I’ll not pretend to have a strong opinion about which direction the markets are headed over the short-term, I’ll only tip my hand enough to say that I’m staying prepared to pounce on either outcome. If this sounds wishy-washy, try to understand that I have zero interest in “making the big call”, I simply want to stay pragmatic and flexible.
With that out of the way, I see a great many Wall Street professionals lately who have found themselves in the role of “apologist” for the 8 month rally, almost as if they feel the need to make excuses for being long and playing the upside given the headwinds we all know face us in 2010 and beyond.
If your professional or emotional circumstances ever happen to put you in the position of playing apologista for the rally, here are a few pointers for overcoming the conventional bear case arguments:
The Rally Apologista’s Handbook
“But the volume is lower than in previous years”
You say: Its time to forget about the volumes we saw during 2006, 2007, 2008. Hedge funds and prop traders will never have access again to the amount of margin that was once freely offered by prime brokerages and investment banks.
“But the volume has declined since the summer/ early fall”
You say: Sure, because no one is in the mood to risk the percentage gains they have on the books until the calendar turns to 2010. How refreshing it is to see people acting responsibly with Other Peoples Money, even if they’re abstaining from trading for selfish reasons (performance bonuses locked in).
“But taxes must be raised next year/ tax incentives will run out”
You say: The removal of fiscal policy may be likely, but the bears argue that incentives like “cash for clunkers” haven’t helped anyway. Plus, in the 90’s, Clinton and Greenspan worked under a tacit agreement – the White House kept taxes just high enough to compensate for Greenspan’s moderately low rates. This worked pleasantly for the markets – until the Long-Term Capital meltdown sent the Fed into Plunge Protection mode. Maybe elevated taxes aren’t the end of the world, as unpalatable as they sound.
“But the worst stocks like AIG and Fannie Mae seem to be leading the markets”
You say: I don’t know if they are leading, although they have made some huge gains. But you can’t have this discussion without mentioning the fact that they were the most crushed stocks going into the rally’s start, some of these names were down 95% from their peaks and probably would’ve gone to zero absent the government’s (ludicrous and illegal) intervention. They only seem to be leading because of how down-for-the-count the shares were to begin with.
“But insiders are still selling, they are closer to the companies’ prospects than anyone”
You say: I have never seen a shred of concrete evidence that shows me that corporate insiders as a group have any edge whatsoever in terms of the timing of their stock buys and sells. In fact, you could make a case that they are in the middle of the forest and can only see the two or three trees immediately in front of them. Plus, I didn’t see any abnormally high spike in insider sales during the fall of 2007, nor was there a rush of insider buying this past February or March. Corporate boards actually suck at timing their own stocks, look at the vast failures of S&P share buybacks.
“But interest rates must be raised”
You say: True, and this will mean two things…one, that the markets and economy are no longer on the brink and secondly, just imagine the effect on stocks when all that money in the bond market (from a a total of $67 trillion-ish) comes rushing out, looking for a home.
“But Commercial Real Estate is the Next Shoe to Drop!”
You say: Yeah, so this “shoe” has been hanging over our heads for so long, I’m starting to think that maybe it’s been amputated before it’s had the chance to drop. It will be ugly for the most leveraged among us, as usual, but there is also a tremendous amount of cash lurking out there, waiting to strike. As a prominent real estate mogul with several decades under his belt recently told an audience in NYC, “Kings will be made in the next few years.”
“But unemployment will remain elevated for quite some time to come”
You say: Congratulations on inventing a time machine that has allowed you to predict with utter certainty that there will not be any new companies/ industries coming out of the woodwork to take advantage of our high capacity labor pool. Did anyone think a coffee chain like Starbucks was going to come out and hire 135,000 people in the US beginning in the midst of the last recession? Did you predict the 25,000 or so new employees Apple would hire in America to help it take over the entire personal technology industry?
“But Healthcare/ Energy Prices/ Aging Workforce will bankrupt the nation”
You say: As we speak, there are brilliant and clever people working on ideas and business models to address all of these issues and others. Human beings have always adapted to difficult circumstances, and American human beings happen to be better at this than any collective in world history. And of course, money will be made in the solutions, because in addition to being innovative, we are also bourgeois pigs who expend every last braincell looking for the next opportunity to provide for our own vanity and comfort.
I hear and read the same scary statistics every day just like everyone else and I certainly try to keep an eye on the exits. But the quote screen doesn’t lie, so I apologize for staying in the game and these are my excuses.