938. The broader S&P 500 has jumped 24.5% during that time.

Amid the cheer it is easy to forget that the short-lived bounce off the market's November 2008 bottom was nearly as strong as this one. Until this past Thursday, November's rally was bigger, with the S&P 500 up 21% in 17 days, compared with 20% for the current bounce. The earlier surge carried through to early January, but then fell off a cliff to hit 12-year lows."
I won't harp on the jobs data from Friday too much even though I could. While many commentators over the weekend repeated the refrain that jobs are a lagging indicator and shouldn't be watched too closely - there are data points that are useful when looking at the real-time health of the economy.
Two of the best figures to follow are hours worked and temporary help.
When businesses come out of a downturn, they often lag in their hiring because they can't be sure that the downturn is over. Thus the average # of hours worked/week slowly ticks up during a turn in the economy. However, the average # of hours worked fell to just 33.2 in March, the lowest level ever recorded in the history of the survey (dating back to 1964).
Also, as businesses start to recover, it is often easiest to add temporary staff before hiring full-time employees. In March, US employers shed another 72,000 temporary employees. This has been a pretty consistent trend since last year and the trend doesn't seem to be shifting direction yet.
With all of this said the Asian markets are still rallying because Bernanke said he thought some progress was being made in unfreezing credit markets.

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