The US Stock Market: Raging Bull or Suspended Reality?
The popular view is rarely the profitable view.
Good morning and welcome back to triple-digit temperatures on the East Coast.
It's fitting, I suppose, given the scorching rally we've seen. In case you've been napping, the S&P (INDEXSP:.INX) has rallied 8% since the June 24 low, 25% since the November low, and a sweltering 153% since the March 2009 low.
The economy must be en fuego, eh? At risk of overheating? The country is fully employed and social mood is off the charts, yes?
Not so much.
I've had numerous meetings the last few weeks with thought-leaders stateside and abroad. One of my closest buddies runs a paper outfit that does the bulk of its business with China, and it's not a small company. He told me months ago that his flow dried up, almost to a standstill, and he's hearing crickets still. Ditto those who have feet on the street in construction, who tell me bids are trading below market.
If I had to sum up their collective take on the stock market, they're in a state of "suspended disbelief." They don't "get" why markets are at all-time highs while businesses, through various lenses, are in a snarl. They ask me why, to which I reply, "The markets are no longer free; there is an artificial bid, and meritocracy -- true, free-market meritocracy -- has been left for dead."
It's a lame response, I know; to be honest, I'm not sure what else to say.
I remind myself to never let an opinion get in the way of making money; to respect -- but not defer to -- the price action; that the reaction to news is more important than the news itself. From a trading basis, those guidelines have served us in good stead, or were at least designed to.
One of our primary principles is that price is the ultimate arbiter of variant financial views. Right behind that is the notion that trading, at its core, is capturing the disconnect between perception and reality.
We've spoken about how many of the world's smartest investors have gone dark -- or are in the process of going dark; conversely, and presuming the market is a zero-sum game, others have picked up the slack, more than willing to step in to bag the Benjamins. Around and around we go; where it stops, nobody knows.
As I wrote last week in, Does Ben Bernanke have a God Complex?:
One of two things is happening before our eyes: Either the baton is being passed to a new investing world order -- one where central bankers and HFT rule the day -- or we're approaching an extremely dangerous juncture where following the smart money will be rewarded in spades.
The Other Side of the Rainbow
Yesterday I shared a discussion I had with the extremely astute Mark Dow, who posits that the Fed is much smarter than we think. We strive to see all sides of the forward probability spectrum and I, for one, was psyched to consume his logic.
After the article posted, there was a firestorm of push-back, not dissimilar from what we saw following It's Always Darkest Before the Dawn, when the S&P was trading with a $6 handle in March 2009, The Gold Scold, when the yellow metal was trading at $1900, or Oil of Oy Vey when crude was at $140 and about to pop. As the profitable position is rarely the popular one, the reaction stuck out to me.
Mark and I continued our discussion last night. "The fact that my position is contrarian," he said, "tells me how far stocks still have to go. Many of the guys playing in the macro sandbox shouldn't be; they're talking themselves out of participating in a bull market. We do have a slow growth problem (demographics and globalization), but people are still way too bearish and way too under-invested."
I told him it's hard to argue with that logic, although my view is that underlying fundamentals don't support stock prices absent the Fed, and that his take made a ton of sense in a vacuum -- but we don't live in a vacuum, for if we did my Delta Tau Chi pledge name would be "Hoover."
He responded, "I think the Fed is propping up the market less than people think. It catalyzed positive psychology and then helped the balance sheet healing. The market would react if the Fed stepped away now but look how fast stocks came back from the last sell-off. That's not a Fed-dependent market, in my opinion."
I share this exchange in our collective attempt to better understand the dynamic between the Fed and the Treasury, what is allowed and what can or cannot happen. We're in uncharted waters through a historical lens, and while nobody can possibly know how this grand experiment will end, we would be wise to learn as much as we can about potential outcomes.
The truth, as they say, will likely be found somewhere in the middle.
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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 firstname.lastname@example.org.
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