Wednesday, May 20, 2009

Now Back to Regularly Scheduled Programming

Just how high can a dead cat bounce? That is the question most investment managers are asking. The historical strong bounce since the March 6th market low has so many attributes that make caution the theme of the hour.

On a per-share basis, first-quarter earnings on the index came in a tad over $10. With forecasters looking for $40 or a bit higher for the full year, which means the S&P 500 is selling for over 20 times 2009 earnings. That is by no means a bargain or near historical market lows in recessions. The market which was at a reasonable value in early March is no longer so.

Despite the appearance of improving credit conditions, lending is still not flowing. Consumer credit is shrinking rapidly. Commercial Real Estate continues to collapse. Today Saks attempted to raise capital to pay down existing debt. Morgan Stanley floated a bond proposal of approximately $190 Million secured by owned real estate. The market's response was to require 15%. That is hardly a ringing endorsement for loosening credit.

Historically, new bull markets do not begin with the leadership of the sectors which led the bear market down. This rally has been largely the result of a bounce of the trash equity that collapsed, particularly banks and financial firms. It would be unusual that a new bull market would find leadership from the likes of Bank of America and Citigroup such as we have thus far seen.

The rebound of the market has had extraordinary and unusual aspects brought about by the enormous influx of government liquidity and curious market manipulation through futures markets. It has the look of a heavy thumb on the scale. While I expected liquidity would lead the market to regain its footing, I certainly underestimated its extent and effect.

As market bottoms go this one is still quite young, particularly considering the uniquely bad condition of the economy. The dotcom market collapse took more than one year to settle down. We appear to be in about the ninth month of a must more serious credit collapse. I think it reasonable to expect this will take at least as long to stabilize. The press and governmental positive spin has been remarkable and I doubt sustainable without pause.

John Barnyak