If we assume that stock market is really just a cruel mistress at heart, one would assume that the market is likely to work against the vast majority of people. At this point it seems safe to say that we have had a huge rally and a pullback would be necessary and expected. Unfortunately this view has been in place for weeks now as the rally approaches its three month anniversary. A pullback would be welcome, a pullback would be expected, which is why we have had NO real pullback yet.
It would make sense that most have missed the rally, paralyzed by fear and then run over by a stampede of never ending bulls. Those that have missed the rally are waiting for the long awaited pullback to get back into this market.
Fund managers are rumoured to be forced into the market at the end of the day in a fit of panic buying because they cannot get a pullback and they must keep up with their primary benchmark, the S&P 500. The volume has been lackluster for weeks now which would seem to imply that perhaps the mutual fund managers are not actually jumping in with both feet here, but the panic buying story does make an easy to read headline to explain a non-stop rally...
So we know that the rally has been relentless and many investors are waiting patiently for the first pullback, and there will be one, there is always a pullback... eventually. Let's just say that someday the market does experience a pullback of 5%. Perfect, those on the sidelines step on the field and get in this market for the next rally. But, what if that 5% pullback quickly becomes a 10% pullback? Do the new investors double down or jump ship?
If the pullback does start to accelerate a bit the perma bears could emerge from their underground bunkers to make bold predictions that we are going to new lows. The experts will tell you not to fear, it is very normal to "retest" the lows. Bottoming is a process they say.
Now after being burned by the 5% pullback, investors may decide to wait for a retest of the previous lows, 666 on the S&P on March 6th to be exact. With the S&P back at 900 everyone is convinced that if the market ever slides below 700 again they will throw all of their ammo at it.
It would be so easy to buy a successful retest near 666 on the S&P. Perhaps it doesn't get there, close, but the pros jump the gun leaving all of the average investors waiting at the train station with nowhere to go once again. A new rally begins, this one for the duration. Investors struggle to get back into the market, worried about unemployment, the economy and the doomsday depression scenarios from their favorite experts, authors, professors and pundits.
This scenario is of interest to us because those that buy without waiting for a pullback could get burned. If you buy the first 5% pullback you could get burned. If you wait for a retest of the bottom that never happens you get burned by missing the rally. This storyline is intriguing due to its ability to screw so many at one time while leading to higher returns that many will miss!
We cannot tell you if the more than 40% rally over the course of about three months is a bear market rally or a new bull market trend, cyclical, secular, whatever you like. Do your own work and trade accordingly. All we know for sure is there will be a story to tell and we cannot wait to read about it.
Shiller was ahead of the curve in pronouncing the housing market a bubble ready to burst just like when he began to express concern over the stock market as tech went to epic levels. Many believe that housing is key to the economic turnaround. Jim Cramer for one believes we are on the verge of a bottom in housing right now. Perhaps Cramer and Shiller may need to compare notes.
It is going to be very difficult to mount a decent recovery without a major improvement in housing on the horizon. The next great concern is that the economy bottoms but the recovery is so slow, so weak that it still feels like a recession and we quickly slip back into recession. This scenario makes a lot more sense if Shiller is right on the housing market. This also might help explain why President Obama's team is looking to ramp up the stimulus as opposed to cutting back on some of the spending as encouraged by his opponents who believe we have already started to see economic improvement.
It is clear the economy has yet to bottom and start to improve, but the positive sign right now is that we have started to get less bad. There is much work to be done to turn this ship around and there will be even more work required to keep it moving in the right direction.
Since Jim Cramer won't say it we will, Nouriel Roubini, a member of the bear market all-stars, is this still a bear market rally?! At what point is a bear market rally a bull market? That is the problem with titles, labels and fun nicknames.
We argued loudly back in early April that whether this is or is not a bear market rally, the label is irrelevant. The key is to make money. If you listened to Roubini and others who are still bearish you have missed a rally of over 40%. Do you realize the majority of the gains in the stock market comes from just a few big days, a few big weeks? Congrats you just missed 40% and who is picking on Roubini etc?
The reason this rally has been so powerful is that so many missed it. Over the past year we experienced several selling panics, lately we are experiencing a buying panic as people throw in the towel waiting for a pullback that seems to never come before getting back in.
The important thing to remember is why you missed the rally. After only a few weeks, the consenus, the experts were in unison in calling this thing a bear market rally... and yet here we are coming up on the three month celebration with NO meaningful correction.
Unless we are going back to the ominous lows of 666 on the S&P sometime soon, a lot of experts have some explaining to do. And be careful when they jump on the bull bandwagon, if everybody is on, it is probably time to get off again...
We are already starting to see it... all of the experts are trying to one up each other by putting a higher target on how high this rally can go before it stops (see CNBC). Reminds me of when everyone kept coming out with lower and lower targets for the market just a few short months ago... I don't recall seeing S&P 500... S&P 400...
Sadly, today General Motors was also removed from the S&P 500 Index as reported yesterday... It will be removed from the Dow Jones Industrial Average on the 8th.
