Download Q1 2009 Market Commentary (Excerpt)

Q1 2009 Market Commentary (Excerpt)
April 17, 2009 S&P500 Index 870
We are witnessing a market manipulation on an epic scale. The institutions that were desperate
sellers with the S&P500 crashing below 700 are now equally desperate buyers at S&P 850! Now, as
before in the Fall of 2008, bad news is “good news” to be bought, and good news causes “dancing in
the aisles”. The buying continues and as stock prices and the market indices rise, more buying
comes in because these same financial institutions need to “be on board” to catch the market rally. It
is positively absurd and exasperating to watch. In this climate of market insanity, if the buying
continues we could easily break through S&P500 900 level to the upside with the market going
positive for the year, or we could stall in the 850-900 range and then sell off. However, in the short
term, regardless of what the institutions do or wherever they push the market to with their flows of
cash in and out, the seeds have been sown for a new bull market in stocks that will ultimately have as
a target, the previous S & P 500 closing high of 1565.
So many stocks were crushed so badly (80% or more), that they have almost no where to go but up
over the next few years, and that is how all bull markets start. This has been confirmed by the
outperformance of the smaller stocks as measured in the Value Line and Russell 200 averages which
have risen by almost 50% since their bottoms on March 29, as compared to the S&P 500 which has
risen 30% off of its bottom. However, the reality is that a 50% rise of a market index that fell 70%, is
STILL down 55% from the peak! Likewise, the S&P500 index which has rallied 30% from its low, is
STILL down 44% from its peak. Or put another way, after a rally of 30% from its recent low, the S&P
500 still has to rally ANOTHER 80% to get back to where it was at its peak in October 2007! So
stocks still have a long way to go to the upside and any meaningful positive news could cause more
waves of buying taking the market still higher.
HOWEVER, the stock market is a leading indicator of the economy and usually turns up MONTHS
before the economy meaningfully improves. This means that hundreds of thousands of people will
still lose jobs in the coming months, more businesses will fail, consumer debt and mortgage defaults
will increase further, and there will likely be other financial panics in other countries. In short, there is
every reason to believe that the economy will continue to worsen as the stock market heads higher
and the inevitable inflation of this endless printing of bailout money looms like a dark cloud on the
horizon.
Against the backdrop of this “reality”, the rate of worsening of the economy is slowing, and in
anticipation of eventual economic recovery, the institutions, hedge funds and large market
speculators are looking to pump in money into all areas of the financial market and are lifting prices of
all assets by doing so. So what’s next?
We have had a spectacular market rally. The largest and fastest since the Great Depression. We are
very, very overbought in the short-term and should sell-off now. But if the money-managers continue
to play “catch-up”, we will head higher anyway, regardless of what is happening in the “real” world. I
believe that a battle will take place at some point between those buying on a large scale, and those
who think the rally is insane and want to sell on a large scale. In between will be more spectacular
rallies and selloffs depending on the news, large flows of money in and out of assets and further
market rule changes and government interventions.
Longer term investment themes are starting to develop, with energy and energy services and
commodities and basic materials at the forefront. Copper has rallied more than 80% off of its bottom,
and Crude oil and Gasoline have rallied 60% and 70% respectively off of their lows. With any kind of
US and global economic recovery, they will go much higher in the years ahead and the stocks of
companies in these sectors will likely go much, much, higher. As inflation comes back, and I believe
that it surely will, the yields on Bonds will explode higher and this will create meaningful long-term
opportunities to buy and sell certain areas of the market.
The stocks of small and mid-size companies will likely continue to outperform the stocks of larger
companies. This will present many other investment opportunities, including in corporate bonds
where the yields are now more than double what they were last year!
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