Hoofy & Boo's Excellent Adventure
Who knows how long this will last or how we've come so far, so fast.
"I'm telling you, everything is great. The air is clean. The water is clean. Even the dirt... is clean. Bowling averages are way up. Mini-golf scores are way down."
--Rufus, Bill & Ted's Excellent Adventure
Bill S. Preston Esq. once opined that Napoleon was a short, dead dude. The same can be said for those betting against this tape.
With the Dow Jones Industrial Average at all-time highs, it's hard to find fault with stocks. Yep, everything's funny when you're making money and grins are in around the Street.
I've been quietly watching media coverage of DJIA 13K and will humbly offer that intelligent investing isn't as simple as "we're going higher so climb on board!" Advice like that is dangerous without the context of time and it paints an incomplete picture of today's market environment.
Jeff Saut, the chief market strategist at Raymond James who I believe is as good as it gets, was on television yesterday and asked a salient question that Minyanville has posed for years. "Are equities rallying or is the measuring stick, aka the dollar, weakening?" Indeed, since the beginning of 2002, the S&P is up 29% while the greenback is off 30%.
So, the question is naturally begged, who's zooming who?
To be sure, for those who earn, spend and owe dollars, the basis of currency matters very little. U.S. consumers, as a country, have been living beyond their means for quite some time, collectively owing $3.50 for every dollar of GDP. Discussing this immediate gratification, A.D.D. mindset isn't a particularly popular topic and will likely fall on deaf ears for as long as the screens are green.
But for foreigners who invest in dollar denominated assets, this chasm is front and center. And that, my friends, is planting seeds of isolationism and nationalization beneath this seemingly calm market surface. After all, we can't claim that globalization was the catalyst on the front end of a bubble and feign indifference on the backside.
Wayne Gretzky once shared that he didn't skate to the puck, he skated to where the puck was going to be. As the stock market is a discounting mechanism, investors would be wise to follow a similar train of thought.
A quick sniff of our four primary pillars finds two sides to each metric:
- Fundamentals are coming in better than expected but currency gains, cost cutting and financing operations have skewed the results. In fact, if you remove earnings from the energy and financial sectors, year-over-year net income has fallen 3.59%.
- Technically, the push through S&P 1450 was the validation many chartists were waiting for. Still, key sectors continue to lag with resistance overhead in the brokers (XBD 248), banks (BKX 117.25-118) and homebuilders (HGX 230).
- Structurally, as discussed above, the slippage in the greenback is necessary for the continued reflation of asset classes. I don't know the tipping point for foreign holders of dollar denominated assets as it's not an infinite well.
- Finally, psychology, while not yet euphoric, is clearly getting a bit giddy. I've lived through a few bubbles and understand that markets can remain irrational longer than many can stay solvent. Still, when I start hear pundits leapfrogging market milestones with reckless abandon, my antennae start to vibe.
So, what's my take for the here and now? The first fade (read: sale) of DJIA 13K seems like the "easy" trade. Beyond that, our future path will evolve as a dynamic function of the elasticity of debt and the velocity of money. I'm watching the dollar as the key proxy for global markets and when it catches a sustainable bid, my sense is that it'll come at the expense of the collective grin.
Who knows how long this will last or how we've come so far, so fast. But if I've learned anything over the years, it's to stay humble or the market will do it for you.
And from what I'm smelling around the Street, humility seems to be trading at a premium.
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