Guest Post: Full Steam Ahead?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Consultant Luc Vallée, the former chief economist at the Caisse de dépôt, started writing his own blog which he aptly calls The Sceptical Market Observer. In his first post, Luc asks: Are we out of the woods yet? Don’t count on it! and concludes by stating the following:

According to Desmond Lachman, Resident Fellow at the American Enterprise Institute “… it is all too natural to be looking … for signs of green shoots that an economic recovery might have begun. However, rather than grasping at straws, US policymakers would do better to honestly ask themselves … whether the policy measures taken to date (are) commensurate to the enormity of the challenges posed to the US economy by the most severe asset price and credit market busts since the 1930s? … The difficult global economic background would also seem to heighten the urgency that US policymakers refrain from wishful thinking about an early bottom to our economy.”

While I agree with Luc and Desmond Lachman that the structural problems of the U.S. economy pose serious challenges to policymakers, there are signs of a trough in global economic activity.

The OECD’s Composite Leading Indicators (CLIs) point to an easing pace of deterioration in some major economies:

While is still too early to assess whether it is a temporary or a more durable turning point, OECD composite leading indicators (CLIs) for April 2009 point to a reduced pace of deterioration in most of the OECD economies with stronger signals of a possible trough in Canada, France, Italy and the United Kingdom.

The signals remain tentative but they are present in the majority of the CLI component series for these countries. Compared to last month, positive signals are also emerging in Germany, Japan and the United States. However, major non-OECD economies still face deteriorating conditions, with the exception of China and India, where tentative signs of a trough have also emerged. etc.

Other indicators are also pointing to a pick-up in global economic activity. The Baltic Dry Index, or BDI, a measure of shipping costs for commodities, advanced to its longest winning streak in almost three years on demand for vessels to haul iron ore to make steel.

[Note: Some questions are being asked about the ‘erratic’ Batic index.]

Hopes that the worst of the financial crisis is over sparked a rally in the markets in the second quarter of this year, the world’s top central bank body Bank for International Settlements said Sunday:

However, the rebound failed to reach levels posted before the bankruptcy of US investment bank Lehman Brothers in September and concern is growing about governments’ abilities to pay back debt, BIS said in its quarterly review.

The dramatic collapse of Lehman Brothers led to a freezing up of bank lending as well as sharp falls in stock markets worldwide.

To unblock choked lending, central banks pumped liquidity into the markets. Meanwhile, governments also unveiled massive stimulus packages in a bid to lift the global economy out of a recession.

These moves “contributed importantly to the improvement in investor sentiment,” the BIS said.

“Glimmers of hope that the worst of the financial crisis and economic downturn had passed sparked a rebound in risk appetite among investors in the period between end-February and end-May,” it noted.

Equity markets and credit markets all rallied.

However, they “remained some way off” pre-Lehman levels.

In addition, investors are increasingly concerned about sovereign debt.

The BIS noted that sub-investment grade and sovereign credit-default swap (CDS) spreads were “still significantly high.”

CDS is a sort of insurance protection in case of defaults, and its spread is the premium paid by the insurance buyer to the seller.

High sovereign CDS spreads means that buyers of such insurance are made to pay more for the protection, suggesting that there is a higher chance that governments would default on their debt.

Likewise, governments are now having to pay higher interests to attract investors to lend them money.

“Moreover, sharply rising deficits have led to concerns about the sustainability of public finances and the ability of some governments to fulfil their enlarged obligations,” said BIS.

“The resulting increases in real or perceived sovereign credit risk may in some cases have induced investors to require higher compensation to hold government debt, thereby pushing bond yields higher,” it added.

BIS cited Britain and the US as examples of countries whose sovereign bonds are fetching higher yields.

Emerging markets’ sovereign credit spreads appeared however to be going the other way. They are narrowing to levels just prior to the failure of Lehman Brothers.

“Investors .. regained their appetite for emerging market assets… Emerging market credit also tended to outperform mature markets,” noted the BIS.

Investors’ appetite for risk assets – emerging market stocks and bonds, commodity currencies, commodities, high yield bonds, and stocks – are all signs of renewed confidence that the worst is over.

