Chris Lau - Seeking Alpha

Wednesday, May 06, 2009

Reasons to be a Positive Bear

1. ADP Reported few job losses in April.


Approximately 491,000 jobs were lost in the private sector. The markets expected a fall of 645,000.

2. LIBOR spreads are now under 1%. When Lehman collapsed last year, the spread was over 4%. Teck Corporation was able to raise over $4B from the debt markets (albeit the yield on the debt is around 10%). Last month many thought Teck would collapse under its existing debt obligations.

3. The "Stress Test" was leaked to the markets. How convenient. The "leak" is preparing the markets to price in and accept that Bank of America will need $34B. Citi will need around $5B. Wells Fargo will need 15B (didn't Buffett champion this company?). Full results come tomorrow, but as Warren Buffett said, the test will not have much meaning or value.

Analysis and Conclusions:
Market "pros" will continue to cheer on the rally, the recovery, the recovery by end of year, "less worse" unemployment, and a "bottom." The latest earnings reports have all exceeded lowered forecasts. The lowered earnings forecasts were reasons the stock market fell two months ago. Beating the lowered expectations would conversely justify a rise in the stock market.

A rising market does not in itself justify a return to "good times." I has, however, very quickly fueled a mini-bubble for specific sectors, namely the resource sector. Teck Corporation did not improve fundamentally overnight. It is still in heavy debt due to expensive acquisitions. Its survival depends on rising commodity prices. The same can be said for the energy sector.

In effect, it is possible that a mini-bubble may emerge in oil/energy. Excess money in the system needs to flow somewhere. This is assuming that money is indeed in excess in our economic system. If the banking sector is not recovering, then money will be "stuck" in the same (subprime, etc.) debt that is a drag in the economy.

This is the tug-of-war that must be closely monitored.

A user on brought this clip to my attention:

Investors need to keep adapting to the changing winds. This is not to be interpreted as a promotion of day trading, swing trading, or momentum trading. It simply means that if the economy is truly improving, then adjust a portfolio accordingly, in small steps.