A 40 Percent Stock Rise Since March - Does That Signal A New Bull Market? Try "Bear Market Rally" (Temporary!)

As the mind virus of misplaced optimism and irrational exuberance continues to spark a rise in both the S&P 500 and the DOW, some of their mesmerized investors have been arguing a new bull market is dawning.  But that is premature, as I will show, especially given these investors may not fully appreciate the extent to which the economy (and stocks) hinge on controlling the virus, and hence the success of reopening without further lockdowns.  Let's say the jury is still out.

What we do know (cf. WSJ. July 7, p. C2) is that between February 19 and March 22, the S&P 500 fell by more than 30 percent, putting into Bear market territory. (By general definition, a "bear market" is taken to be a drop of at least 20 percent .  Similarly, a 20 percent recovery puts an index back in a bull market. However, if you've fallen thirty feet into a hole, does getting two thirds of the way out of the whole count as being "out of and above" the hole? Not really.

To be fair, the market has now rallied 40 % since March 22 - thanks to near zero interest rates (signaling cheap money, and other Fed support, i.e. buying up bonds)  to enter what many regard as legitimate bull market status.  So many are thinking, "Hey, we're out of the hole and now really in a proper bull market!"  But not so fast.  As the WSJ 'Business & Investing'  piece observes:

"Such rallies can be robust but short -lived. The bear market during the 2007-08 recession included a rebound from early March, 2008 to mid May 2008.  Then the downtrend continued."

That may well happen in this cycle as well. Recall in an earlier post I warned about the risks of excessive leverage, e.g.

http://brane-space.blogspot.com/2020/06/is-financial-repression-solution-to.html

Noting:

"Both individual investors and whole companies have now taken to the leverage 'drug'  to place their market bets using borrowed money.  The losses they have accrued, along with decades of trillion dollar tax cuts,  have helped to monumentally add to the $164 trillion in global debt.  But WHO is being asked to pay now, even with the party still going on? Well, the average Joe and Jane on Main Street.

In a separate WSJ piece, Paul Hannon warns us:

"In the U.S. and elsewhere, government debt is set to soar this year, reflecting lower tax revenue and the cost of financial aid to households during lockdown. The International Monetary Fund forecasts that U.S. government debt will reach 131%  of annual economic output this year, up from 109% in 2019."

Hannon makes clear Joe and Jane American are going to have to pay the piper, especially if we are to avoid bank collapses" (Warned about in  a sobering article for The Atlantic’s July/August 2020 issue )"


The argument I made then and which I believe applies now, is that these hyper optimistic investors feeding the current rally are not factoring in the immense risks if we are unable to get the virus under control.  All they see now is a light at the end of the tunnel, but that light may well be illusory- especially if there's no real vaccine for 2 years or even more.   Couple that with Senate Republicans blocking any further stimulus even as the last financial cushion expires at the end of this month (not to mention the eviction moratorium ending in two weeks) and you have a debt bomb going off and utter calamity.

This is also reinforced by the recent Business & Investing WSJ piece ('Crisis Upends Corporate borrowing Binge',  June 24, p. C1) noting how companies "had loaded up on debt after years of low interest rates, buyouts and increasingly lax lending standards."  Worse, with much of that debt "bankrolled by an elaborate ecosystem of debt funds called collateralized loan obligations, or CLOs".  Which we then learn (ibid.):

"Buy up risky corporate loans and turns them into supposedly safe  bonds, bought by banks".

Sound familiar It should because the "elaborate ecosystem of debt funds" also appeared back in 2007-08 but under the name credit default swaps, e.g.