The ability to raise capital by the banks has been incredible in such a short amount of time especially since the results of the stress tests were released. Reuters has the rundown of the banks who announced $18 billion in capital raises just today!
While the idea of finally paying back the TARP is great news for the taxpayer, there are two other risks in the short term.
1) I believe the Treasury still plans to take the TARP money back from the major financials but then lend it out again to other firms still in need! Hopefully the new firms will also pay it back in a timely fashion.
2) The extreme dilution is pressuring financial shares right now, just imagine if financials were still rocketing higher with the rest of the market...
General Motors will be replaced in the S&P 500 by Devry (DV) tomorrow.
Devry is already up over 5% after hours on the news.
As noted here and here we had a few ideas, but we were dead wrong on this one. We expected to be dead wrong on the Dow pick because our goal was to make a logical addition, but the Dow has a history of adding something that is performing well. No need to take into account the various sector weightings, let's add more tech!
Many on the street seemed to be pushing for Cisco to get the nod, whether that had any influence who knows. Hopefully the Dow didn't top tick the recent run in tech like they did by adding Microsoft and Intel back in '99. They added Bank of America (BAC) to the Dow in February of 2008 - that worked out well!
Citigroup (C) was also removed (replaced by Travelers [TRV] a financial) which was a brilliant idea. It will be interesting to see how TRV and C compare going forward, being removed from the Dow could actually be a positive for Citigroup.
Keep in mind that we are still in a historically weak period of the year for the market so do not jump to conclusions based on the gains in May. The volume has come in quite a bit and volatility is subsiding. The market is essentially stuck in a range at the moment. The market high for the month of May actually occurred back on May 8th, went down and drifted upwards into the end of the month.
Keep an eye on which side of 875-930 the S&P can close on, that may determine the next trend.
As for the week ahead, the always interesting (although never truly accurate) jobs number will be released on Friday morning. Revisions are always interesting to take into account, the most important thing for the bulls is for the jobs numbers to continue to be "less bad".
Cramer may want to take a look at the latest trucking data from the American Trucking Association. This data tends to be a leading economic indicator. The bad news is that truck tonnage decreased over 13% year over year falling to the lowest level in over seven years.
The transport stocks are predicting an economic turnaround but the leading data on trucking does not support the theory - what does that say about the strength of the transports rally?
Today's list includes some of the usual suspects courtesy of BNY ConvergEx Group:
- Goldman Sachs (GS)
- Cisco (CSCO)
- Wells Fargo (WFC)
- Apple (AAPL)
- Google (GOOG) - once again, the Dow is a price weighted index, probably not the place for a $400 per share stock!!!!!
Cisco got the most love from the desk, but after a few hundred votes, Apple is winning the fan vote, probably votes from Apple shareholders. Can't blame them, but our guess is they don't go with tech. However, with no actual rules, it is kind of a crapshoot as to which stock will be the winner. The people in charge don't tend to make the best or most logical decisions with the index and stocks that are removed actually tend to do better than stocks that are added! So Citigroup should be praying to the market gods that they get kicked out with GM!
S&P actually announced several changes to their indices earlier this morning, nothing about GM days before bankruptcy, but they did add FMC Technologies (FTI) so bravo to those that thought FTI was a potential S&P 500 stock - right stock, wrong reason but hey the stock closed up almost 7%!
Unfortunately only 100 investors were involved in the survey, but 74% predicted an increase in volatility to 40 is more probable than a decrease to 20. If that is true, then expect the market to sell-off, nothing crazy, but a decent correction which we really have not seen since the rally started March 6th.
The reason this article is of interest is with such consensus from the few investors involved in the survey, the conclusion is probably incorrect. If that is the case, and the Vix does see 20 before 40, that would be interpreted as bullish. Something to keep an eye on for sure.
The next important question is when will GM be replaced in the Dow Jones Industrials Average and which stock will be added? CNBC has a nice rundown of the possibilities. The article features a very non-scientific survey with the predicted winner being Apple (APPL) followed by Abbott Labs (ABT). Hopefully the selection committee will not jump on the ever popular Apple which would only jinx future performance for the beloved stock, there is already plenty of technology exposure in the Dow as it stands currently.
In our opinion, the addition should be made in the area of financials or healthcare. Our pick in the financials space goes to Wells Fargo (WFC). Second financial pick would be Goldman Sachs (GS) which would be fitting since they secretly run the world.
In the healthcare space the Abbott Labs pick makes a lot of sense followed by Amgen (AMGN). We think there is an outside chance of adding a discretionary stock, Amazon (AMZN) would probably be a mistake but another remote possibility is Target (TGT).
As noted in the CNBC article, the elimination of GM would be a perfect opportunity to also eliminate Citigroup (C)! Citigroup is currently trading under $4 and in case you didn't know, the Dow Jones Industrials Average is a price weighted index as opposed to the market cap weighting used by the S&P. This means that due to their low prices, GM and Citigroup have almost NO influence on the Dow at this point. At over $400 a share it also questions the CNBC voters who believe Google should be added to the Dow... probably not going to work...
