07/20/09 Jacobus, Pennsylvania
In last week’s market, you could almost feel portfolio managers reacting to the prospect of missing a rally. Career risk drives many irrational investing decisions. And missing out on a rally is a cardinal sin for portfolio managers. This goes a long way toward explaining this week’s rally.
The consensus seems to be looking for a return to something resembling the environment before the credit crisis. They’ll be waiting for a long time. Sure, there are still lots of wealthy people. But the essence of the financial crisis has to do with most consumers and businesses stretching their budgets and capital spending plans in unsustainable fashion. The next few years will reverse this trend, and we’ll continue to see economic development in emerging markets maintain pressure on commodity prices.
Mr. Market is now testing the conviction of the bears. But through the rest of 2009, the momentum favors the bears. The stock market is far below its peak, but this is justified by long-term fundamentals. In fact, the recent rally has priced in very rosy earnings for many sectors and stocks, including our short ideas.
Remain patient with your short positions. This rally will end soon enough, probably by the time the fourth branch of government — the mega banks — are done reporting their paper trading profits and we learn more about the bleak outlook for earnings in the real economy.
Dan Amoss
Dan Amoss, CFA, is a student of the Austrian school of economics, a discipline that he uses to identify imbalances in specific sectors of the market. He tracks aggressive accounting and other red flags that the market typically misses. Amoss is a Maryland native, a graduate of Loyola University Maryland, and earned his CFA charter in 2005. In spring 2008, he recommended Lehman Brothers puts, advising readers to hold the position as the stock fell from $45 to $12. Amoss is managing editor of the Strategic Short Report.
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Sorry you missed a nice run. But it will continue through the summer pretty much unabated. So, good news is, you still get on board for the run. I would be shocked if we didn’t see 10k the Dow again this year.
Sometimes you have to realize that when the economy turned back in May, out of the recession, we were given an equities gift of a life time. Don’t squander that.