Monday, March 23, 2009

As The Market Turns?

February 19, 2008...."A reasonable person cannot simply abandon equities. Once the market turns, it will turn with a vengeance." - Clear The Mist

In response to the Timothy Geithner plan for a partnership between the federal government and private capital pools to purchase "toxic assets" from banks, the stock market soared today.

The DJIA closed at 7776, up more than 497 points, or 6.8 percent. The broader S&P 500 Index closed a tick below 823, up more than 54 points, or more than 7 percent. Even the tech heavy NASDAQ closed at 1556, up more than 98 points, or nearly 6.8 percent. All in one day.

Since reaching its bear market lows earlier this month, the U.S. stock markets are up about 20 percent.

Don't get too excited yet. Equities indices remain close to 50 percent below their 2007 peaks and all-time highs. So if you think the train has pulled away from the station, or the space shuttle has already zoomed away, relax.

A couple of things about the new Geithner Plan ("Plan"). Will private capital show up for the dance? At what prices will banks - if at all - be willing to sell their currently unpriceable assets? AND, perhaps more concerning to taxpayers and our international trading partners, while private investors have the possibility of earning big profits off this scheme, they are protected by the Treasury against big losses. Why? Because the way the current Plan is proposed/structured, you and I, as a taxpayers, stand to absorb the vast majority of any potential losses.

I am not proposing an alternative solution, mind you. And I am happy to accept fault for criticizing the Plan while not proposing one myself. It's very Republican of me, isn't it.

But I must remain skeptical about this Plan. While I believe that bad mortgages represent a relatively small percent of mortgage-backed securities or CDOs (collateralized debt obligations), given how complicated these instruments are, I'm unsure how you accurately price them - even if you are a so-called expert. It all bears further patience.

Regarding the current bear market rally, let us keep in mind that we've been there before. I hate to bring it up, but during the calamitous bear market of 1929-32, investors - what remained of them - experienced no less than 9 rallies of 15 percent or better. In fact, one rally was some 40 percent! The ultimate result, though, was an overall stock market decline of about 86 percent.

Now bear markets do not announce their ends with fanfare. They do not end simultaneous with the end of recessions. I think we all know this. Conventional history shows us that markets bottom some six months before the economy. So the question remains: when will the economy bottom?

Many pundits are pointing to the "fact" that many stocks that are reporting disappointing earnings and other events are not responding with further declines. They suggest that we see this when investors have "priced in" pretty much all the bad news. This may or may not be the case. I hate to be the cynic. But when investors have sold as much out of equities as they have over the past six months, clearly some feel the urge to reinvest en masse, especially when we see daily gains of 4, 5, 6 percent or more. We just hate missing trains, especially after so much money has been lost.

I, for one, need to see more clarity on the Plan. When and how will investments actually be made? I, for one, need to see some tangible evidence of an improving economic world. I don't even mean increasing corporate profits. A leveling off of unemployment trends would be very nice for starters.

Clearly, as I have stated in prior postings, many many stocks are cheap. It doesn't mean they are as cheap as they can possibly get. But as I have also said, averaging your investments is only prudent, especially given this market's volatility. There is a sense in the air of a change in psychology. But again, we've experienced that before during big rallies in prior big bear markets.