This year the market has been tough to all types of investors. We have witnessed violent price swings to the upside and downside, conflicting economic data, and high uncertainty about the future.
To profit from this market, investors needed to quickly adjust their views and strategies, shorting rallies during the first months of the year and buying dips since March onwards. Perma-bears and perma-bulls probably suffered losses during this time period.
By the end of July, the broad and worldwide advance in equities and commodities confirmed that we are in fact in a bull market and there is a strong upward trend. Every dip has been bought and the market keeps making new highs.
Strong technicals suggest investors should remain long and have some exposure in the market.
On the other hand, fundamentals have not improved and, in my view, have gotten worse.
One of the factors that concern me the most is that fiscal deficits have grown to historic highs in order to save failed companies and “stimulate” the economy by growing the size of the government.
Starting this week, there will be an issuance of an extra $207 billion in Treasury Bills in order keep the U.S. government’s policies going. Clearly this can’t go on forever and all this debt and its interest will be paid by the taxpayer and through the devaluation of the dollar, both negative for long-term economic prospects of the Unites States.
Plus, massive issuance can drastically drain liquidity from the market, one of the key elements that have fueled the rally.
Perhaps a more critical factor is that toxic assets have not improved. There is still a very high debt-to-GDP ratio in the system and the bad debt has not been defaulted and cleared.
The change in mark-to-market rules and cash handouts through the TARP are making the banks look "well capitalized." You may value assets in any way you want but, in reality, you might not be receiving any cash flow from them.
The recent bust of Colonial BancGroup revealed what was really going on behind the accounting games. A merger presentation by BB&T, which absorbed Colonial’s assets, disclosed that some of the loan portfolios had a market value 67 percent below stated par value.
On average, the loan portfolios had to be marked down by 37 percent. The bank had negative tier one capital and should have been seized by the FDIC long ago. The government and regulators are obscuring the real situation in order to prop the economy and raise confidence in a quick recovery.
This leads me to wonder about how are the rest of the banks’ balance sheets are faring in real terms. With rising unemployment and delinquencies rates, I presume many more banks are very poorly capitalized or bankrupt. Noted analyst Richard Bove predicts up to 200 more bank failures! It seems there is an economic time bomb ticking and ready to go off.
I don’t see a durable recovery and this nascent bull market won’t as long as the one experienced from 2003 to 2007. I’m certain that in the future we will face harsh economic problems once again. Despite my bearishness on the economy, the technicals are strong and the trend is up. The trend is your friend and until proven wrong, buying the dips is the way you can currently make money investing.
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