Even Paul Krugman sees the recession ending:

After trading lower for most of today’s session, Wall Street rebounded in the final hour. The Dow Jones industrial average closed with a gain of 1.36 points, to 8,764.49, recouping a 130-point decline. Other major indexes finished with modest losses in light trading overall.

Some traders said the last-hour rally was sparked by comments from Nobel Prize-winning economist Paul Krugman, who said in a London speech that he would “not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer.”

Krugman has been mostly downbeat about the economy’s future because he doesn’t believe that the Obama administration has done enough to ensure a strong recovery.

But he already has said that the recession could end this summer. He told an audience in Hong Kong on May 22 that the ending point of the downturn may be dated (after the fact) to August.

Krugman’s concern remains that the recovery just won’t look like much. “Almost surely unemployment will keep rising for a long time and there’s a lot of reason to think that the world economy is going to stay depressed for an extended period,” he said today, according to Bloomberg News.

Evidently, though, all the bulls have to hear is “recession over” to shovel more money into stocks.

That’s a good thing for every investor who’s still riding the spring rally. But it’s vexing the folks who are waiting for some kind of significant setback to get aboard.

Since the surge began on March 10, the Standard & Poor’s 500 index hasn’t had a pullback deeper than 5.4% before buyers have jumped back in. “It’s tough to keep this market down,” said Todd Leone, head of block trading at Cowen & Co. in New York.

The S&P eased 0.95 of a point, or 0.1%, to 939.14 today. It’s up 39% from its 12-year low reached March 9.

The spring rally has caught big money off-guard and now many big funds are in a sittuation where they will be chasing stocks higher.

Countless articles have warned investors not to be fooled by this sucker’s rally, but I happen to agree with those who think the real suckers are in cash:

Let’s get a grip on reality. The bear market ended March 9, and the end of the worst recession since the 1930s–or is it the mid 1970s–is plainly in sight.

About $120 billion has been pulled out of global money market funds since mid-March; yet money market assets are still equal to 50% of the S&P 500 market cap. That is huge potential buying power. Since 1990, money market assets have averaged about 20% of the S&P 500 market cap.

There must be a horde of perplexed investors, like Croesus, who have been hoarding cash at no yield because risk aversion compelled them to adopt a conservative approach. Alas, they missed a rally in the S&P 500 that just polished off the best performance in more than 60 years, a 90-day steamroller worth 40% in recouped value. Up already 35% from its nadir in March, it looks like the Dow Jones industrial average will blow right through 9,000. Who knows, maybe 10,000 by summer’s end.

“We can’t say for sure that a new bull market has begun, but this looks to be a whole lot more than a bear market rally,” says BMO Capital Markets, a Canadian firm that produces succinct valuable insights. No more talk of a sucker’s rally. The suckers look to be on the sideline lending their money to banks at zilch.

Stocks broke higher on June 1 even though the yield on 30-year Treasuries climbed back above 4.5% last week. This is what the long bond yielded in August of 2008, just before the meltdown in credit markets during the fall of 2008. Today, the credit markets are healing, as spreads have fallen considerably, and corporations are able to raise tens of billions in the short-term debt market. The yield curve–the difference in yield between short-term and long-term securities–usually widens in advance of an economic recovery, and it has done so. Stocks also rose spectacularly despite the bankruptcy of General Motors and the continuing loss of jobs from the automobile industry. Bad news doesn’t seem to be rocking the market like it did a few months ago.

Earnings yields on equities still remain comfortably above the yield on 10-year Treasuries and should have the ability to absorb higher interest rates driven by economic recovery.

There are several other hopeful signs that the recession is near its terminus.

The U.S. manufacturing Institute for Supply Management index rose to 42.8 in May, which usually signals that gross domestic product is expanding rather than faltering. If this 42.8 level manages to rise, “there’s a good chance the recession will be over before the end of the summer,” says BMO Capital Markets. Amazingly, activity in private non-residential construction has also been rising, a sign that the recession may be losing its grip on the commercial property market.

Housing, the genesis of the crisis, is showing signs of stabilization and even amelioration. Pending sales were up 6.7% in April, even if prices are still in the tank.

