1016 or 1121 on the S&P?

August 3, 2009

The S&P 500 closed today above the psychologically significant 1,000 level, the first time it has closed above 1,000 since just after Lehman failed in October 2008.  Today’s market action surprised a number of people who were expecting at least a day’s reprieve from last weeks run up for month’s end.

It’s anyone’s guess where this market will go, but for those who beleive in technicals, I have pasted a Fibbonacci retracement from the market high in 2007 to this morning, before the market broke 1,000.

S&P 500 Retracement 2007-Present

S&P 500 Retracement 2007-Present

The retracement shows significant resistance ahead at the 38.2% level which is equal to 1,016 on the S&P.  If that fails to turn this market back down, 1,121 (a 50% retracement) will likely mark the end of this bear market rally.  Enjoy it while you can, and don’t forget to take some profits!


Alan Abelson in Barron’s “The Great Beer Bash”

August 1, 2009

Nice work from Alan in this weekend’s Barrons.  Fairly well tempered for Alan as well, which I think helps to propel his point, and bearish agenda.  Included are two quotes that I could see becoming quite precient decidely soon.

DAVE ROSENBERG IS AMONG the vanishing breed of die-hards (we confess, in case you haven’t guessed, to being another) who still cling to the notion that stocks’ explosive rise since March is perhaps the mother of all bear-market rallies, but nonetheless still a bear-market rally. The essence of his skepticism — which we happily second — is simply that the economy, contrary to Wall Street’s jubilant insistence, has yet to turn the corner.

He wonders, moreover, whether the March 6 lows in the stock market were the real McCoy. Although, in contrast to us, Dave persists in keeping an open mind, he’s doubtful that they were. On March 6, he recounts, the market was trading at two times book, with a 13 times multiple on forward earnings and a P/E of 18 on trailing earnings, and a 3% dividend yield. Pretty rich valuations by all three measures of earnings, but pretty skimpy on yield, to rate as a true market low.

And today, after a 45% rise, the metrics, to dip into the Street cliché, are positively mind-boggling. The dividend yield on the S&P 500, Dave notes, is a meager 2¾%, and payouts so far this year have lagged some 32% behind last year’s not-exactly-torrid pace.

In a like astounding vein, he observes, the trailing P/E on operating earnings (adjusted, he explains, “to take out everything that is bad”) is now at 24 times, while — and if you have a queasy stomach you can skip this number — on trailing reported earnings, the multiple is a mere 760-plus!

“Something tells us,” Dave sighs, “that the marginal buyer of equities today at that price may well be the same person who was loading up on real estate during the summer of ’06.”

And a nice reminder of how we often misinterperate importate economic data is this gem below which comments on the recent decline in continuing claims.

As Bill King notes in the King Report, the “exhaustion rate” — that is, the percentage of the involuntarily idle who have used up their unemployment benefits — is now 49.8%. Which explains the decline in continuing claims that, in turn, has been a recent spur to stock prices. Reason enough to keep the bankers off the jobless line and let them have their million bucks.

The “real” bears are still weighing in, odds are they are more right than wrong after a 45% rally.

The Great Beer Bash
Alan Ableson, Barrons, August 3, 2009

A Few Short Reasons Why Main Street May Avoid Some of the Pain of Wall Street

August 1, 2009

1. We are no longer a country dominated by manufacturing, at least we weren’t leading upto the recent asset bubble.  Thus while there is painful contraction happening, and much talk about a jobless recovery, a lot of those lost jobs are “over there”.  We are a nation of consumers, not producers.  It’s the producers who get hurt most when consumption stops.

2. Industries that bubbled over were high paying like Real Estate and Finance.  Yes many of these people have had to downsize by a bedroom or two from the McMansion to the HappyMansion (named after the smaller and lower priced Happy Meal), but they are not out of house and home, for the most part.

3. This country is certainly feeling some “pain”, however as a percentage of disposable income, food remains quite small relative to other parts of the world.  During the Great Depression Americans spent over 25% of their disposable income on food.  If you consider that rent typically accounts for about half the average American’s after-tax wages, back then 25% pretty much was a hefty chunk of your pay.  Today American’s spend about 10% of their disposable income on food, a significant decrease, and a strong indication of the massive amount of wealth that we have created.  There is an excellent chart on this blog by Mark J. Perry and Economics Professor at the University of Michigan outlining the dramatic fall in the percent of disposable income we use for food.  American’s are not taking to the streets with push carts to feed their kin. They may put off upgrading their iBook to a MacBook and they may delay trading in their iPhone for a Palm Pre, but by in large Middle-Class American’s are not starving.

4. Global coordination of financial policies seem at least to be working.  Regardless of the immediate efficacy, the more important point is that countries across political, cultural and geopolitical divides seem to understand that such coordination now can dramatically reduce the need for a major global conflict.  This is driving efforts to re-inflate every major economy around the world, something that will eventually take root and avoid the kind of misery that led Hitler to power.

5. While a good deal of American wealth has been impaired or destroyed, the running joke is that a 401k is now a 201k.  Nonetheless, during the depression most people did not have enough saved/invested to regret the losses.  The losses for most people was the loss of work compounded with already lower living standards (compared to today) and a paycheck to paycheck lifestyle.  Not to dismiss the many people today who are in a similar situation, their numbers are far fewer than in the 1930’s.

6. The Obama Administration is bent on an egalitarian doctrine for rebuilding our economy.  This is likely to help inflate the middle-class and pull a larger number of upper-middle-class citizens back into the center pew.