Dooming Real Growth

After all is said and done, asset speculation is the only driver in fostering positive market perceptions about this recovery. The Fed, having to find some means to stem deflationary pressures, chose to provide massive liquidity to hopefully inflate asset prices which in turn would imitate real growth. While asset classes such as stocks and commodity prices have recovered, higher prices do not in themselves create enough impetus for job creation. Like Greenspan before him, Bernanke thinks whatever it takes to inflate stocks prices is the ultimate answer to economic recovery and expansion. It must be a part of the limitations of the job and the preoccupation by the Fed to create a policy which appears to be striking a balance fostering growth and fighting inflation, but is really dooming real growth and inflating assets. If there is no real job growth, nothing gets fixed and higher asset prices end up being lousy trades.

Greenspan II

Bernanke, or Greenspan II, restated in a prepared statement for the House his belief that the Fed needs to remain accommodative because of the overall weakness of the economy. This is all quite bullish of course to the market carnies who claim zero interest rates will provide all the energy necessary to unleash the true nature of the markets, up. Now without being able to identify any of the exact characteristics which will signal when the up turn in the economy will mean Wall Street needs less stealing, the Fed, made up of people who have no particular skills, bankers, claim there is a sense that current rising markets along with historically high unemployment is proof the stimulus is working. Well the unemployment part is a problem but why not take a little satisfaction in the fact that Wall Street is doing better. Why do others always have to bring everyone else down by being negative about the majority of the economy. Sure, people across the country are tapped out and would not be in as bad of shape if they had received anything near the deals of Goldman, JP Morgan, and others. The Fed would love to help out everyone but those people just do not work on Wall Street.

AAPL Risk to Value

On this chart, you want the numbers to be on the top half if you are a bull, and on the bottom half if you are a bear. In June of 2008, the bulls risked about $130 bucks being long. In December of the same year the bears risked about $80 being short. Right now a very slight edge for the bulls, still a bit of risk to the bears, but obviously much less at these levels.

Lower Lows A Trend?

Bloomberg poll states, " Among those who own stocks, bonds or mutual funds, only three of 10 people say the value of their portfolio has risen since a year ago." Now the author of the article, restates the media mantra declaring a bull market is underway.

Are we sure? From its high the DJIA declined over -54% in a 17 month fall. We now are experiencing a twelve month rally but remain over -23% off the all time highs set in October of 2007. More will follow on the Nasdaq 100 and S&P 500 but here is a chart of the DJIA lows made after rally roll overs since 1974. A rally roll over low is a low made after declines from higher highs.

It Takes Ten Years

Expertise takes time, lots of time. Nothing could be more true than designing market applications which provide trading solutions and analytic content focused on understanding risk. For those who skip around from one venture to the next, there is little hope. For those who have never committed themselves to a goal of product and application design, they must settle on being mediocre. Whether investor or high end high frequency trader, a commitment to process and design takes enormous sacrifice and a huge amount of time. The search for alpha clearly puts at peril the performance of not only large fund operations due to popular investments
which breed huge bets with processes which do no fully understand risk parameters, but even the performance of operations with smaller trading goals. The 10 year rule applies to all software and application design. If your models failed in 2008, well, it was a great test of your expertise on risk.

UPP Index

Monetizing the SP500 and NQ100 futures against our own UPP (underlying price propensity) Index suggests the year long action may be part of a bear market rally. The big break in the UPP Index begins at the end of summer 2008 where market participants were still believing the bull was still alive. However that soon changed as massive liquidations began and continued up to the spring of 2009. The Index measures price behavior conducive to prolonged upside action. For more information click.

Upsiders

FedEx (FDX), like so many stocks, bottomed around March 9th of 2008 ($34) after an 86% decline from its 2007 highs ($121). It is currently trading around $87 or about 150% off its lows. News coverage today claims its earnings beat is proof of global economic recovery and merits an even higher stock price. Maybe, but even considering this Blog pointed out in Feb of 2008 the lunacy of the declines of the overall market, prices represent a move in position from opportunity to liability. Fixed point values which analysts are famous for are useless. Agreeing that price is where it is trading and value is where it should be, only gets into endless discussions as to value methodology. FDX's earnings numbers may have something to do with global and domestic economic recovery, but probably more to do with a business plan adjusting to promote the bottom line and a natural technical recovery of the stock which has already been captured by those willing to risk ownership at low prices.

Like so many stocks currently, the strong hands have made their money and now want the others to take it higher. They always have, but will they this time? Years of trading have taught me never try to underestimate the stupidity of upside traders, and certainly the greatest upsiders, fund managers. Long term investors do not have much to show for the last ten years and to think Fed and Treasury intervention has realigned the stars to make everything good again is an unreasonable assumption.

