Stock Market Rising on Fumes
Normal 0 false false false MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} Here we are…already in mid September. You may recall that September 14th was the one-year anniversary of Lehman Brothers’ collapse. One year ago, Lehman Brothers became the largest bankruptcy in history, tipping the financial system into crisis mode. While the drastic measures taken last fall and spring in response to the system-wide reaction to the firm’s demise averted Great Depression 2.0, by just looking at the major market averages today you would think that problems in our economy have mostly been solved. But the fact of the matter is the rebound in stocks owes its existence in large part to questionable accounting changes, unprecedented sums of cash being pumped into the system with no clear strategy to later remove those funds, and investors’ renewed appetite for risk.
This later point is particularly troubling. It appears that investors haven’t learned a lesson from 2008, or 2000 for that matter. Many of these investors seem eager to make up for their earlier losses and are throwing caution to the wind to achieve that goal. They’re buying lottery tickets such as Citigroup, Fannie Mae and Freddie Mac, which have risen three- to five-fold, despite being bankrupt and still in operation only by dint of the government’s intervention. With investor sentiment (always a good contrary indicator) now about as high as it gets, it’s hard to see stocks making much in the way of forward progress.
Several factors are at work right now that could easily derail stocks: rising commodity prices, the weak U.S. dollar, a deteriorating employment picture and indications that the economy isn’t going to rebound swiftly could all do the trick. The bond market is signally loud and clear that these are very real risks not to be dismissed. But for now, given the momentum, the bubble that equities are in could continue. I can’t say with any certainty when this cosmic rise will end; it has definitely gone on far longer and carried stocks far higher than logic would dictate. But when it does end, watch out. You’re going to see a big stampede for the door.
Gold hasn’t sold off as it has the previous two times it briefly crossed the $1,000 mark. While a modest retreat wouldn’t be surprising here, the action in the metal shows there’s plenty of interest at current levels and it suggests prices could climb higher still. Adding to the bullish tone of the market, Barrick Gold, one of the most conservatively run gold companies last week announced last week that it’s closing its hedge book. The company issued more stock, (diluting existing shareholders in the process) and will take a stiff write-off in its earnings to pay for the move. I doubt management would take such steps if they didn’t think gold prices were headed much higher.
This later point is particularly troubling. It appears that investors haven’t learned a lesson from 2008, or 2000 for that matter. Many of these investors seem eager to make up for their earlier losses and are throwing caution to the wind to achieve that goal. They’re buying lottery tickets such as Citigroup, Fannie Mae and Freddie Mac, which have risen three- to five-fold, despite being bankrupt and still in operation only by dint of the government’s intervention. With investor sentiment (always a good contrary indicator) now about as high as it gets, it’s hard to see stocks making much in the way of forward progress.
Several factors are at work right now that could easily derail stocks: rising commodity prices, the weak U.S. dollar, a deteriorating employment picture and indications that the economy isn’t going to rebound swiftly could all do the trick. The bond market is signally loud and clear that these are very real risks not to be dismissed. But for now, given the momentum, the bubble that equities are in could continue. I can’t say with any certainty when this cosmic rise will end; it has definitely gone on far longer and carried stocks far higher than logic would dictate. But when it does end, watch out. You’re going to see a big stampede for the door.
Gold hasn’t sold off as it has the previous two times it briefly crossed the $1,000 mark. While a modest retreat wouldn’t be surprising here, the action in the metal shows there’s plenty of interest at current levels and it suggests prices could climb higher still. Adding to the bullish tone of the market, Barrick Gold, one of the most conservatively run gold companies last week announced last week that it’s closing its hedge book. The company issued more stock, (diluting existing shareholders in the process) and will take a stiff write-off in its earnings to pay for the move. I doubt management would take such steps if they didn’t think gold prices were headed much higher.