The Financial Black Hole

 And those financial entities nearly brought the entire financial system crashing down.  See e.g.

http://brane-space.blogspot.com/2020/05/the-equation-that-nearly-brought.html


The point being it is way, way too early to proclaim a viable bull market, given so many countervailing factors many of which carry vast hidden risk if elements go sideways.   Perhaps one of the few rational inputs on the situation comes from Anupam Damani, portfolio manager at Nuveen, who terms what we are seeing a "bear market rally".     As expressed in the earlier (July 7) WSJ piece:

"She says the rally since March was the result of extra liquidity provided by the Fed, and she sees a disconnect between the fundamental weakness in the economy and the strength of the stock market."

In other words, the investors already betting on a bull market are living in a fool's paradise.  Maybe that will change when they behold consumption dry up because of lack of stimulus $$$, and  millions tossed out onto the streets after being evicted from their apartments in the midst of a pandemic.  Oh yeah, and when they see the banks stuck with over a trillion in toxic business loans on their books.

Stay tuned.

See  Also:

Economic Policy | Wall Street

Indecent Stock Market Boom Exposes Riot-inducing Inequality, Not Economic Positives

Making Short of the Short Sellers

Within mere days of the Security and Exchange Commission's announcement of a tough new rule designed to limit "short selling" (now believed responsible for driving share prices of financial stocks into the tank) you can see and hear the howls of protest erupting from every quarter (e.g. 'SEC Short-Sale Rule Gets Negative Reviews', The Wall Street Journal, July 19, p. B1).

What is short selling, also called "shorting"? This occurs when financial (especially) share sellers aim to profit from share declines by selling borrowed shares then buying them back in the market at a lower price. In a more egregious variation, called a "naked short sell", the shares are sold without any arrangement to have borrowed them first. The end result? These shorting operators make a killing with little or no risk, and certainly none of the upfront exposure that normal purchasers of shares have. (So, in many respects they are like the oil commodity speculators who only have to produce 5% of the total purchase to speculate a much higher price). Prior to the SEC rule, by one report, it was estimate short sellers had creamed $11 billion of profits from their short sales.

What is amazing to me, especially in view of the much reported market timing ploys of a few years ago, is how many average Joes and Janes still entrust their hard earned money to Maul Street. This, despite all the recent markers that disclose it is a bad bet.

The cold, brutal and hard fact of the matter is that most Americans (unless they have at least $2-3 million in disposable wealth) had best stay out of the Maul Street casino. It is purely a game for the 'whales' (as huge bettors are called in Vegas). Even mutuals offer little or no assurance of getting anything more than chump change - unless you are remarkably lucky in your redemptions.

A Stanford University study- based on the median return of 62 mutual funds- showed that $1 invested in 1962 would have grown to $21.89 by 1992, on a pre-tax basis. The study disclosed that the $1 would have grown to only $9.87 on an after-tax basis. And the investor would have had to come up with $12.02 to pay the taxes. By contrast the study showed that a “conservative” investor who put assets into a U.S. Savings Bond in 1962, had every $1 become $10.93 by 1992.

It is easy to work out from these numbers which investor actually fared better over the thirty-year interval according to the study. Hint- hint: it wasn't the sucker in stocks. Unless mutuals investors do the math and watch the numbers they cannot be aware of how little they're actually taking home. (A point also made emphatically in The Wall Street Journal, Nov. 27, 2003, page D1, 'A Harsh Truth: Most of Your Investments Won't Make Money- Even in the Long Term', after assessing stocks, bonds and mutuals).

Recent articles appearing in MONEY magazine, and The Wall Street Journal bear this out, noting that in the past ten years the S&P 500 has barely eked out 1.6% a year, not even matching the gains of CDs or Treasuries. Plus, one has to contend with onerous expenses, fees )e.g. 12b-1) clobbering from every angle.

It is also well for small investors to understand that, to a large degree, they are in a game with a 'stacked deck'. Not only that, but under current laws their investments are almost entirely blind. Like buying a pig in a poke. This point was emphasized in a London Financial Times article (‘A Metaphorical Proposal’, Mar. 13, 2003, p. 11A) by Michael Skapinker. He cited remarks by Joseph Berardino – chief exec of Arthur Andersen- who noted how the current reporting system “fails to communicate essential information about the real risks facing companies” to the small investor.