Heck, even automobile sales improved in May to an annualized 10 million vehicle level, up from 9.3 million in April. This is the best month since last December, though still below the 12-month trend of nearly 11 million vehicles.

There has also been a mini-bull market going on in commodities that has been mightier than the one for stocks. This outperformance by commodities is another leading indicator of an economy about to turn the corner. Oil, which fell to $30 a barrel from $147 a barrel, is approaching $70 a barrel. This is driving the rebound in energy stocks, as well as the Russian market, which had been in the doldrums. Copper has moved higher by more than double.

Commodities can appreciate even more if inflationary expectations grow. Gold, which has rallied to nearly $1,000 an ounce, is being recommended for deflationary as well as inflationary times. It’s the way also to hedge against a declining dollar. Robert Smith, founder of Smith Capital, a fixed-income investment firm in New York, has been putting 5% to 10% of his pension clients’ money into gold through SPDR Gold Shares (nyse: GLD) and Canadian gold trusts.

Fear mongers raise the inflation warning as the next hurdle for equities. Maybe we’ll be surprised about it rearing its ugly head, but it seems two to three years away. Still we have to deal with rising unemployment, a sick Europe, falling real incomes, falling real personal outlays and weak industrial production.

Another factor that helps the Dow is the replacement of two stocks with no earnings–General Motors and Citigroup–with Travelers and Cisco. This triggers a reappraisal of the projected Dow earnings. The GM bankruptcy is no market-impacting disaster as its contribution to the nation’s economy is a fraction of 1% of economic growth, though unemployment will rise in the auto dealership and auto parts companies that service the industry.

Looks to Croesus that this market wants to rise, deflation or inflation both be damned!

Is this the start of a new bull market? Nobody really knows the answer to that question. All I can tell you is what I see every single day: the dips are being bought aggressively in the stock market and I see the early stages of a liquidity bubble in some sectors (energy, especially alternative energy like solar stocks).

With each passing day, stocks keep grinding higher. Dips are being bought and nervousness of a global depression is being replaced by nervousness of performance anxiety.

For now, everything suggests that we are moving full steam ahead. My biggest concern is that we are going too far, too fast, heightening the risk of a W-recovery.

But don’t be surprised if this so-called sucker’s rally leaves many of the biggest suckers (pension funds and mutual funds) chasing equities higher. In these markets, being too skeptical can cost you your job.

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  1. anonymous

    I checked my calendar and today's date is June 9, 2009. With due respect your article is of zero value – if you had the insight or gumption to have made such comments back in Februray, March or even April you would be making a contribution. But to imply that a new bull market is underway on the back of an extended rally is tantamount to predicting yesterday's weather.

    Instead why don't you step out and comment (with some specifics) on equities, commodities and the dollar (US) for the next six to twelve months.

  2. GreeneTimes

    I don't buy it, and won't buy it.

    The rise in long term rates, and now shorter term rates shows that the bond market is starting to choke on the US debt supply….and it is only the beginning. This week we have another 95 billion and next week and the week after that. The requirements are staggering and that money has to come from someone. Unless the Fed is doing all the buying rates will stay high and choke off the recovery. If the Fed is doing all the buying then yeah the DOW could go to 20,000, but a loaf of bread will cost you $100.

    Look at history. After the 1929 crash there was a lovely rally (very similar to the one we are having) followed by many more years of DOWN.

  3. Leo Kolivakis

    With all due respect, READ carefully what I wrote above. I did not call for a new bull market but I did say that the spring rally can extend well into the summer, thus the old adage "sell in May and go away" may not apply.

    Go read my comment "Small is Beautiful" and learn how to read the signals of the stock market. As long as we get higher weekly highs, lows and closes, were are heading higher. I focus on sectors where volume is picking up significantly (like solar stocks).

    As for the USD, I expect it to pick up in the second half of the year as traders see that Europe is much weaker and will need to cut rates more.

    Finally, if you were reading my blog (Pension Pulse), you'd see that I was calling for a Q2 rally, led by energy stocks. I got hit hard late last year in my solar stocks and double down at the end of February.

