Thursday, July 23, 2009

Be careful reading too much into these rallies...

The market continues to show remarkable "headline strength". When I opened up my laptop this afternoon every financial website was screaming "DOW PASSES 9,000", "STOCKS AT HIGHEST LEVEL IN 8 MONTHS!!", etc.

All of these facts are true, but I continue to get the sense that this is driven by:

* greedy day-traders
* technicals, not fundamentals
* a smaller and smaller pool of stocks

The consistent theme this quarter has been that companies have dramatically cut costs (likely because they feel the recession will be long and deep) and because of these cost cuts earnings have been a little better than expected. However, consider two scenarios:

Company A is growing a 50% a year and hiring like madmen. They are expanding in China and India and as a result of this growth their earnings were 2% below analyst expectations.

Company B has cut 30% of its staff and shut 10 plants in the past year. They are looking at more closings in 2009 and 2010. They "beat expectations" by 3% in the second quarter.

Which stock do you want to buy for the long haul? Right now the market is loading up on Company B's stock and that should scare us all.

This Quote of the Day echoes my sentiments:

"Who needs earnings in this casino barely disguised as a market? Nobody’s investing anymore anyway. It’s all just numbers going up and down with no real meaning behind any of them"

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People that agree with me always occupy a special place in my heart. When you are a prominent economist at Harvard, then I get all warm and fuzzy inside...

"The U.S. recession may not be coming to an end and there is a risk the economy may experience a “double-dip” contraction, said Martin Feldstein, a professor of economics at Harvard University.

The economy could “flatten out” or “even be positive” in the third quarter, and then it’s likely to contract again in the last three months of the year as the effects of the federal stimulus program wear off and companies finish rebuilding inventories, he said.

“There isn’t going to be enough to sustain a really solid recovery,” he said, even though recent data has provided some “good news” on the economy."

This meshes perfectly with my thinking that things look better in the second half before we take another leg down in 2010. With mid-term elections occurring 2010, the next series of bailouts might be interesting....

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Just when I think I'm about as the most negative person I know I find someone that reminds me that I'm a happy go lucky sort of guy....


Sprott Comment July 2009



Wow.

Cheers!

PS - I'm going to touch base on the cash for clunkers deal again tomorrow, there's too much misinformation floating around about this program (who would think car dealers might be a little less than forthright?).

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