OK, we are in a rally — a bear market rally. Winter isn’t over, but this week’s market sure feels like spring. More snow predicted later.
While bonds are flat, and commodities are up slightly over the last five days (through Thursday March 12th), US equity REITs are up 22%, and stocks are up in the 10% to 12% range.
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One Week Performance — Key Categories
The most important contributor to the rise in the stock markets has been the financial sector, which is way up from very low levels based on “suggestions” from the CEOs of Citigroup (C) and Bank of America (BAC) that they are profitable for the first two months of 2009.
Unfortunately, no details were provided, and there was no mention of whether the profits were before or after asset write-downs.
We see the CEOs and bank investors grasping at straws over these snippets of info which may be no more than spin — remember the confident statements about capital adequacy and dividend safety in recent months that proved to be false.
Bank of American was up over 85% in the past five days, but it’s still just a $6 stock that used to be a $53 stock.
SPY, the S&P 500 proxy, has pierced first level resistance in the $74 area, but faces several other key resistance challenges, including the major lows from the 2002-2003 period.
The 2002-2003 lows still represent an important hurdle opposing large expansion of this rally, which we believe is a bear market rally.
Why we think this is a bear market rally:
Given that this is Friday the 13th, citing 13 reasons that the bear will continue in spite of this rally seems appropriate.
1. Current P/E: the current 20+ P/E on trailing “as reported earnings” is too high for this set of negative sales, earnings and dividends growth conditions.
2. Forward P/E: the projected 2010 S&P 500 earnings by Standard and Poor’s at about $40 would only support 800 at best (20 P/E), and more likely would support 600 (15 P/E), assuming there was a general recovery under way — before that time, the current market should sell for less than 800, and perhaps less than 600.
3. Earnings: profits are still declining in the aggregate
4. Dividend Yield: banks and other companies continue to cut dividends, reducing stock appeal and putting total return in question until dividends stabilize and begin to grow (historically dividends generated about 1/3 of total return for the S&P 500)
5. Revenue: overall sales are down — declining sales, earnings and dividends are not reasons for bullish markets.
6. World GDP Growth: credible parties (Goldman Sachs, IMF, and noteworthy individuals, such as Nouriel Roubini, predict worsening global economies) — until forecasts for improvements within 12 months or less for the US or world economies become prevalent, the market is unlikely to “anticipate” with a sustainable trend reversal to a bull
7. Government Intervention: the US and global economies are currently highly government policy dependent, and while policies are becoming more clear, they are not all revealed, and there are suggestions more may be needed — the resulting uncertainty warrants low valuation until government policies to “save” and “stimulate” economies are no longer the centerpiece of investor hopes and earnings prospects
8. Real Estate: the US and global real estate asset deflation continues with waves of negative impact on household and institutional wealth — until property prices stabilize, or are believed to be about to stabilize, a new bull market will have difficulty gaining traction.
9. Other Bank Shoes to Drop: the major banks have not yet experienced likely future write-downs associated with non-mortgage asset types, such as credit cards and auto loans.
10. Auto Industry: the fate of GM, Chrysler and the entire supply chain is uncertain with unknown government involvement.
11. LBOs: private equity firms built on leverage, may not be able to continue to service and rollover the debt they used to make recent optimistic acquisitions — those debts could be a further burden on the financial sector.
12. Retirees and Pre-Retirees: the 55 and over crowd who control the largest portion of US private assets are not as likely to risk their life accumulations in stocks relative to bonds as they were in the boom times of the last couple of decades — that will delay the onset of a bull and subdue the extent of a bull when it occurs
13. Credit Availability: the credit and leverage availability that helped the US stock market recover from the 2002-2003 bottom is not available at this time to increase household expenditures and corporate capital investment — even the US government may be put on credit rationing by China, which today said it is “worried” about the credit quality of their US Treasury holdings, which has implications about their willingness to support the borrowing our “stimulus” programs require and assume to be available.
[some relevant funds: SPY, IVV, AGG, BND, VNQ, IYR, DJP, DBC, EFA, VEA, EEM, VWO]
Richard Shaw
QVM Group LLC