    Commodities will do well but there is a lot of speculative activity going on in oil. I prefer natural gas plays.



  4. Leo Kolivakis


    History tells us that we can still rally 20-30% more from here. But I warn you: using history has some major drawbacks. We are not the same global economy that we were back then. If you stubbornly stick to your doom & gloom, you risk missing a hell of a ride up.

    Admittedly, you might also miss the next leg down, but knowing what I know about the terrible shape of pensions, the big money will be chasing equities much higher and so will mutual funds and hedge funds.

    The bond market will not "crack" unless there are credible inflation fears. With wage growth practically non-existent, there is no credible threat of inflation.

    But all that tidal wave of liquidity will show up as an asset bubble. My bet is that the next bubble will be in alternative energy and I am putting my money there.



  5. D

    Great Post, Leo.

    The news coming out of China is seriously bad.

    Electricity consumption and exports are still in the dumps, even as rising energy prices begin to throttle the economy.

    Businesses that have held off on layoffs for hopes of a 2nd half recovery are now moving to cut staff.

  6. Brick

    First let us separate the economy from the stock market as I see different things happening in these two arenas. It would be quite wrong to suggest that market participants should stay out of the current rally in stocks and I think most big investors are coming to the same conclusion. We are beginning to see volume pick up, but there are notable differences in trading strategies to pre 2008. Quant and ETF strategies appear to be currently ascendant which tells us that the big money is quite prepared to pull the plug on the stock market rally at a moments notice. Combine with this certain questionable strategies using dark pools and prop desk pumping at the Wall Street banks mean the rally could defy all expectations. I don't see this as a matter of liquidity, but more likely a level of risk taking which goes beyond anything we have seen before. At some point corporate earnings and fundamentals will assert themselves and pension funds will get burnt again.

    I don't specifically want to be negative about the OECD data as I think their conclusion that it is too early to tell whether the economy is turning seems right, but there are a couple of points you should consider. Expectation of a number of variables including stock prices plays a part and I think they need to do some more work on their cycle identification. The cycle as I see it starts with retail taking fright last autumn and cutting orders and slashing prices. The retailers over did things and manufacturing cut staff right back. In the cold light of the new year retailers began re-ordering to replace diminished stocks and started to push back up their margins. This gives something like a 3 month bounce in manufacturing which in the coming months should stabilise slightly lower and then begin to slowly decline as unemployment feeds through to demand. Remember the full effects of unemployment are yet to feed through and working hours are still being cut.

    This is without considering any structural faults and risks and Treasury/FED policy decisions which I admit could have an impact either way. We should also consider that the way seems littered with potential black swan events, whether it be CMBS, treasuries or currency. Still Krugman's view that the economy will stay depressed or continue to slightly decline seems reasonable, but I would question whether there is really more room for Keynesian action since treasury markets seem particularly squeamish already.

  7. LIL

    Treasuries squeamish? That's an understatement. I'd be interested to read Leo's thoughts on Karl Denninger's statements about the US economy. So far, just about everything Karl has predicted has occurred in 2009 and its not even July yet. As you might guess, Karl was not exactly full of good news.

  8. David

    Leo I don't understand this statement:

    "About $120 billion has been pulled out of global money market funds since mid-March; yet money market assets are still equal to 50% of the S&P 500 market cap. That is huge potential buying power."

    How can money be pulled out of money markets in aggregate? Where do you get this information? It must be wrong. The amount invested in money markets is determined by the amount of money market paper issued. So it is determined by the issuers not the investors. The investors only get to determine what yield is required for supply to equal demand.

    This is the old "sideline cash" myth that gets repeated all the time. It really makes so sense. So called "side line cash" is not just sitting there waiting to be invested. It is already invested in funding the money market issuers. If those investors pull out and buy other assets, someone else has to sell those other assets and buy money market securities.

  9. viking

    Credibility killer for Leo. Let's tuck this one away and look at again in October for a few laughs.

