What’s Up with the Stock Market?

[powayseller]

TV interview w/ roubini

Steve, Roubini says that the bond market is predicting a recession, and the equity market is having a sucker’s rally, just as in March 01, because they bulls believe the Fed will come to the rescue, but they won’t. As soon as the recession started in 2001, the market fell 18% quickly. Roubini says the market will fall sharply as soon as the recession starts. After a recession ends, it can take 1-2 years for the job market to recover, so this recession can have a big negative effect on the 2008 elections.

Steve, you are like my friend in 2000: she thought she was so smart to be in the stock market. Then she lost half her money.

[Steve Beebo]

ps –

I’ve had money in mutual funds since 1990 or so, and I always will. The returns are better over time than any other investment. I didn’t lose half my money in 2000, and I don’t invest in individual stocks. I prefer conservative mutual funds, including some income funds, that don’t do quite as well in bull markets, but which do way better than the market as a whole in bear markets. Weren’t you advising people that we had to get out of the stock market 4 or 5 months ago?

[rseiser]

davelj,
I liked your example. A great interpretation and certainly one way to see it.
Regarding your other post, why didn’t you just link to it. I would have read it, too.

[powayseller]

Steve, I’ve been advising people to get out of the stock market since March, I think. I missed this last run-up, but I will also miss the 28% or greater fall. Meanwhile, I’m earning over 5% in my CDs. Let’s check back in with each other in the spring of 07, and compare notes, and compare your mutual funds to my CD performance. If you take this challenge, then we’d need to know the names of your mutual funds?

[no_such_reality]

Anyway, I’m just wondering why the stock market is going up?

1. Earnings are looking up. (Good)
2. Oil and energy costs are down. (Good)
3. Inflation looks to stay tame. (Good)
4. Terrorism looks to stay tame. (Good)
5. Housing looks to be tame. (Good)

Really, this board is way to pessimistic on the death spiral of woe caused by the implosion of housing.

[(former)FormerSanDiegan]

REITS up too !

In a side note, the closed-end REIT fund (RQI) I purchased on March 7 of this year is up 19% including dividends. (14% price gain, 5% dividends, in 7 months).

Most of the gain occured in the last 3 months as the it became clear to the market that the FED was going to take its foot off the brakes and bonds started rallying.

It currently is paying a dividend of 7%, so maybe more upside until bonds reverse ???

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

Wow and no next big thing even, hmmm !!

[powayseller]

The Federal Reserve has been on a publicity mission to quell this disconnect between reality and the stock market. They’re letting investors know that inflation is still a danger (Bernanke and Hoehnig spoke earlier this week), because the market is expecting a Fed cut, causing the market to go up.

CNN:
“U.S. interest rates may not be high enough to quell a recent bout of inflation, Philadelphia Federal Reserve President Charles Plosser said Thursday….The bond market reacted negatively to Plosser’s comments, since many investors had been betting an economic slowdown could force the Fed to start cutting rates by early next year.”

no_such_reality, your screen name is fitting, because your list is a complete disconnet from reality. Oil is still up vs. 2 years ago (you’ve got to overlook the temporary summer spike – so what if we’re down from April, we are still up over January), corporate profits are shrinking, worker unemployment is level BUT their hours have been CUT so their wages are down esp. in construction and retail, retail employment is way down, inflation is still a problem according to the 3 Fed Reserve speeches this week, and housing continues falling. We’ve had the first national fall in median prices since the early 1990’s. What tame housing? The list you provided has no link to the reality.

[heavyd]

I’m with no such reality on this market’s move; newsflow has been overwhelmingly positive over the last 4-6 weeks in terms of interest rates, energy costs, and geopolitics, even housing has been no worse than expectations. And for the most part corporates have reported decent earnings without a lot of nasty surprises. In the absence of negative newsflow, and without a lot of attractive alternatives, markets tend to float upward.

US housing stocks have been CRUSHED…over the last 15 months or so. TOL US is down 51% since its high in July 2005 while the S&P500 is up 10% over the same period…investors begain pricing in a housing slowdown well over a year ago, and to date the worst-case scenarios just haven’t panned out. These stocks are up because they were technically oversold in July and because they’re now trading on single-digit PE multiples…even after analysts have cut 2007 earnings estimates by over 50%.

Markets react to changing expectations…they move up on news that is good RELATIVE TO previous expectations, and they move DOWN when expectations are not met.

[no_such_reality]

Oil is up from two years ago. Whoopie. here’s the fact, even with oil at $70/bl, US business could still drive a profit. Oil and energy is down from that point.

Employment earnings are stable.

Housing is STABLE. Down a percent or two is noise and given 20% appreciation, is trivial.

