Daily Investment Interpretations

April 17, 2009

2009-4-17:   The market indices rose one more time today: U.S. stocks' 6-week winning streak is longest since May 2007. The NASDAQ gained 2.63 points (0.16%) to end the day at 1,673; the Dow garnered 5.9 points (0.07%) to close at 8,131; and the S&P 500 gained 4.3 points (0.5%)  to 870. Well, OK, it wasn't a royal flush, but it beats dropping 3%. Oil rose half a buck to $50.33 while gold lost $11.90 to finish at $867.90, respectively. The VIX fell another 1.85 to 33.94.
Hey, Economics Geniuses! What Happened?
    This article provides some perspective concerning the various schools of economics, and their inability to anticipate the current financial crisis.

2009-4-17 (Mid-Day):  Over the past few days, there has been some good news. Banks have reported better results than anticipated (amid considerable skepticism regarding how meaningful these rosy numbers are), and this week, new jobless claims came in at 610,000 instead of the 660,000 they've been running. (It's noted that one-week results can be skewed by holidays such as Easter, and that one swallow does not a summer make. It will take several weeks of similar data to support a trend.) Consumer sentiment highest since September. 
    At the same time, commercial real estate defaults are beginning to take off, amid claims that a commercial real estate collapse will eclipse the residential real estate debacle we've seen so far. Also, after a month (February) in which new housing starts rose for the first time, they fell again in March at a record-setting pace of 11%. And now that the moratorium on mortgage foreclosures requested by the Obama Administration has run its course, a tidal wave of mortgage foreclosures is getting ready to break over our heads. Credit card delinquencies are on the rise.
    In the face of this, we've had a dramatic stock market rally in which every  market pullback stimulates fresh buying interest. The market is now seriously overbought, so investors have been waiting for a major pullback and a retest of the March lows in order to buy into this market. And because a majority of investors have been expecting a pullback opportunity to buy, it hasn't happened even though the market is quite overbought. What will probably have to occur is a blow-off capitulation of the bears, at which point the stock market will roll off gradually and then more steeply, inflicting maximum pain, frustration, and loss of investment capital upon bulls and bears alike. Or it could plunge a few percent in one day, catching many investors off-guard.
    One of the striking characteristics of this rally is the rapid shift from fear to optimism. At its March low, the VIX closed a little under 50. That's high, but far below its panic-state peak of 96 last October. By now, there's widespread belief among financial pundits that the worst is behind us, and there seems to me to be a perception that we're going to experience a V-shaped recovery, albeit to a lower steady-state GDP and stock market maximum than we saw in 2007. It's basically, "Happy days are here again." Weekend Investor: Five ways to set up your portfolio for a global market recovery
    Mark Hulbert has just published the article I expected him to publish: Worrying about lack of worry, quantifying the (bearish from a contrarian viewpoint)  optimism among investment newsletter advisors.
    In Traders, not investors, fueling rally: NYSE chief, the chief of the New York Stock Exchange' Euronext explains that this rally hasn't shown the kind of volume he expects with a market turnaround. He thinks it will retest its March lows before resuming its climb.
    Paul Krugman examines the current optimism in Green Shoots and Glimmers He points out that at just about the point we're at now, there was a strong rally during the Great Depression. The Dow rose about as high percentage-wise as it has now, along with talk about "the worst is behind us" and "this market has finally turned around". 
    At the same time, our horrendous debt levels haven't gone away. It will take years to materially lower our ratio of debt to GDP even if the worst proves to be behind us. (See also: Enjoying The Suckers' Rally?, Krugman: Waaaaay Too Early to Declare End of Depression, and Helicopter Ben talks a good game.)