The news may be absolutely horrible and yet the market moves higher. Several companies this week reported disappointing quarterly earnings. Their stocks skyrocketed. Pay attention, investors. Either step aside or go with the flow but whatever you do –don’t fight the tape.
It is an expression that dates back to a time when stock prices flowed across ticker tapes. On up days in the market the buys would overwhelm the sells and it was useless to fight it. We are in that kind of environment right now. For those who have put money to work back when the S&P 500 bottomed in early March, the gains have been gratifying. Of course, we still have a long way to go before recovering the losses we incurred in 2008 but at least it is a start.
Monday’s 4% sell-off however was a reminder that this is still only a bear market bounce. It simply gave us a taste of what we can expect the market to do once it reaches the top of this bounce but we are not there yet. Readers will recall that I have now moved my target for the S&P 500 from my original objective of 840 to 900 and last week I said there was a distinct possibility we could reach 940 or so. That’s still another 10% to go in addition to the 29.9% the S&P have already attained.
“Why,” asked one client in Great Barrington, “has the markets been so happy with all this bad news. It doesn’t make sense.”
The main reason is that most market participants were expecting even worst. I’ve seen this happen many times before in bear market corrections around the world. It’s about who can make the most bearish predictions or forecasts. Early in 2008, the economists and market pundits (including the Federal Reserve) predicted a minor recession. The Bush administration would not even use the “R” word. Once the numbers started coming in the same crowd flip flopped and suddenly we were in a bad recession. As more statistics came to light and the mood darkened so did their forecasts.
Recall that only a few months ago economists were not ruling out another Great Depression or at least the worst economic tailspin since the Thirties Since then analysts, economists and even Square Pants Sponge Bob have lowered their forecast on everything from consumer spending, company earnings to this year’s worm crop in downtown Tuscaloosa. Right now these numbers are too low. As a result, when weekly unemployment numbers reveal a mere 600,000 job losses or so the market, expecting much worse, rallies in relief.
As the markets flourish, optimism blossoms and not even the revelation this week by New York’s Attorney General Andrew Cuomo could ruffle the market’s feathers although it ruffled mine. I find it difficult to accept that both ex-Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke not only leaned on Ken Lewis, the Chairman and CEO of Bank of America to buy troubled mega-broker Merrill Lynch last year but threatened his job if he didn’t. That was bad enough but if the news reports are to be believed, Lewis was told not to reveal the extent of Merrill’s financial difficulties to the public. These actions raise so many questions that I’m not sure why the media is not all over this.
For the taxpayers, it appears that two of the government’s top financial officials deliberately lied to us. They invested billions of the $750 billion bail-out money in Bank of America/Merrill Lynch knowing full well that those tax dollars would be gone for good. It also raises a myriad of corporate-governance issues concerning the management of Bank of America and the rights of shareholders. Its investors lost billions as Bank of America’s share price plummeted while Merrill’s shareholders were bailed out with B of A’s purchase. And I’m not convinced that this conspiracy stops with these three individuals. How many members of the House or the Senate Banking Committee were aware of this? Will deceit and lies be glossed over once again as “necessary” for the survival of the financial system? What do you think?
In the meantime expect the markets to move higher. There may be another sharp sell-off at S&P 500 level 900 but it will only give buyers an excuse to add to their positions. Enjoy it, luxuriate in your gains but don’t get emotionally attached to the possibility of a new bull market. Remember the old saying “sell in May and go away”? Anyone check the date lately?