Same Game

Greenspan helped put the disaster together along with the great deregulators from the Bush and Clinton administration. The current Fed and Treasury are an exact extension of the same policies. Same attitudes and allegiances operating the same game. While Congress scolds them for poor vision, it cannot get beyond the same spheres of influence from lobbying interests so set against any financial reform. Having all but abandoned any real help for homeowners facing growing delinquencies, generous bailouts have been selectively reserved for only the grievous of financial institutional sinners. The same all will be well with cheap money crystal ball Greenspan scanned is being used to look into the future and declare all will improve with time. As a result, values of everything from equities and junk bonds are being propped up, convinced the healing has begun, without honestly appraising the permanency of the underlying damage.

China, Housing, Stocks

China sounds a bit testy over suggestions by the U.S. that it should realign the yuan. The edginess stems from a nervousness by governmental heads as they realize it is hard to control their own invention, a super heated economy where speculation is mistaken for growth.

Housing market in the U.S. has an underlying problem of accelerating prime mortgage delinquency. Foreclosures have been put off and seem to be a part of a growing hope or plan that a slow recovery might occur over time if inventories are absorbed by a recovering economy. Lots of liquidity in the banks under tighter loan standards unfortunately does not create enough lending to save the sector. Lack of significant job growth means dull real estate for the foreseeable future.

Stocks continue to have a bid as low volume and small ranges dominate daily trade. Zero interest rates however are proof of a sketchy recovery where 'eat like a bird, ___t like an elephant' market action keeps the bulls nervous and the bears weary.

Get In Or Get Out

The troubling part of an upside scenario is who is going to carry the water. While the DJIA has had a rebound from an approximate 50% drop in value, assembling the usual suspects for buying is more problematic. But there are optimist. According to Barron's last weekend, it is time to position oneself for the second half upside run.

Surely there must be some new insight into the coming rally?

Not really.

The impetus for this rally according to the Barron's author, Andrew Bary, will be because "the S&P 500 is trading at about 15 times estimated '10 profits of $75, based on Wall Street strategists' forecasts. That's not expensive, given today's low bond yields. Besides, the profit picture could brighten as the year unfolds, as strategists often underestimate earnings. A year ago they were projecting 2010 profits of only $66." He continues, " ..Even after the past year's rally, the S&P 500 is no higher than it stood in 1998, and profits then were running at just $45. The index still is 27% below its 2007 high of 1565."

Dangling the same old bait as a rationale for investing is really coming out of the same guide book that got pension funds and other cheerleaders in deep red. Unfortunately for promoters of such logic, the earnings formulas may not have the magic they used to, and may be as lame as reasons for buying gold, you know, because it is going to double. Further, pension funds, up till now, the great buyers driven by these historical extrapolations, seem to be dumping stock in favor of long term bonds. Its not that the great crowd does not want to be bullish, they just don't trust the story.

New Fools Wanted

There was little information in today's unemployment numbers other than business talk shows analysing the impact of snow storms and census workers on the overall job picture. What lies ahead are years of structural high unemployed levels ultimately resulting in modest GDP growth. That is good news on inflation which is bad news for most markets, since most strategies, even in equities, are relying on a jump. Markets will continually have to rely on declining governmental stimulus for trade opportunities such as the odd but understandable developing demand for weak corporate and sovereign debt, since they are the only markets with perpetual guarantees, thanks to a new world of governmental economic intervention.

The markets are gearing up for disappointment as it becomes evident there will be few areas to mine for growth. In the 90's we had the "I want to be a tech investor" fool. In the 0's we had "I want to be a borrowing" fool. And while some will argue that the Green Revolution will be the spark, it just does not seem that an 'I want to be a wind and solar fool' will work .

Now with low job growth ahead, the horizon is flatter than ever. Polarized social discontent will deliver fitful governmental commitments as political forces lean back to the right. Stagnant real estate prices will not recapture lost asset wealth and China will turn out to be more of a danger than an opportunity.

Upside For All

Market Bulls want to project Buffett's recent earnings success as proof of current overall upside opportunities in the market. His opportunity play however was ultimately made successful by the taxpayers giant stabilization check. The big picture Buffett promotes has done little for investors over the last ten years and his current strength could be a result more closely resembling a pick pocket than a stock picker.

Marketing the continuation of a generational upside swing of post Great Depression Wall Street is rooted in market concepts that depend on abundant resources, both materially and financially. That may be a problem. But that is another post.

Despite what long term gurus would have the public believe, the market's usual day to day price action has, in large part, always been less about investing, and more about what price opportunities market players can get away with. Legions of willing buy side enthusiasts are part of the success of marketing one of Wall Street's products, the next great run.

In a world where opportunities only present themselves to buyers, there is no downside. But if markets were rational, efficient, and always reflecting value opportunities for buy side investors, Wall Street would not be doing as well.

So while the Bull will tell you the market has a lot of catching up to do, it is reality that is always catching up to bad investing concepts. Upside for all does not work. Something people inside Wall Street have always known.