  10. In Debt We Trust

    I'll buy it if the majority of commodities – including gold and natural gas – move out of contango

  11. Leo Kolivakis


    The spread between nat gas and oil is huge. I'd be buying nat gas by the truck load here. Look at Canadian Natural Resources and Arc Energy Trust.



  12. Leo Kolivakis

    Viking wrote: "Credibility killer for Leo. Let's tuck this one away and look at again in October for a few laughs."

    Dear Viking,

    Please read my post carefully. I know people on NC like to paint everything BLACK, but I prefer to make money. I do not care much about perma bears or perma bulls.

    The fact remains that energy stocks are soaring and solar stocks in particular are sizzling. I had gone into solars too heavy last year and got killed after they retraced from 60% to over 85%. I then doubled and tripled down and so far that fresh money is up over 250% since late Feb/early March when I increased my positions.

    This isn't a testosterone contest for me. People have to stop trying to find the next doomsday scenario. Libor spreads are at record lows, stocks are soaring and the risk of another systemic fallout is low for now.

    Sometimes I read NC and all I hear is "watch out the sky is falling". I feel like saying, "watch out you are losing BIG staying in cash".

    Yeah, my credibility is zero. See you in October.



  13. shargash

    I think you are mistaking the end of the credit seizure last fall for the economy's having hit a bottom. The economy has been in decline for almost a year and a half. Last fall, a confidence of trust in banks caused international trade to practically stop. The rise in the Baltic Dry Goods index is nothing more than the backlog of trade that was impaired last fall working its way through the system (plus some Chinese buying of raw materials in place of US treasuries). There is absolutely nothing about any of this that implies that descent of the economy begun in 2007 has reversed, bottomed, or even slowed. The credit crunch caused the descent to get a lot steeper for a period. Now it has resumed its previous rate of decline. People who seem to want to grasp at straws are interpreting this change in the second derivative as a "green shoot". While it is possible that it is, it is far more likely to be just another piece of straw. Lets see where we are in September.

  14. David

    Viking wrote: "Credibility killer for Leo. Let's tuck this one away and look at again in October for a few laughs."

    To Leo.

    I don't think it is right for this poster to mock you in this way. However consider this. NC readers and the finance blogosphere in general are indeed bearish but there is a good reason why. Generally it is believed that the US economy is now fundamentally unsound. You should know this more than anyone from your study of pensions. People are deluded into thinking there is more wealth than there really is. Everyone expects all these entitlements and government services and stimulus but no one wants to pay for it. The world has accommodated this delusion by simply lending us the money even if there is little prospect of us being able to pay it back. Someday that has to end and the whole ponzi scheme has to collapse. We have simply borrowed prosperity from the future to fund our current over consumption. Between now and the inevitable reckoning the stock market will go up and down many times. But that doesn't mean that it is logical to ignore the state of fundamentals and chase rallies. If the system is unsound that investing is merely speculating on how long it will take for the fraud to be recognized by the majority.

    Also beyond what is profitable, there is a sense that many people don't want to take part in what seems to be a morally bankrupt system. Western style capitalism has always been defended as being morally right, for example in Max Webber's "The Protestant Ethic and the Spirit of Capitalism". If Citigroup survives and prospers through cronyism and government favoritism, that is simply antithetical to the spirit of capitalism. I don't want to be part of that and I think many other would agree.

  15. kackermann

    What is amazing here, and this is not unique to Leo, is that a whole post talking about the stock market, and not a single reference to earnings.

  16. Leo Kolivakis


    This is a liquidity driven rally, mostly in energy, commodities, emerging markets, high yield bonds, etc.

    Earnings ALWAYS LAG the economy. By the time they turn, you would have missed a huge part of the rally.


    You wrote: "The world has accommodated this delusion by simply lending us the money even if there is little prospect of us being able to pay it back. Someday that has to end and the whole ponzi scheme has to collapse."

    The Ponzi scheme will continue as long as the rest of the world needs American consumers. Let's be clear: the U.S. still dominates the global economy. The myth of 'decoupling' is just that: a nice myth.

    We wil not go back to the glory years, but I guarantee you there will be speculative bubbles in various sectors of the stock market.

    As for pensions, we need to scrap them and rethink how we will provide millions of people stable retirement income.