The Fed is supposed to blow the horn on inflation, it’s a future threat, but stable. It isn’t run away, it is getting pushed by commodities. It’s manageable. Which is exactly what you want with inflation.

Your doom & gloom PS, is irrational pessimism.

[powayseller]

Jobs: Housing Steady, Watch out Retailretail employment during the past year has consistently lost ground in the government’s monthly reports. Retailers have shaved more than 100,000 jobs off their payrolls

CEOs Take Dim View of US EconomyThe findings suggest that volatile energy prices, rising interest rates and cooling U.S. housing market of the past year are beginning to take a toll on business.

Bernanke: US to shave off 1% from GDP

Bernanke says housing in ‘Substantial Correction’ “There is currently a substantial correction going on in the housing market,” Bernanke said. The decline in residential housing construction is one of the “major drags that is causing the economy to slow.”

Sevices in US Grow at Slowest Pace in 3 Years The report suggests the economy is losing momentum as the fourth quarter begins. A weakening housing market that has left Americans feeling less wealthy is limiting consumer spending at retailers such as Wal-Mart Stores Inc. and dragging on growth

Factory Orders Unchanged in August Oct. 4 (Bloomberg) — Orders placed with U.S. manufacturers were unchanged in August, the second month without an increase, suggesting a slowdown in production as the economy cools.

Sluggish Hiring in September

US Chain Store Sales Fell for 4th week Sales at U.S. retailers in September were flat when compared with the same period in August.

[heavyd]

Powayseller, every single one of the factors you mention is well known to the markets — old news, in fact. Investors have known about Iraq, high fuel prices, fairly soft employment numbers, and the potential for a housing slowdown for well over a year and so these have all been fully discounted.

So what will move markets?

Anything that differs dramatically from the above trends. You don’t need ‘good’ news to move a market or individual stocks; you just need newsflow that is not worse than consensus. Which is what we’ve had the last couple of months.

[powayseller]

I have no idea what will cause these market participants to “wake up”. Maybe the first GDP report at 2%? Maybe higher unemployment claims? Maybe rising gas prices? Another year of lower national median housing prices? I was moved much earlier than the market in general, so what moves me is not enough to move them.

[rseiser]

Actually, I agree with all of you at the same time.
-I agree with no_such_reality that things ARE good at this moment and that the perception IS for things to be ok and getting better.
-I also agree with powayseller that going forward things MIGHT NOT be that good.
-And I totally agree with heavyd that it only matters how the perception will CHANGE from now on.

While nobody knows exactly the future I am certainly leaning to the side of perception being soon be adjusted to the downside.

First, we had an incredible rally and everything comes in swings, so maybe we swing back to the mode we were before July, i.e. rising interest rates and oil.

Second, there is one single piece of information that this board believes in and that is different from the mainstream perception. This one piece is housing and credit. Both are so huge, that people cannot even comprehend what it means if real-estate drops 10% or more. It wipes out about 3 trillion dollars that somebody thought he had, but nobody really had, including owners, lenders, builders, contractors, mortgage brokers. Yeah, the government can print 3 trillion which they probably want to, but hey, good luck to all the different market participants.
The second question is, does it drop 10%, or maybe only 2% as some suggest. Well, it can also drop 20% if we consider where it came from or by what empty speculation it was driven, or by what it compares to rent. So 10% is a totally reasonable guess. If someone thinks the market just drops 2% and then goes up again next year 5%, like some coworkers of mine do, I can only say that even mathematically it wouldn’t add up. Nobody could afford to buy any property anymore, with all the bills coming, and to service all those buildings in the future. Especially, where rents and salaries lag behind so badly.

[heavyd]

I’m beating a dead horse here but…

Powayseller, have a look at the price chart for TOL US (Toll Brothers), one of the largest listed US homebuilders. Beginning in the Summer of 2005 investors dumped this thing, and continued to do so until a few months ago. Investors have known about the current housing slowdown for well over a year, and unless things get MUCH worse from here, TOL will probably trade sideways, even drift up. The newsflow on this stock and US housing markets in general has been bad, certainly, but it’s not been nearly bad enough to spook the current holders of the stock.

Surprises move stocks…to go back to the TOL US example, the current holders of this name (including Neuberger Berman, Goldmans, JP Morgan, T. Rowe, Vanguard, etc) probably aren’t going to wake up tomorrow and say to themselves, “Sweet Jesus, there’s a mild housing slowdown in the US — who knew? I’d better dump my Toll Brothers position ASAP!”

If you’re short the homebuilders, you need an absolute collapse (ie, prices down 25%+ in a year) in housing on a nationwide basis to make money…the mild decline in prices we’re seeing won’t do it.

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