The basic Wall Street pyramid game is elementary to grasp. Pundits, wags and paid flacks on cable business channels hype the various stocks, funds or instigate a "buzz" about them - to get suckers to buy in. The increasing buy-in inflates the price-to -earnings ratio (P-E ratio) and produces a bubble of high profits. The "Big boys" (mostly large, institutional investors, but also big money single investors) get tipped 1-2 days in advance and cash out, leaving the little guys to sink. If they're lucky they may earn a few bucks. Not much.

For example in the Financial Section of the Balt. Sun of 1/27/97, p.1C there was this little headline: INVESTORS COMPLAIN OF UNEVEN EXPOSURE :

Quote:
General Motors Corp. gave a welcome warning last month to a few close friends. One by one, the automaker called analysts at top brokerage firms on Dec. 18 to say that fourth quarter costs would be higher than expected. Word was quickly passed to those (brokerage) firms' big clients, whose sales of GM stock sent the shares tumbling $1.375 on a day when the Dow Jones Industrial Average rose 38 points. Other investors had to wait until the next day - when nine analysts cut fourth quarter earnings estimates - to find out what GM said in private.

The thievery works eventually because most manjacks are conditioned to "buy and hold" rather than fold when the share price dives below a certain threshold. (Which ought to be the tip off). Thus, there are always ample marks left at the end game to be properly fleeced. Amazingly, they're always ready to play the game again, and pile their newly saved up money in.

I wised up in 1997 after the DOW was "juiced" and reading a lot of books and article on how the game was played, especially the psychological enticements to become "an investor". (I.e. you were "missing out" if you didn't plunk that cash into the Street). I cashed out of all the high risk equity and other funds before the 2000 bubble burst. I've stayed strictly with money market accounts, funds, and laddered CDs since. I did lose more than I'd like to have in a few bond funds, but also pulled out of all those in early 2000. (That was after I learned of the collateralized mortgage obligations or "toxic waste" piled into many of them)

Slow and steady is the way to go, albeit not "sexy" - and anyone who tells you any differently is trying to pick you off. I may not have millions at the end of the day, but won't have to go back to work prematurely because an IRA tanked by 40% or 50% - as many too trusting people are learning now.

The only real diversification in the end, is not to keep all the eggs in Maul Street's casino coffers. As Joe Dominguez and Vicki Robin note in Your Money or Your Life, about 20% on the Street is perhaps the maximum, the rest in cash (money market) accounts, laddered CDs and Treasuries. That way - when the market tanks by 40-50% as it surely will when the next bubble bursts, you don't have to commence from square (X- 100) again. Particularly as all losses are compounded in a downmarket environment - since as I noted- Maul street will still exact its Shylock cut (in expenses, fees, commissions etc) even as you're reaping market losses! Add a 15% loss to a 5% load, and more than 3.5% in fees-expenses and the results are not very pretty.

However, the hype and media fomenting of the PR of the market mythology keeps most prospective retirees thinking that they must be in the market or they won't be able to retire. Even now, the media drumbeat has begun for people – with portfolios and 401ks still in tatters- to get back into the market game. “Buying opportunity” is the mantra issued to rope in millions more suckers. Meaanwhile, oldsters who've taken a beating in the current Bear market may be looking at another ten to twelve years of work to make up their losses - assuming they can find work!

The stock market's sole purpose, As E. Brockway observes in his The End of Economic Man, 1990, is to steal capital from the poor or middle class (that can least afford losses) and give it to the rich. The means to achieve this are not obvious, but all one needs to do really is pay attention to the financial news and especially how market manipulation rears its ugly head again and again.

One day, perhaps, people will learn how to protect their assets themselves, without being drumbeaten into being hostage to stock sharks, con artists, shorters, speculators and other denizens!