  17. kackermann

    Leo said:
    I then doubled and tripled down and so far that fresh money is up over 250% since late Feb/early March when I increased my positions.

    Redemption in solar must have felt great. Nice hit.

    During this crisis I piled into Citi when they crashed through $15. I bought a mountain of puts at a $5 strike never thinking they would go ITM. I chickened out at $6.70, but they moved so fast I locked in near 300%.

    I have not done any serious trading since. I've just been creating new products for people to not buy.

  18. David

    Leo wrote:

    "The Ponzi scheme will continue as long as the rest of the world needs American consumers. Let's be clear: the U.S. still dominates the global economy. The myth of 'decoupling' is just that: a nice myth."

    This has nothing to do with coupling and decoupling to the US consumer. Of course the world will continue to sell things to the US consumer. The US will remain one of their biggest markets. There is no decoupling. But that doesn't mean that they will continue to finance ever rising US deficits. The ponzi stage is reached when new loans need to be given just to pay the interest on the current loans. We are there already. There is a point where losses from US dollar denominated assets outweigh the benefits of export competitiveness. We have reached that point.

    The US consumer will simply consume less, save more and will no longer be a source of export growth for other countries. The US consumption pie will shrink and other nations will need to find growth opportunities elsewhere, probably from their own consumers. It does not make sense for these countries to be acquiring more and more US government assets in oder to fight over pieces of a shrinking pie and even more so when the dollar must inevitably lose value in local currency terms.

    Of course the current account deficit in only one ponzi-like feature of our economy. The other is future entitlements that people still expect but which we both know, they will never receive. In short people think they are far richer than they really are because they think that someone else will pay for their retirement when that person does not exist. That will require a combination of lower spending (more savings) and more taxes.

    How does this affect corporate profits which should affect stock prices? A higher percentage of GDP will need to go towards taxes which will pay for some of these entitlements and also higher interest rates on government debt. Higher interest rates on government debt will increase interest expenses for all indebted companies. More savings means lower revenues. The only other option is if wages increase but then labor expenses for companies increase. In short, corporate profits as percent of GDP has to go down. It will likely hit an all time low (say 3% of GDP rather than 10% at the peak). That puts the S&P 500 normalized earnings at around $40 (maybe lower) which means the S&P is trading at about 23.5 times earnings. Given that baby boomers are about to start moving out of equities, valuations should head closer to secular bear market levels of 10-12. That puts the S&P around 400-480, less than half of today's level. Obviously we can argue over the numbers but I can't see how S&P 500 of 940 can be a buying opportunity just because the recession may be slowing down. Can you imagine it doubling over the next decade? I can't. Not without massive inflation but that would suggest other investments are best like gold etc.

  19. anonymous

    Hey Leo,

    the baby bears are lost and worried… Hang tight until the second dip. I totally agree with you : the earlier the recovery, the earlier the second dip. I admit the reaction to the employment report was far too strong. it is a good time to buy the Fed fund futures curve around dec.09 to dec.10, short the DXY and maybe even go long the TY, if you can risk it. News in coming weeks will dampen the mood progressively, we hope to return long stocks for a while, maybe over the seasonal rally, and then the baby bears will say the knew it all along… But obviously they will be out of a job, or maybe they never had one to post such nonsense. NO ONE can stay out of a 40 % rally and keep a real job, unless they shorted october big time and are 10%-20% ahead for 08, and so have leverage over all the dozing commitee people back seat driving under pretense of risk management…

  20. Neil

    The people who are advocating buying into this market here obviously haven't been paying attention to the mechanisms behind the rally. Small traders started buying in March (I was one), then there was a huge amount of short covering, and finally blatant manipulation by the prop trading desks of JPM and GS. Most notably, the rally within each sector has been led by debt-laden companies – a sure sign of a massive short squeeze that is only now losing steam. The commodities market rally is a pure $ hedging strategy that lost touch with fundamentals long ago.

    You have written some good stuff here, Leo, but this one is coming back to haunt you.

