WHY IS THERE SO MUCH SKEPTICISM REGARDING THE RALLY?
There is no doubt that is one of the most hated rallies in the history of the equity markets. Despite signs of economic recovery investors refuse to vote in favor of the U.S. economy with their hard earned money. Rather than jumping on the bandwagon and riding the bull the majority of investors remain hateful of the rally and refuse to accept the idea that everything is now fine after having been so close to the brink of collapse just one year ago.
But what has caused this extreme schism between Wall Street and Main Street? It’s quite simple in my opinion. Main Street sees the 60% rally as a fabrication that is the doing of those who helped cause the entire mess to begin with. Like a masterful cattle herder, the Fed has handed the banks billions in funny money and given these institutions and the investment public no choice but to chase the asset reflation trade. Richard Russell recently expressed his opinion on why the rally is so hated by both small investors and institutions alike:
It’s because many seasoned investors believe that the advancing stock market is a product of the various stimulus plans. That could be what’s wrong with that thinking? The problem is that nobody knows what this administration is going to do next. For instance, Bernanke says he will hold interest rates low (around zero) “for an extended period of time.” Now what in the devil does that mean? We all know that if enough pressure comes from Congress, Bernanke could raise interest rates tomorrow. In other words, big money, institutional money, doesn’t trust that market advance. They think it’s being “manufactured” by a Fed that is frantic to “beat the bear,” and they aren’t convinced that the Fed can pull it off. They also don’t trust Bernanke’s promises.
In other words, the general public is beginning to catch on to the reckless behavior of the U.S. Central Bank and the bank controlled Congress. While consumers continue to de-leverage and struggle with double digit unemployment it’s business as usual for the banks and the loose pursed Congress. The investing public is fed up with it and remains hesitant to put their hard earned dollars at risk in an equity market that they believe is being driven by the Fed’s funny money monetary policies. Russell elaborates:
Nevertheless, technically the stock market is acting well. So why not load up with stocks? I guess the same thing bothers me as bothers the institutional money. It bothers me to put my money in a market that I think is being manipulated with stimulus projects. And frankly, if I bought stocks here I wouldn’t feel like an investor, I’d feel like an in-and-out trader who’s trying to scalp the market with the help of what I considered temporary stimulus plans.
The stock market has evolved from a place of financial prudence and long-term planning into a place of “fast money” and trading. As we’ve previously surmised, this is all due to the boom/bust policy of Central Bankers who have created trillions in easy money which has resulted in excessive leverage, excessive debt and excessive risk taking. As opposed to achieving their goal of smoothing out the business cycle the Central Bank has in fact accomplished the opposite. And the investing public has voted with their dollars over the last 10 years – they’re tired of the boom/bust Fed policies and reckless government spending that do little to create an investment environment that is trustworthy for any time period greater than a few months.
Why? People don’t like doing analysis, getting it correct, and then having the rules of the game changed on the fly by the government/Fed (mark to market accounting, government sanctioned accounting fraud, new acronnym programs getting invented and implemented on the fly, etc., etc…) to cause that correct analysis to tip the scales in favor of the ignorant, the greedy who lost across all levels of society, and the Fed themselves.
If the Fed mailed everyone a million dollar check and then reported GDP, manufacturing, and retail sales all went up nominally would you not be skeptical.
Off topic question wondering if anyone could help:
If I cover my SPY short for a loss for tax purposes then put on an ishares IVV s&p 500 short is this a way I can legal get around the wash sale rule.
Thanks.
Oops, meant for Eric. Where is the edit button TPC?
http://www.fairmark.com/capgain/wash/wsident.htm
That looks correct, but please consult a tax expert.
I admit I hate this rally and I would like nothing more than to see the big banks go under which they should have and be sold to small community banks. With that being said I bought puts ONCE this whole rally and got out with a profit due to DUBAI because I respect the reason why it is going up and know that I’d be killed if I got in the way.
Doubtful:
http://www.fairmark.com/capgain/wash/wsident.htm
I think that’s the most important thing James. When I first became bullish on March 8th it was entirely due to government intervention. I knew the government was going to forcibly drive prices higher, but even though I thought I knew what was coming I had no idea the magnitude of it. I think that is what has people most irritated. It feels so contrived and manipulated, but that’s the market for you. It doesn’t always move in rational ways. The best we can do is decipher the reasons for moves and make unbiased decision.
It just makes no sense. How can we basically be fully recovered from such a massive heart attack. I think investors are skeptical for good reason. We’ve tried this Fed policy before and now we see the banks back at their old tricks. Why wouldn’t investors be skeptical of what we’re being told?
