This past week kicked off what stands to be a very busy couple of months in terms of conferences, panels, what do you think for 2010 interview requests and maybe new exchange traded products.What to make of a new year always makes for good discussion but 2010 could make for an especially engaging debate. 2008 was horrible and 2009 in terms of US equity market results is pretty good so far. Before getting to any sort of analysis a YTD gain for the S&P 500 of 21% is a good result.
Once we begin to peel away the layers some will conclude that in fact things are really as good as a 21% lift would indicate and others will find reasons to doubt how "real" the move is.
It is my nature to be skeptical of big moves up in the market against this type of backdrop for the simple reason that The Greatest Story Never Told (does Kudlow still use that one?) does not hurt my clients or cause them to freak out. We are certainly going along for the ride but doing so cautiously. People tend forget what it feels like when the market is puking down, I don't. It is those times, during a puke down, when the biggest mistakes get made so trying avoid ever being the position to potentially panic takes on a lot of importance.
Doug Kass made an interesting point on Thursday;
The message of the markets over the past few weeks is that, with increased certainty, investors are growing more comfortable with the forecast of a smooth and self-sustaining economic recovery in 2010 and beyond. Many now have even adopted the view that the current cycle is the start of a normal multiyear recovery that could resemble the average 45-month expansionary phases that have typically followed a recession.
Not too long long ago this was the worst crisis in 80 years, maybe even worse than the Great Depression. Now sentiment seems to be headed in the direction Kass mentions. From where I sit, for the recovery to be close to normal in terms of magnitude and when it starts then the world's assessment of the crisis being so bad would have to be wrong--meaning it wasn't that bad. But how can that be given the higher number of failures than normal, the higher number of foreclosures than normal, the current state of unemployment and under-employment and the very extreme actions being taken by the Fed and Treasury?
If this was worse than normal then it would be reasonable to conclude the stock market has it wrong, that there will be more economic and fundamental shoes to drop and if that is true then the chance of another shake out or a few more years of trading range becomes very plausible.
That being said I been very consistent (and wrong so far) about one more decline that scares a lot of people but does not make a new low. I don't think we get anywhere close to 670 on the SPX but maybe it trades with an eight handle again.
The goal with this sort of assessment is not to be correct so much as to not get blown up or totally blindsided in case it does play out this way. After all no one will panic if SPX closes out the year at 1200 but some folks might if it closed out the year at 850.
The picture is from downtown Juneau. I think it is neat how Mount Robson shoots straight up behind the town.
5 comments:
I don't think we're out of the wood yet, but speaking of 2010 I have decided to make a move.
I normally have a portion of money invested in lower risk stuff and I add to that each month. I've been holding that in cash for over a year now and I've decided screw it, I'm putting it in action in 2010. So look for a market drop, say, last of January 2010.
I have a pet theory that, as time goes on, "recoveries" could be faster as the Fed/etc. learn more and more about manipulating liquidity. We knew nothing in the 30s, and that recovery took a looong time. Plus a war. We learned from that, and we have shorter recoveries. Of course, we could easily hit a point in the future where a)the market or issue is too big for us to fix or b) we've manipulated so many recoveries with buckets of liquidity that we're broke and can't do anything.
A follow-on, I think, to Stephen Drone's comment. The prevailing opinion in the federal gov't is that Keynesian stimulus (an alphabet soup of new gov't programs and WWII) ended the Great Depression and provided the catalyst for the expansion that followed (ignoring the fact that the US was the only major industrialized country not destroyed by WWII). Therefore, the logic is that more Keynesian stimulus is needed now. A problem (maybe that is not the most correct word) not frequently mentioned is that the going in position is drastically different now than in the 1930's. Keynesian institutions, such as unemployment insurance and numerous other gov't safety net programs, were not in place going into the 1930's and they are now. So, it is not unreasonable to expect the national and international responses to Keynesian stimulus, today, will not look exactly (or maybe not even closely) like the response in the 1930's and 40's. Also, the US and the rest of the world entered the stimulus era with unprecedented debt. I don't know the answer, but I question if classic Keynesian stimulus is it.
Roger,
pretty good year? your bearish bias is showing.
Anon,
Keynsians did not solve the 30's depression WWII did.
Keynesian economics has been used to the extreme in Japan. Japan has bankrupted the next generation due to stimulus and have NOTHING to show for it.
Keynesian clowns will bankrupt our country for an economic model that does not work ans is only loved by socialists.
Socialism has also been proven bankrupt. Socialist east Germany was rescued by capitalist east Germany. There is no paradise on this planet but socialists and Keynesian's will lead you to ruin. Lets not go down Japans path.
SD, you can start by going in slowly. The biggest crisis involves when there is a real estate bubble. The fed has been pumping liquidity. The question is can the private sector start to walk on their two feet. When the fed takes out that liquidity we can tell at that point. If they continue pumping money without stopping, then look at Japan. Go back to the early 70's going to late 70. S&P fluctuated between 60's to 110. I had been saying from back may-june we can go up to 1166 on S&P. After that we can look at 880-900. SD pick the stocks that you want to be for the long term, and might want to consider going in slowly. I hope I have been of help.
Best,
Jeff from Milan, Italy
P.S. for those that want an explanation of S&P 1166 - from March to June first leg. Correction to July. The secong leg is equal to the same distance as the first(March - June). DisitionPoint web(mike C. favorate) has pointed this out last weekend (Nov.7 2009)
Matching duration to discounted cash flows, timeline and purpose continues to matter as always; here's another take at http://tinyurl.com/yhb3fvu -- why would anyone concerned with hedging both inflation and deflation invest in both equities and short-term bonds, both of which essentially anticipate inflation (ht Zero Hedge).
OT: As to the rather odd comments regarding Keynes there was insufficient historical foundation or reference to arguments proponents of the general theory actually made to respond but those interested in Japan's failure to follow neo-Keynesian requirements for structural reform may find Nouriel Roubini's notes of interest; e.g., http://library.thinkquest.org/28837/japan.pdf
NB: The general lack of respect for labor in the US will lead to a different path downward than Japan's, assuming the nattering nabobs of negativism on the right get their way, but the notion of "stimulus" can be something of a red herring IAC: The central problem of a liquidity trap is the private sector's unwillingness to take the risk of spending absent some kind of serious backstop, if you could make folks believe in that you could avoid the need for a lot of backstop.
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