Is It May 2008 Again?
We have had the Greek Debt Crisis a few months ago, accompanied by a near meltdown in the sovereign debt and currency markets. Nothing has been solved, but the animal spirits which drive the financial mavens to their destiny have pushed the markets back near their recent highs. Yet, there is a disquiet that is almost material. A feeling that things are not quite right and susceptible to unknown and unseen forces, which may not have our best interests at heart. At least the interests of those who are long paper instruments of many kinds. There are imbalances in the stock market, the main is that of a narrow advance fed by a surprising amount of giddiness and ebullience characteristic of tops in 2007 and 2000. The financials are punk, while the "tech bellwethers" (high beta consumer discretionary in drag) are flying high. To see what I mean look at AAPL, AMZN, NFLX and PCLN to name a few. Compare these with BAC, GS and MS. Throw in RIMM, SHLD and URBN to round out the middle of the bunch.
The 1st group are the "consumer tech" stocks. Dependent on 20%+ earnings growth and multiple expansion. Never mind that their multiples have already expanded to 40x, 130x, 93x and 30x five-year average earnings.
The 2nd group is the financials which are all rolling over despite one of the strongest months in history, especially for the worst performing month of the year, traditionally. BAC is plumbing the lowest levels of the year, while GS and MS are only 10-15% above their 2010 lows.
The 3rd group are bottom feeders. Poor performers who are essentially consumer stocks of one type or another and have largely been slammed in the last few years, although Urban Outfitters has rallied nicely off its 2008 lows, it is rolling over pretty seriously of late and threatening new lows for 2010.
There are a number of ways to interpret the action. Maybe consumers are tired of the same old stuff and looking for quality. Maybe the shrewdest operators are grabbing the bulk of the remaining dollars. Maybe iPad is worth more than Kenmore. All true (especially since you may not need a new washing machine when your house has been foreclosed). But it is all starting to look eeriely familiar, with the thin breadth and low volume advance, punctuated with sharp, early morning sell-offs which are quickly corrected near the close and overnight moves, where relatively large advances can be achieved with minimal volume, leaving a maintenance operation for the following day. Is the PPT at work? Maybe. Are the big boys distributing their holdings? Maybe.
As usual, a picture tells speaks 1,000 words. And the following one says that despite the sharp rally, momentum is fading and divergences are steepening. Does it have to fall apart just because cracks appear? No. Maybe it will all be OK, the economy will recover strongly, unemployment will drop, people with underwater mortgages will be able to refinance while the market recovers reasonably strongly and keep their houses, while the debts will be repaid in some orderly fashion. And maybe the Irish, Greeks, Spaniards and Hungarians will dig their economies out from under debts bigger than their collective (declining) GDP. Maybe but simple mathematics would suggest that when debt are climbing 10% plus per annum, while output is declining by 10% plus per year, eventually the difference will become so large as to swamp all wishful thinking down the toilet where it belongs. And when that happens, where will the Dow, Euro, Junk Bond Market be?
The 1st group are the "consumer tech" stocks. Dependent on 20%+ earnings growth and multiple expansion. Never mind that their multiples have already expanded to 40x, 130x, 93x and 30x five-year average earnings.
The 2nd group is the financials which are all rolling over despite one of the strongest months in history, especially for the worst performing month of the year, traditionally. BAC is plumbing the lowest levels of the year, while GS and MS are only 10-15% above their 2010 lows.
The 3rd group are bottom feeders. Poor performers who are essentially consumer stocks of one type or another and have largely been slammed in the last few years, although Urban Outfitters has rallied nicely off its 2008 lows, it is rolling over pretty seriously of late and threatening new lows for 2010.
There are a number of ways to interpret the action. Maybe consumers are tired of the same old stuff and looking for quality. Maybe the shrewdest operators are grabbing the bulk of the remaining dollars. Maybe iPad is worth more than Kenmore. All true (especially since you may not need a new washing machine when your house has been foreclosed). But it is all starting to look eeriely familiar, with the thin breadth and low volume advance, punctuated with sharp, early morning sell-offs which are quickly corrected near the close and overnight moves, where relatively large advances can be achieved with minimal volume, leaving a maintenance operation for the following day. Is the PPT at work? Maybe. Are the big boys distributing their holdings? Maybe.
As usual, a picture tells speaks 1,000 words. And the following one says that despite the sharp rally, momentum is fading and divergences are steepening. Does it have to fall apart just because cracks appear? No. Maybe it will all be OK, the economy will recover strongly, unemployment will drop, people with underwater mortgages will be able to refinance while the market recovers reasonably strongly and keep their houses, while the debts will be repaid in some orderly fashion. And maybe the Irish, Greeks, Spaniards and Hungarians will dig their economies out from under debts bigger than their collective (declining) GDP. Maybe but simple mathematics would suggest that when debt are climbing 10% plus per annum, while output is declining by 10% plus per year, eventually the difference will become so large as to swamp all wishful thinking down the toilet where it belongs. And when that happens, where will the Dow, Euro, Junk Bond Market be?
posted by Matt Butler at 8:47 PM
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