stock_creeper's  Instablog

Ignoring economic news paid off. The majority of bad news is either priced in, unimportant (in terms of profits & earnings or GDP), or simply priced in. Seldom is there bad news that the market can't shake off after a few sessions, or hasn't already been digested. To shock this market you need not just big bad numbers, but really, really big numbers. I remember the results of long-awaited 2009 bank stress tests which revealed that 10 out of 19 banks tested need to raise new capital. Bank of America needed to raise $33.9 billion and the futures fell one percent. The next day stocks reversed higher and the rest is history. It didn't matter that the banks were undercapitalized by $75 billion. The worst was over, and the situation had dramatically improved. Just a few months ago people were throwing out numbers like $750 billion or a trillion. $75 billion was quaint by comparison and manageable.

Ignoring the sentiment polls and bloggers paid off. There is a positive correlation between successful policy and public disapproval. The masses, the bloggers don't always know what is best for the economy, and vastly overestimate the likelihood policy failure. Geithner, Bernanke, Congress, Merkel & Sarkozy, among the least popular people on the economic & political blogosphere, defied the endless nitpicking and gloom, crafting successful policy that has staved of potential crisis and prolonged panic. For example, in 2008-2009 the blogger consensus was that TARP would fail and there would be a banking crisis relapse. Instead, by March 2011 the treasury had turned a $6 billion profit. It was widely predicted that lowering interest rates to zero and QE 2 wouldn't work. QE2 and operation twist have so far successfully depressed long term yields, even as stocks and profits keep booming. The recent sell-off in bonds will prove temporary and 10-year yields are still extremely low, even lower than in August 2011 when the market began to plunge on the European debt fears.

Since the first quarter of 2009, GDP has remained positive, which is nowhere close to the two negative consecutive quarters of GDP required for a recession.

Technical analysis is a waste of time in this market. From March 2009 up until now, if you bought every dip and held, you made money. Its pretty much that simple. THe S&P 500 cleared 1,370 without breaking a sweat. Same for NASDAQ and the DJIA which blasted past 3,000 and 13,000 like it was nothing. Anything that looked like a head and shoulder or a double top obviously failed. In my opinion, fundamentals will always trump technicals for things like stock market indexes. In penny stocks or thinly traded stocks maybe technical analysis will give an astute trader an advantage, but not the DJIA or S&P 500. Now there's a lot of headlines about how volume is too weak to justify this year to date rally. Obviously, volume will fall as prices rise because you can't buy as much quantity. It's why Berkshire Hathaway Inc. has such low volume. When the SPY was at $70 three years ago it traded half a billion shares a day. Now at $140 it trades 150 million shares a day which is reasonable considering it's twice a high and we're not in a market panic.

It was predicted many times that the housing market would drag the economy into a double dip. Housing remains weak, but the rest of the economy has detached from it and isn't looking back. How about those predictions of Zimbabwe-like hyperinflation from the fed's supposed reckless policy? Or deflation like the Great Depression? Wrong; since 2009 core CPI has remained at a benign 1-2%. Bloggers like Peter Schiff and Karl Denninger continue to spread undue fears about hyperinflation, apparently oblivious to the bond market or CPI readings. How about the PIGS nations destroying the Euro, and in the process sending the global economy into a tailspin? With the US indexes at multi-year highs and Italian, Spanish, and German yields falling I guess the end of the world will have to be put on hold.

A lot of experts get the price predictions right (like higher oil and gold prices), but the consequences or causal factors wrong. Whenever I read predictions about how pain at the pump and surging oil prices will doom the economy I mentally bring up this one-year chart showing how UGA (an ETF that tracks gas prices) and XRT (an ETF of retailers) have nearly perfect positive correlation, handily debunking this very popular theory.

Another example are the predictions of lower treasury yields due to a weak economy. True, yields have fallen a lot over the past year, but the most widely purported cause, a weak economy, is wrong as evidenced by the strong profits & earnings and robust GDP. Falling yields can't be attributed to a weak economy, but rather due to abnormally high demand for US debt from various institutions and fed policy. Hence, rising gas prices rises, rising gold, and a weak economy are not mutually inclusive. Gold is rising not because people are scared (the common theory on the blogs) but because of huge demand from China and India. In October 2008 when the world seemed to be coming to an end, gold plunged because a global recession would result in less demand for precious metals from BRIC countries. For the first week of October 2008 GLD fell 15%.

Academics like Nouriel Roubini and Nassim Taleb upon reaping the rewards from being right 2008 (incorrect predictions made earlier notwithstanding) were humbled by this relentless bull market. Roubini's abysmal prediction record doesn't need words; this chart will suffice:

Roubini has the record for calling the most number of premature market tops.

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Double digit 'real' unemployment hasn't put a debt in equities or consumer spending, in spite of Paul Krugman's repeated cries for a bigger stimulus to prevent a recession. Apparently he hasn't seen Apple's latest earnings, which puts to rest any doubts about the propensity of Americans to spend in the face of adversity and uncertainty. Or this chart that shows the dip in personal consumption was temporary.

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No one is expected to find permanent, closed-form solutions to things like European debt, excessive risk taking, or toxic assets but delaying what won't be inevitable is just as effective. Surging stock markets and improving economic indicators is evidence this strategy working. For example, despite being hyped to epic proportions by the media and blogs, the great Summer 2011 'debt crisis' which later morphed into the 'European debt crisis' was a dud and in retrospect a great buying opportunity. Media coverage was nonstop. Obama and congress exchanged barbs before eventually compromising by creating a doomed-to-fail twelve person bipartisan committee of pencil pushers, but the bond market (a $35 trillion non-partisan gauge of inflation) didn't blink, even after Moodys downgraded the US debt rating. On Nov 16, 2011 the deadline passed with predictably no agreement and Wall St. and the bond markets reacted with a collective yawn. No one is expected to pass a budget, but talking about it creates the impression of progress which is good enough. Same for gas prices. The national media frenzy about pain at the pump isn't going to fix the problem, but we feel better about it by complaining and blaming things like speculators and big oil.

