Up, up and away – it’s Super Market!
It’s bugdet proof, oil proof, terror (threat) proof, housing proof, inflation proof and pullback proof 3 weeks in a row!
This is truly a Market of Steel (and the recent movement of X underscores that) and looking at the movement of the past week we really do have to believe it can fly… Is the US consumer (driver of 2/3 of the economy) really impervious to harm? What, if anything, is our stock market Kryptonite?
Why is the retail sector down 7% for the year if everything is so great? I know, I'm supposed to switch my brain off and just go with the flow but even Superman can be more effective if he knows to look out for glowing green rocks. The rational approach to this sort of market is to participate in the rally, enjoy it while we can, but keep a lookout for signs of weakness that undermines the overall strength. As I said back on August 22nd: "We (US equities) may actually be the least sucky place to put your money in the second half of ‘07."
While we took a bullish posture based on my outlook, we didn't take THAT bullish of a posture as there are just too many darn things lurking in the corner for us to ignore. Here we are, one month and 1,000 points later and we'll have to say it this time like we mean it: "Sure we have this overhang of sub-prime mortgages and we’re fighting a war of attrition for goals we’re uncertain of at an absolutely staggering cost while plunging the economy onward to $10T in debt but – so what? We’ve been doing that since 2003 and the market is up over 50% since then and last year I dubbed it the Meatball Market because bad news Just Doesn’t Matter!"
It just doesn't matter, It just doesn't matter, It just doesn't matter, It just doesn't matter, It just doesn't matter!
Unstable currency, runaway commodity prices, spiraling inflation, low savings rates, hedge fund collapses, declining home values, banks writing down their virtual portfolios, hundreds of thousands of layoffs, millions of foreclosures — it simply does not matter as long as they are LOCAL problems for the US as we are a smaller and smaller cog in the great global economy, one day we may even be granted emerging market status by our Chinese masters!
Sure we're lagging behind the rest of the world and sure, from a global perspective, the decline in the dollar has wiped out all of our market gains. Sure our performance compared to Japan, India, China, Russia, Brazil, Mexico, Indonesia, North Korea, Taiwan… is a total joke but even the benchwarmer on the championship team gets a little champagne spilled on them once in a while.
Three weeks ago we discussed how the runaway success of the global markets has left China flush with cash and we were very suspicious that this whole rally could have been nothing more than window dressing as we prepare to dump our stocks on China's new Investment Company, which is mandated to throw $200Bn into the global markets, possibly injecting that much new capital every year! In addition to China, the Abu Dhabi Investment Authority has $875Bn petrodollars to invest, GIC Singapore has $330Bn and Norway's Pension Fund is looking for a place to park $300Bn. GM plays the market with their $95Bn pension fund, making more money there than they do selling cars!
As long as it all keeps going up, this is no problem and one could even imagine that, even if the rest of the world markets start to flatten out, we are so far behind that our markets may still keep going up. If we were to update the above map, the US would be all alone in the light green this year amongst the industrialized nations, Europe and Australia blew past us in Q3…
Notice at no point in this conversation are we discussing fundamentals! This rally is nothing more than hyper-inflated capital looking for a place to go and US equities represent a fairly liquid, fairly tangible asset that can absorb Trillions of overseas dollars without becoming too unstable (we hope). Just as we diversified into emerging markets when our economy was on fire in the late 90's (leading to disaster but that's another article), other countries will diversify into the pokey US markets, especially with a fire sale on the dollar.
The Dow (an index of multinational corporations) stands 40% behind the Nikkei and the CAC 40 since 9/11, we are 75% behind the DAX and 100% behind the Hang Seng. If those markets keep going up, we really don't have a choice! The Hang Seng came off a holiday and added yet another 1,000 points yesterday, closing at 28,199.75 despite Greenspan calling the Shanghai market a bubble. "If you ever wanted to get a definition of a bubble in the works, this is it." he said, at the end of a third quarter in which the HSI gained 45%.
Europe is also continuing on in party mode with half-point gains across the board. Money is still flowing from Europe to the US as our market looks irresistibly cheap at $1.42 to the Euro.
At home we will be thrilled to just hold yesterday's highs but the banking sector should get yet another boost as TD uses those mighty Canadian dollars to pick up my favorite bank, CBH for $8.5Bn, giving them control of 2,000 US branches and $250Bn in deposits. Don't get too excited, 75% of the deal is TD stock, which is up 30% this year and it works out to just about $42 per share for CBH, who were at $39 yesterday. Still, CBH had a HUGE p/e of 26 and this will get all the lazy analysts to sharpen their pencils in a sector with an average p/e of 17 and well-known names (and possible takeover targets) like SUSQ, NPBC & MTB all trading well below 15. We'll keep an eye on these three, especially the two Nasdaq banks, for signs of a sentiment shift but I can't wait on MTB so let's grab 5 Nov $105s at $4.50 for the $25KP, we'll sell the Oct $105s if it breaks back below that line.
Let's keep an eye on holding positive today, It would be nice if oil stays below $80 so we can start buying some transports. YRCW is very tempting down here but let's see how the day goes. Gold will take a big hit on a dollar bounce but we covered our gold plays at $750 so no worries there.
Have a fun day,
– Phil