Speaking of the far superior, market weighted index, the S&P 500, GM will also need to be replaced in this index. The stock that gets added to the S&P could see a decent pop on the news given the amount of money that is allocated to track the S&P Index and its underlying holdings.
Our votes for possible additions to the S&P go to Visa (V), assuming they have been around long enough to qualify, followed by Ross Stores (ROST) and then Western Digital (WDC).
The Dow pick is very challenging given that there are "no rules for component selection." S&P actually has some requirements that are followed. It is hard to imagine that General Motors meets any criteria these days, it is only a matter of time.
"The word itself is taboo in respectable circles, reflecting a kind of magical thinking: if we don't call the economic crisis a 'depression,' it can't be one." Posner recognizes how woolly the word is and offers his own definition. "I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and, among the political and economic elites, a sense of crisis that evokes extremely costly efforts at remediation."
We offered up our thoughts here on how we would begin the discussion of whether this is or is not a depression. We acknowledge the limits of a word which has no technical definition and admit that the correct label cannot be applied until after the fact. While some would argue that making the call after the event has clearly ended offers no real value we would approach the debate in a different fashion. As we said in our last paragraph on our original discussion on the definition of a depression, the label is useless, and only serves as a tool for the media, a headline, a debate. In reality it is just word.
Whether we are experiencing a severe recession or a minor depression, the title does not dictate which action to take. The title does not resolve the issue. A label does not ease the pain or frustration. In fact, depression is a strong word that carries with it a new level of anxiety and fears of a time of dark history that many thought would never be repeated.
We have a vision of what depression is and a real understanding that we never want to experience it again. The debate on defining a depression is only semantics, leave it to the historians and the academics. In the meantime, there is much more important work to be done and great minds should be focused elsewhere.
Or maybe the guy just wanted to get some good press and sell some books, if so, mission accomplished. Perhaps capitalism is alive and well after all. A book about the failure of capitalism trying to capitalize on the very tenants of capitalism. Ironic isn't it?
Cramer's basic take is that since the fund has performed so well it will attract new assets as investors chase the leaders and ditch the laggards. Cramer then goes on to state that the fund will utilize that new cash to add to their largest holdings. In the short term this is a positive catalyst for those stocks.
While this theory likely holds true for the majority of mutual funds, American Funds is not your typical fund family. American Funds is not the type of fund to attract the fast money given their long term investment strategy. This family thrives on minimizing losses during periods of decline and have a long track record of accomplishing just that. The fund has never been afraid to hold a large cash position unlike many funds that are usually close to fully invested at all times. Currently Growth Fund is holding over 13% of their assets in cash! Down from over 17% just a few short months ago.
Cramer credits the leadership of Rothenberg and Crawford as portfolio managers of the fund. What makes this fund truly unique is that Rothenberg and Crawford are only responsible for a portion of the assets. The fund actually features 11 total portfolio managers (and a host of industry specific analysts who trade their best ideas) who are able to make independent decisions and invest their portion of the assets as if it was their own mutual fund. This gives each portfolio manager the autonomy to invest when the time is right and only put money towards their highest conviction ideas as opposed to two guys trying to monitor almost 300 stocks!
Cramer lays out the case that the fund will likely see an influx in cash soon which will benefit the stock prices of the fund's top five holdings:
- Google (GOOG)
- Oracle (ORCL)
- Cisco (CSCO)
- Apple (AAPL)
- Microsoft (MSFT)
Now here comes some rigor that might even make Cramer proud.
At the end of April, American Funds Growth Fund of America reported almost $123 billion in assets down from almost $180 billion as of December 31st. During the past four months assets have decreased roughly 30%, allowing the funds to deliver great returns off a much smaller base. Although assets declined 30%, their cash position actually declined a greater amount, 37%, indicating that some cash was actually put to work on the buy side during 2009. So the question is what did they do with it?
If you look at the entire family of funds for American (not just the Growth Fund of America) it turns out that during the first quarter they made the following changes to their aforementioned top holdings across all of their equity funds in total:
- Google - decreased shares held by 4%
- Oracle - decreased shares held by over 4%
- Cisco - decreased shares held by almost 12%
- Apple - increased shares held over 50%
- Microsoft - essentially flat for the quarter
Hmm.. doesn't seem like the type of fund family that uses cash to add to their largest holdings.
Looking specifically at Growth Fund of America again - during 2007 the fund saw assets increase over 26%!! Likely due to outperformance helping them gain popularity among investors. The interesting thing is that although the assets increased 26%, their cash position actually went up over 40%! Once again, doesn't sound like new assets means new purchases for this family.
The truth of the matter is this - American Funds has cash, tons of cash. If they get an increase an assets they are not going to turn around and throw it at the market. American Funds buys value, they don't chase performance, when the price is right, they will be in there just like they were the last few months.
This seems like a very misguided thesis to make money in the five tech stocks above so tread carefully. Not trying to be Cramer Haters, even Jim would encourage you all to do your own homework.. so we did.