David Rosenberg asks the all important question – are there drivers that can sustain further gains in equities after a huge advance.  Via this morning’s note:

“Is there a bull case for equities?

Well, after a 20% pop off last October’s lows, that would seem like a pretty strange question to ask.

But what is most important is not looking through the rear-view mirror, but driving ahead by focusing on what is happening through the front window.   With that in mind, we now need to build some assumptions to get to the bull case…


This housing recovery story in the US has more legs than just balmy seasonal December weather, and


China manages to navigate its economy to a soft landing instead of a hard landing, and


Europe can hang in…


One can build the assumption that, if all goes well, the forward PE multiple reverts to 15X, where it was before the trap door opened up last spring…”

Source: Gluskin Sheff


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:

  • http://pragmaticcapitalism Michael Schofield

    Sometimes buying isn’t rational.

  • Larry

    @Michael (and others), are you invested in equities (perhaps lacking a reasoned argument, just following momentum??). Or are you holding cash and waiting for housing to backslide, Europe to revert into another crisis, or China to show more evidence of slowing? I’m 25% cash, 25% defensive equities, and 50% in bonds like MBB and LQD.

  • Octavio Richetta

    Everybody is feeling like jumping in because equities are going up. Equities have been more expensive and the end of the world may not be coming anytime soon since so many are predicting it. If one is not invested in equities, a good plan may be to dollar cost averaging into them. For example, if you are now 0% equities and want to go up to 1/3 equities (i.e., about 33%) you could do it at a rate of 1%/month and take 33 months, which is almost three years, doing it. Sometimes you will buy low and sometimes you will buy high but if you do it all at once you may be buying at a higher price.

  • Octavio Richetta

    And forget about picking individual companies or sectors just go with Vanguard ETFs such as VTI and VXF (to spike the US equity portion with small and mid caps) for the US market and VXUS or VEU for international (they are very similar) if you want to spike the international side withsmall caps, go for VSS. This focuses just on equity ETFs. The rationale for 1/3 in equities is that if WW equities go down 50%, your portfolio will go down 16.66% assuming you buy and hold.

    For active invest management, take a look at the Ivy portfolio, which dshort has looked at and seems to be about as good an active management system as any pro.

    As usual, this is free investment advise possible worth less than that.:-)

  • http://pragmaticcapitalism Michael Schofield

    I think you’re exactly right Octavio people are getting in just because they see the market going up. Mutual fund inflows are just starting to turn positive and they’ll immediately invest knucklehead money whether it makes sense or not bc it’s in thier covenants. I’ve found a few things I like but not without a put. I don’t know what to tell more traditional investors except be careful. BTW what do you think about calls? I might replace some of my longs with them they’re getting so cheap. I could actually lock in a profit on my bac.

  • anon

    ahh yes – markets are ruled by fear and fear. People are either fearful of losing money or, as they are now, fearful of missing out on making money.

    We know another tape bomb is around the corner… I just wish I knew exactly when…

  • http://pragmaticcapitalism Michael Schofield

    As always, have a plan and accept the risk. Cash can be an excellent plan- it has it’s risks but it won’t rip your face off.

  • Andrew P

    I am inclined to buy only in business sectors and reasonable companies that have been beaten into the ground. My big problem is investing in financial sector companies, because I know of no way to have any clue what they are really worth or what they really owe. Too much stuff is off balance sheet or otherwise hidden.

  • http://. Octavio Richetta

    To Michael S. and anon.

    On buying calls, as with everything there is a trade-off. Call options limit your downside but penalize your upside due to the option premium. But the biggest problem is time decay. I bought a boat load of spx 2 year – leap calls in Jan-Feb 2009 with 850 and 750 strike prices (enough to be about 150% long equivalent) because i saw significant upside potential but was afraid of the downside, and, of course I had to see them go down In price as the sp500 dipped under 700.

    At the worse point, I was down about 15% while people long equities were jumping from Bridges. It felt bad but I was able to stomach the ride because as MS said, I had a plan and have learnt to accept the risk. When the market recovered and I had made a decent profit I sold in the summer of 2009, as usual, too early.

    I have hesitated buying calls of any duration at this point since I see limited upside potential in the indices. With individual beaten down growth stocks the story may be different, but those options cost more so I usually conclude the premium, vis-a-vis the upside potential, is not an attractive proposition.

    One possibility is to sell covered calls on your longs, this does not limit your downside potential but offers some extra income if the market stops going up.

    I am now naked short (i.e. I have no long positions in equities) via SPX 1300 June 16 puts. I invested about 2% of my portfolio to get a 40% short exposure. I am considering hedging this position by buying some VTI, and then sell 2-3 mo covered calls on the position but have a feeling I may be doing this precisely at the top:-) so I continue to watch the market going up:-) and then again, wouldn’t this just be a fancy way of capitulating? As scuba divers say, plan your dive and dive your plan. It may be worth to risk a 2% loss if the market keeps roaring up as I still think the odds favor a market dip before June. But we aware in such short time frames anything is possible. As WB says in the short term the market is a voting machine [in the long term it is a weighing machine, I.e., fundamentals driven]

  • http://pragmaticcapitalism Michael Schofield

    Thanks for the post Octavio as usual worth reading. Pullback by June- I was thinking one by end of February and surely a seasonal (and bigger) one by May. I’ll go net short at the drop of a hat. Then long. Then short. What can I say it’s a trader’s market. Risk premium is so cheap. I’ll probably adjust my strategy with some options soon. I don’t really expect this market to be investable until fall.

  • jt26

    One thing he misses is that as the political leaders start to listen to TPC, they will realize that the MMT-put is the only option on the table. That’s what is/will keep equity prices “up”, in the current trading range.