Paradise lost – twice over. Once in the tech bubble – second in the housing bubble.
I’m a prime example of one the sheep in the flock being herded over the cliff (twice no less). Buy and hold, buy and hold until finally you capitulate. Confidence is lost – too much volatility for your average buy and hold investor.
The irony of it is staggering. Ben & Co have sought out this holy grail of a smooth business cycle, but they have turned the business cycle into an utter joke with their constant intervention and volatile interest rate policies. I’m sorry to hear that you were caught up in it all.
I think what most in the ivory tower set get is middle america has been raped twice. Partly due to their own greed and ignorance – let’s be blunt.
But when you make the average wage of $40K in America, it is not quite so easy to recover then these people who preach to us about the stock market as the way from their cushy $300K, $500K jobs as strategists, economists, and the like. Same with most guys who manage money in the financial industry – many of whom took a long time to build a business – but they live in a different planet. They deal with people with assets, lots of them – generally they won’t look at you if you don’t bring in $250K to manage. $100K at the bottom for many. That’s just a small sliver of society – thats their circle. Their friends, their work mates, their clients.
They have no idea what is going on in middle America other than statistics and its all just numbers.
The reality is our ownership society has fleeced the many. When we talk about half of Americans owning stock its a joke. So many people have $1200 IRAs and $2800 at work in a 401k. Thats why the data is skewed up. If not for 401ks I bet “stock ownership” would be 12-18% of society.
We’ve been sold a bunch of goods, and thats just reality. Japan’s stock ownership rate is 3% for a reason. Most of Europe is somewhere in the 6-12% range. America is the outlier because we believe the dream.
Now we have to wait for a new generation of suckers to be born, because let me tell you – the average folk I talk with in their 40s, 50s and 60s both choose not to put any more money into this gambling hall, nor can afford to. At least in Vegas they are honest about the fact the board is tilted in their favor.
Thats “reality” when you leave the streets of NYC or DC or Boston.
The frustrating issue is that you cannot with any degree of comfort go long or short on these markets, in ANY asset class. While this is always true to some degree (why there is risk in investing), I’ve never seen an environment where both strong deflation and at least the market perception of strong inflation are concurrently non-negligible probability events.
On the long-risk side, it appears that for equities valuations are rich and expectations (in terms of next year’s earnings) are too optimistic. We are beginning to see PIK, cov-lite, and dividend recap deals in the leveraged loan / HY market again, reflecting perhaps the start of a return to irrational exuberance in high yield credit. Commodities have staged an enormous comeback on the basis of a falling dollar and China’s hoarding (overcapacity?).
However, shorting these has only led to pain, and the potential for a strong natural economic rebound off the bottom + juicing from the Fed and fiscal stimulus mean that the first half of 2010 could be very strong and terminally painful for shorts.
Putting money in more conservative investments is also unattractive. Treasuries yield almost nothing on the near end and the long end has been inflated by quantitative easing and enormous (and abnormally high) purchases by financial institutions with gigantic excess reserves and nowhere to put them. Putting on a steepener trade is also scary given the very large potential for a double dip in the back half of the year.
Put it all together, and the lesson to take away is that everything is wacky when you are trapped between (1) necessary massive deleveraging at the household level (fat tail risk = deflation) and (2) monetary and fiscal authorities using all of their tools to fight this deleveraging (fat tail risk = inflation). Going long on any asset class right now is in essence a bet on the ability of authorities to navigate between Scyilla and Charybdis to create a Goldlilocks environment.
Well put.
Soros had it right with his theory of reflexivity. Prices drive fundamentals, not the other way around. EMH theory does not explain bubbles, yet they exist, if not dominate financial markets. As the Fed inflates markets, the economy seems to improve. It’s all a big ponzi scheme but it doesn’t mean you can’t make money. Technical traders should have done well if they kept CNBC turned off.
EMH is also flawed because it assumes markets are forward looking discounting mechanisms, but as we’ll see in 30 minutes they are more like a coincident indicator as opposed to higher efficient discounting mechanisms. This has fooled policy makers into assuming that they are being more proactive than they really are. They respond to what they believe are forward looking indicators when in fact they are not.
Anybody that has traded for an extended period of time knows how utterly deficient the EMT truly is. And yet so much of our policy is based upon this mythical equilibrium point that economics mimicked from Newtonian physics. Why mythical? B/c of the idea that perfect knowledge is needed to reach this equilibrium point, but sadly the concept doesn’t make any sense. When you step back and think about our central bankers, who hold the fate of the free world in their hands, mistaking their rational models for what turns out to be alchemy in practice, it boggles the mind.