  21. Anonymous Jones

    The future is unpredictable, and the past is a generally poor guide for prognostication anyway (especially given how necessarily unique each new situation is when we're talking about an economy with millions of mostly uncorrelated variables). Those who think they can predict the future and control their own destiny are foolish and subject to extreme cognitive bias.

    If there is anything to take from a 40% rally in equities when one was in cash, it is that one made a mistake. It is *most assuredly not* that the market is more or less likely to rally from here. I won't even get into unpredictable exogenous events like wars, major terrorist events or other catastrophes.

  22. rhu1

    Still believe it's a sucker rally. Housing continues to tank, the banks still have all the worthless assets on the balance sheet and outlook for corporate earnings is dismal. Nothing has changed except rather than have more financial failures, we are going to slowly going to conclude the only option is to break them up. Deflation. Still too much debt, estimated $1 trillion in losses leveraged 30 times and throw in the CDOs, swaps etc and it will take years to settle.

  23. Leo Kolivakis


    You wrote: "Small traders started buying in March (I was one), then there was a huge amount of short covering, and finally blatant manipulation by the prop trading desks of JPM and GS. Most notably, the rally within each sector has been led by debt-laden companies – a sure sign of a massive short squeeze that is only now losing steam. The commodities market rally is a pure $ hedging strategy that lost touch with fundamentals long ago."

    With credit markets still weak but coming back to life (check out high yield bonds), i was not surprised to see debt-laden companies coming back.

    I agree with everything you wrote EXCEPT that pensions and other institutions (natural longs) will keep chasing equities higher in the second half of the year.

    Nobody can predict the future but I see them buying the dips aggressively here. There will be pullbacks – and I am watching weekly highs, lows, closes – but the trend is up.

    Even if a pullback happens, I highly doubt we will test new lows in the next year. I could be wrong but this sucker's got legs.



  24. Johan

    "The Ponzi scheme will continue as long as the rest of the world needs American consumers. Let's be clear: the U.S. still dominates the global economy. The myth of 'decoupling' is just that: a nice myth."

    $300 million consumers will always be important so no, the will be no 'decoupling' per se. However the US Consumer isn't today and will never be the huge driver on which many other countries have relied for past 2-3 decades. Assuming folks in the US are even able to keep their jobs, health care costs (which are not only rising on their own, but more and more companies are cutting back what they provide its employees) and education expenses are further draining folks' ability to buy "stuff." Add to that the imminent (repeat) rally in oil/gas prices and food prices thanks, once again, to the speculation resulting from the Fed's easy money policy there just ain't much there.

    "watch out you are losing BIG staying in cash".
    – This may be a correct statement if you are a professional investor/trader who, thanks to information access and the having the time (i.e. it's your job) and thus can play the rigged game that the US equity has become. The average person, even knowledgeable ones, will get slaughtered by the government-sponsered Wall Street butchers.

  25. Leo Kolivakis


    You wrote: "The average person, even knowledgeable ones, will get slaughtered by the government-sponsered Wall Street butchers."

    I do not day trade. I swing trade and can stay in a position for months. Please go read my comment on "Small is Beautiful" on my blog, Pension Pulse.

    If you do not like picking specific stocks, then focus on ETFs. I like the QQQs (Nasdaq) and semiconductor holders ETF (SMH).

    The solar stocks ETF has the following symbol: TAN. However, I prefer to buy specific stocks in this sector.



  26. Hugh

    Count me in with the skeptics. I agree with Brick that it is a mistake to equate the markets with the economy. kackermann is right too that all this talk of stock price ignores what is going on with earnings.

    The disconnect between the paper economy and the real one remains. What we are seeing is the effort to re-inflate the financial bubble. Just because a sucker's market lasts a while doesn't make it any more real. This one will last as long as the money does. It could end by the fall or stumble along all the way to 2011, but at some point the money will run out that is being pumped into the markets by the government and now risk takers trying to make up for their previous risk taking losses, and the bubble we are seeing now will burst. The consequences for everyone whether they are investing or not will be dire. We will be worse off with vastly diminished tools to work our way out of this crisis.

