What are the bulls seeing that gives rise to such optimism? How does the tape have such a persistent, underlying bid?
--Del Griffith, Planes, Trains & Automobiles
Two concerned motorists once yelled to John Candy and Steve Martin that they're "Going the wrong way!" They looked at each other quizzically and replied "How do they know where we're going?"
That question is being asked around the Street as the end of June begins to bear down. The mainstay averages are flirting with double-digit gains and money managers who are paid to play are beginning to feel the heat.
Performance anxiety is always most palpable as pencils get sharpened and quarterly letters are shaped. At the end of the day, money talks and excuses walk, particularly when others are participating in the party.
Time and price, the adage goes, are the ultimate arbiters.
To be sure, there are plenty of reasons to question this rally. Debt levels are at historic highs, the housing market has visible cracks, the U.S. economy is finance-dependent and rates seem to be trending higher around the world.
And yet, true to form for the last few years, reward chasers are once again making risk managers feel silly for exercising their prudence.
One of the first things I learned on Wall Street was to always question what the person on the other side of your trade is thinking. See what they see, I was taught, and understand the logic of your counter-party.
The bears have been schooled in humility this year as the market shrugged off bad news and embraced good news. The natural question is begged, why? What are the bulls seeing that gives rise to such optimism? How does the tape have such a persistent, underlying bid?
The answer to that, in my estimation, is two-fold. The transfer of risk and the transfer of wealth.
The first point is something we touched on in February when Fortress Investment Group went public. The logic was that if hedge funds and private equity firms tapped into the marketplace, they could then re-leverage their risk and introduce yet another layer of liquidity.
That dynamic will dance center stage tomorrow when the Blackstone IPO is placed. The action of this issue should offer a strong tell regarding the future flow of similar situations, particularly given the specter of tax-rate legislation.
The transfer of wealth can be viewed through two lenses. The first is the steady accumulation of domestic assets by overseas buyers as a function of the weaker dollar, which is down 30% since 2002. Net foreign purchases of US equities rose to a record $27.4 billion in April, up from $9 billion in March.
The previous record, for those keeping score, occurred in February 2000 while net foreign purchases bottomed in- anyone? Yes, in 2003.
Closer to home, the chasm between the haves and the have-nots continues to widen. The rich are getting richer and the poor are getting poorer yet the slimming winners have enough money to carry the load and fuel consumption. The real estate market is serving as a real-time encapsulation of this evolution.
Speaking with high-end brokers, they tell me that there is NO inventory in the upper-crust Park Avenue region or in high-end Hampton properties. Yet, talking with friends in middle America, they inform me that "For Sale" signs are littering the landscape, particularly in regions once fueled by the manufacturing sector.
Both transfer trends are powerful, both are big money and both are reasons to respect the Matador Crowd as they eye the path of least resistance into earnings. The question I wrestle with is if these processes are evident and obvious, what inning are they in?
- Hey, if you're gonna be a bear, be a Bruin! Indeed, researchers from UCLA argue that "although we're not in a recession, we're certainly close." The question is therefore begged, if the market is a leading indicator, how close to we have to be before equities reflect that risk?
- S&P 1540 remains the next, best level on the upside while BKX 116 and S&P 1490 are ursine levels of lore.
- Do the technicians need to "buy in" hook, literally and figuratively, before a downdraft qualifies as the path of maximum frustration?
- Two of my current holdings have relatively tight support levels for those looking to define risk. SunMicro (above $4.80) and Goldenstar ($3.50) both held recent gut checks, with the latter matter rallying nicely yesterday.
- As much as I want the Apple I-phone, how do I resolve the fact that it won't synch with my business functionality? And how many other professionals are facing the same quandary?
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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