Unfortunately, poor Soros cannot communicate his brilliant ideas in plain English. Every book he comes out with is regurgitating the same indecipherable points again and again as if repetition was what’s missing. Timing is entirely lacking from his theory as well..it’s unfortunate he didn’t devote any of his considerable talents to that topic.
TPC,
Great article. As I have read several times both from Denninger and Russell, this is a market for traders not retail investors. Pezhead’s experience confirms it. I am your average reyail investor , and I was burned badly in both of the last two downturns. That led me to you guys ( TPC, ZH, Calculated Risk,KD and Mish) to educate myself better. I only wished that I had learned sooner, but most of the literature was buy and hold and that was no help. Now with what these Bernanke and Obama have placed in motion, this country is going bankrupt and it may not matter that much anyway.
Good article and accurate – I spent a lot of time trying to learn how to trade using various methods and tools (tradestation) and what I’ve learned is the process is cooked! The retail investor (sheeple) can’t use TA – Wave theory – common sense etc. to guage stock/futures purchases etc.
Because the market has been manipulated to go strait up, it seens to most, that there is kinetic engery stored to bring it down. Instead of blowing off steam ocassionally, the Fed and Big Banks won’t let it fall – via stimilus, rate reduction – dark pools etc.
This makes it even harder to reenter the market, becasue with a Black Swan event (international crisis), it could crater.
This market is also propped up becasue it’s the only thing keeping Obama from having a 20% approval (self declared liberals, which he’s rapidly losing) rating.
It’s a bummer, anything safe is cheap and so called safe alternative instruments (gold – foreign currencies) are developing bubbles too (and novices are getting schooled).
Good luck to all – I wish I had answers
The decision of how much to invest in equities is simply one risk versus reward. If you believe that with near certainty equities will outpeform all other asset classes over the next 25 years and will trend up in a straight line then then you should probably be 100% invested in equities (ala Ken Fischer).
If you believe that there is near certainty that equities will crash in the next year or two, then you probably want to stay out of the market and maybe build a short position at higher levels (how high I have no idea) (ala Pretcher).
If you believe that somehow the country will muddle through and that the government will intervine to keep the markets from crashing again, but that growth will likely be uneven (strong then weak then strong, etc), then somewhere from 40% to 60% equities probably makes sense even at today’s prices. If the market levitates and moves sideways without falling then you are invested and if the market declines you have funds to buy more equities. Hedged both ways.
Even at today’s market price, equities seem to have a higher long-term return potential than fixed income or cash. (That was not the case in 2000 or in 2007). What alternative are their for the typical investor? Gold prices are already bubbly. Paper gold (GLD) is potentially risky if you ever want to take delivery. Most physical assets have carrying cost. Real estate only makes sense if your income stream exceeds your expenses (or with cheap long-term financing as an inflation hedge)
The reason not to invest in equities is that there may be opportunities to buy at better prices in the future. That day may or may not come. Most likely it will come in different markets at different times and when no one is expecting.
I would agree with what you said, but I would add that it is not that simple and straightforward no matter what your mindset is. Just take the simple discipline of buying low and selling high. It takes an extraordinary amount of courage to buy low, when blood is in the streets, and an extraordinary amount of discipline to sell high, when the church bells ring of peace, to use the old Rothschild quote. This is not what the herd does, and it is contrarian and lonely. Just today I put on UNG, whose chart looks like a ski slope…this is a game that is just plain tough to execute.
I completely agree. It is very difficult and almost against human nature. Even if you have internalized the need to take a long-term perspective and go against the herd sometimes, it is very difficult to decide when low is low. In March the markets were down, but NOT historically cheap. I had no sense that there was blood on the streets. There was a margin of safety for sure, but without intervention the market could have really found a sound base. Now it is on an upward sloping tightrope.
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Despite signs of economic recovery investors refuse to vote in favor of the U.S. economy with their hard earned money
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what signs???? BEA NBER BLS… it’s all crap… it’s all fabricated.
only true sign is in monthly/daly treasury statement AKA taxes that
being paid..
so,, last monthly treasury statement.. personal income taxes DOWN 20 %,
COPR taxes down 50 % compared w/ 2008
2 month goverment deficit is about 300 bln $$
what signs???????
sorry folks, but its not even a bottom… still going down down down..
alex