Archive for May, 2009
Do the Patients Know More than the Doctors?
Posted by Jody Eisenman | Filed under Uncategorized
Imagine that you are having health problems. You decide to go a doctor, who decides to give you a complete physical. After looking at your blood levels, the doctor tells you that your cholesterol is too high and you must change your diet. Instead of agreeing, you protest, telling the doctor that the number is in range, and he needs to change his testing methodology. In the end, the good doctor agrees with you, and you go home happy (but no healthier!).
In essence, this is what happened to the banks and the stress tests this past week. After deciding that 10 out of the nineteen banks were substantially undercapitalized, the Fed was met with vociferous protests by the banks. In the end, the Fed capitulated. Bank of America went from needing more than $50 billion to less than $34 billion. Fifth Third Bancorp went from $2.6 to $1.1 billion. However, the biggest winner was Citicorp, which went from $35 to just $5.5 billion! Apparently, C convinced the regulators that they had “pending transactions” that would significantly change their capital structure in a positive way. To me, this seems like the teacher asking the students what they would like their grades to be. I thought the Fed was supposed to be independent.
In any case, the market continued its’ upward climb, with the rally now entering its’ third month. While it is unclear how long this will last, what is clear is that market sentiment has changed 180 degrees. For over a year, virtually any news was interpreted in a negative sense and was used as an excuse to sell stocks. For the past two months, investors use any news as an excuse to buy. Although I think we are going higher short term, I am very wary that market sentiment could turn again. Therefore, as usual, I would continue to use stop losses in most positions.
An Interesting Debate I had With Someone
Posted by Jody Eisenman | Filed under Uncategorized
I’m of the belief of two things in this market:
1. The market is virtually never in equilibrium. It’s either undervalued or overvalued at any given point in time. This is true for individual stocks as well. There are many reasons for this, but the main one is that stocks trade on emotions rather than fundamentals.
2. The day and swing traders run this market. This has led, as we all know, to a very high level of volatility on a daily basis.
Anyway, someone I spoke to disagreed with premise number one and felt that stocks were always trading at their true value. My proof against him was this:
Lets take a look at a very heavily traded stock. The reason I chose a heavily traded stock was because thinly traded stocks can move dramatically on above average volume. However, a widely traded stock should, in theory, trade in a relatively “normal” pattern without wide daily swings. The stock I chose was Citi. Citi normally trades over 500 million shares/day. Well, today Citi traded over a billion shares (the total volume equaled roughly 20% of the total market cap), and the range was between 3.50 and 4.41. That 91 cent range was equal to about 30% of the low price of the day. My question was, “If Citi is always fairly valued, please explain how the company was worth 25% less over the span of a few hours? On top of that, there was no real news inter-day of any substance.” Needless to say, he had no response.
The market finally took a breather today, as the Dow closed down about 100 points. It is clear that market sentiment has now changed 180 degrees since March 9. Lets see if this can continue.
Stocks Move into Positive Territory for 2009
Posted by Jody Eisenman | Filed under Uncategorized
On the heels of a ferocious two month rally, the S & P 500 index has now turned positive for the year. In almost the antithesis of the first two months of the year where stocks were in a free fall, equities are now being snapped up by investors in an era reminiscent of bull markets of old. Here’s a chart of a few heavily traded stocks along with the S and P, with prices at the beginning of 2009, the low point of March 9, and today:
Stock Jan 1 Mar 9 May 4
Alcoa 11.02 5.39 10.36
Dow Chemical 14.85 6.23 16.39
Morgan Stanley 15.77 16.43 27.02
General Electric 15.74 7.41 13.10
S and P 500 903.25 676.53 907.24
Although many market commentators believe the market is due for a pullback, it just isn’t happening. If you are still short here, you would have to be about ready to jump out the window. It is clear that market sentiment has shifted 180 degrees since last year. For about a year, the market would drop on almost any hint of bad news. In the last two months, the market just seems to shrug off any bad economic news, whether it be earnings, unemployment, or capital raising. More importantly, the credit markets are finally beginning to respond as investors are now grabbing the juicy bond yields in corporate and municipal paper. I expect these yields to fall as bond prices rise, and I expect treasury yields to slowly rise as investors start to move into corporates and munis.
How long can the equity rally last? Its’ really hard to say at this point. I would not bet on any sustained decline here. It is still a traders’ market, and sell offs can occur at any time. On the other hand, there is still a tremendous amount of money sitting in treasuries and money market funds. This could temper any major profit taking. If you are going to buy stocks, stay nimble. If you are already long, enjoy the ride!