    So yes, Leo can go out and make money on this market as long as he knows to exit at the first sign of trouble. But such an egocentric approach can't work for most investors. Not everyone can bail on the market at the peak at the same time. There have to be many bagholders. But more importantly this sucker's rally wastes the resources we need to get us out of the mess we are in, and somehow I find that more important than Leo's need to make a buck while the getting is good.

  27. Leo Kolivakis


    You wrote: "But more importantly this sucker's rally wastes the resources we need to get us out of the mess we are in, and somehow I find that more important than Leo's need to make a buck while the getting is good."

    >>The game is rigged. Accept it or risk deluding yourself that you can change the world. Remember candidate Obama's tune? "Change we can believe in"? I believed it too, then I woke up and saw reality.

    You can sit this folly out but don't criticize me for trying to make a buck. If you only knew the obstacles I face in my life, you wouldn't be so smug.

    I am offering you my insight. Pensions are MASSIVELY UNDERWEIGHT equities going into 2009 (relative to their benchmark weights). They will chase this sucker up by buying the dips.

    You can wait for the sky to fall or earnings to come back, but you will never make money. I am not here to feed you crap you already believe or to convert you.

    I am here to give you my fiercely independent insight. As long as they keep buying the dips, this sucker's got legs. I have seen these liquidity steamrollers before and they can go on a lot longer than you can imagine.

    Don't moralize or castigate me. The market is a beast in and of itself, but I want others to start learning to make money and fend for themselves.



  28. juan

    while current only through 1Q, not much in the nipa profit and fixed investment tables to indicate any recovery in the real economy though, as might be expected given the 'stimulus', there was a big swing in domestic financial sector corp 'profits' even as the nonfinancial continued to fall – the financial sector upturn appears to almost entirely account for the QoQ rise in total corp profits.

    Expanded reproduction [growth] is not tenable on the basis of a casino.

  29. anonymous

    Leo Kolivakis said…

    Viking wrote: "Credibility killer for Leo. Let's tuck this one away and look at again in October for a few laughs."

    Dear Viking,

    Please read my post carefully. I know people on NC like to paint everything BLACK, but I prefer to make money. I do not care much about perma bears or perma bulls.


    Leo I will not speak for Viking but I will speak as a "person on NC" who has read your various responses carefully and would like to ask what you basis is for the statement "people on NC like to paint everything BLACK".

    Are you that insecure that you need to be hostile towards the loyal audience of NC who dare challenge your perspective.

  30. MP

    hi Leo, I think your point that the market continues to trend higher is very valid. However, on MACD histogram, I've noted that when the S&P futures trades higher, the MACD histogram is slightly lower, this is true too of TAN (which I checked out after reading your post). Further, the market swings to top of channel and back to EMA seem to be getting shorter. I agree that liquidity can push this rally higher, but I'm wondering what your take is on other technical indicators that may reflect fading willingness to keep chasing the market?


  31. The Rude One

    This isn't even a bubble, it's hot money chasing its own tail. We've suddenly got a metals and oil spike typical of the end of a boom, not the approach to a deep trough in the cycle. The disconnect between price and value extends across the board. In this environment I think it would be impossible to count on gains in any particular stock or sector. As for the indexes, they're regularly gamed as many commenters have noted. In a situation where price and value are so disconnected you can't even call it a bubble. It's like a Magellanic cloud. Gains are as impossible to count on as losses.

  32. Leo Kolivakis


    I agree that the technical indicators are overbought, but I have seen overbought before go to extreme overbought. The Financial Ninja writes about volume fading and how we have not cleared the 200 day EMA on the S&P or the 951 monstrous high after last Friday's jobs report.

    Here is what a strategist who trades wrote me: "People keep discrediting the market advance owing to the lack of volume but when leverage has been cut in half (deleveraging), a new-normalized volume level has to be lower."

    I will say it again, as long as those dips keep getting bought, this market is going higher. Forget fundamentals, it's all liquidity right now. And most of that liquidity is going into energy, commodities and other risky assets.


    Sometimes I read NC and get the sense that people here are too negative, including yours truly. I am skeptical of a lot of things, but I try to keep an open mind and when it comes to the stock market, I filter out all the noise and focus on the tape.



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