We're in an era that be described as one of perpetual upside and limitless wealth creation, an era that began on March 9 at around 1:00 AM PST when the ES began to rally, a rally that rages on to this day without any inclination of slowing.

The greatest stock market and economic boom in human history continues to defy the critics and skeptics. The critics lecture us about the need for 'sound money', increased taxes, more regulation, higher interest rates, etc. Since 2009, such calls for 'fiscal restraint' have gone unheeded. Wall St. doesn't want to take its medicine because it's not needed. Stocks are surging, earning are great and fed policy, like it or not, is working. Including dividends, the S&P 500 is up more than 116 percent in three years, the strongest bull market since World War II. Oh, and PE ratios are still very low, proving that this rally is being driven by real fundamentals, not just funny fed money.

As of March 15th 2011, the DJIA is up an eight day in a row, pricing blowout profits & earnings, a decline in the personal savings rate, and booming exports that will be manifested in upcoming economic and earnings data, which the gloomers will dismiss as being rigged, as they have done for the past three years in what can be described as some sort of ritual of futility. I don't know what motivates people to always see the negative, predicting failure, recession and crisis and yet being wrong with a few exceptions like 2007/2008 or 2000 where they get it right. Many predict oil shocks, huge gas lines, double dip recession, stagflation or hyperinflation, upheaval, and crisis yet those things refuse to happen (and I'm very certain they won't). I would rather be right most of the time than to keep waiting out for the crisis that may never come.

In the preceding thirty-six months, an immense amount of wealth has been created. The market cap of the S&P 500 fell by almost half to $7.9 trillion by March 2009; a whopping $7 trillion has been recovered, the greatest amount of wealth ever created in a three year period in the history of the United States, even greater than the wealth that was created in the final years of the high-tech boom between 1997-2000.

Here are a few highlights:

-Apple surged from $70 on March 2009 to $560 making it the most valuable company in the world with a market cap of $550 billion

-Baidu surged from $15 to $140 making it one of the most valuable brands in China

-Priceline went from $80 to $657

-Chipotle went from $40 to $407

-Las Vegas Sands was a penny stock in 2009; it's up 3000 percent

-Twitter, valued at a whopping $30 billion, has overtaken traditional news media.

-2011 exports at $1.3 trillion, surpassing 2008 highs

-Gold, silver, misc. grains, oil, and gas prices have more than doubled

-Groupon, Linkedin, and Yelp went public and have a combined market cap of $20 billion. On March 2009 these companies were worth just a fraction of this value.

-Facebook is expected to be valued $150 billion or more after the first trading day of its highly anticipated IPO, a 15 fold increase from its $10 billion valuation in March 2009. Facebook will have a pre-trading valuation of $75-100 billion, but there will be a huge pop due the hype as was the case with Yelp and Linkedin.

-Since March 2009 thousands of millionaires and billionaires have been minted thanks to the web 2.0 boom, which unlike the first internet boom has much higher valuations and profits.

- The S&P 500 has doubled in price and earnings since March 2009, which is why the PE ratio is still only 13 even after this nosebleed rally. This is the greatest three-year increase in price and earnings in the history of the index.

The economic boom is attributed to exports, consumerism, spendism, globalism, profits & earnings, QE 2, zero percent interest rates, and the bank bailouts. Scoffing at oil and gas pries, Benrnake has no plans to raise interest rates, and there is no sign the BRIC boom is slowing down. Record high profit margins are sustainable because productivity is perpetually rising. This means companies can keep squeezing more output from each employee. THe latest blowout consumer credit report shows the 2008/2009 predictions of a 'new era' of de-leveraging and frugality were resolutely wrong. The personal savings rate will keep falling as commodities, education, food, energy, transportation, and healthcare costs continue to outpace wage inflation at a blistering pace. This additional spending goes into GDP and earnings, like any other form of spending. Congress has shown little willingness to raise income taxes, and I predict that income taxes like interest rates aren't going up for a long time, if ever. Raising taxes guarantees a loss for the incumbent and the bond market is signaling that deficit spending still isn't a problem.

On March 8th, US Initial Jobless Claims rose 8,000 to 362,000 and the March 9th unemployment rate remained at 8.3%, despite the consensus calling for further decline. I believe a sudden worsening of the labor market will be a catalyst for a massive breakout to dow 14,000 thanks to increased odds of a new QE program and low interest rates though 2015 and beyond. Weakening economic data in less important areas (employment, housing, construction, manufacturing) is rocket fuel for equities and treasuries. What I mean by less important is that they don't impact profits & earnings or GDP nearly as much as they influence fed policy. The most important economic data (exports, consumer spending, web 2.0, personal savings, productivity, consumer credit) keeps getting better and better.

Since 2009 there has been no shortage of name calling and partisan politics. Obama is being blamed by republicans for surging energy prices and sluggish job creation, but it wouldn't have made a difference if McCain, Hillary or Romney won in 2008; oil prices would remain high, the housing market would still suck, and labor force participation historically low. Politicians have little control over the commodity markets and are bad job creators. We read about the pressing need for alternative fuels, pipelines, and regulation; of course such efforts won't lower prices, but these empty promises and threats makes people feel better about a problem which they have no control over by creating the illusion of progress. We are more dependent than ever on foreign oil and prices will keep going higher for a myriad of factors such as speculation, huge BFIC demand, Middle East tensions. These super bullish factors will easily negate any downward price pressure from drilling. It will take years to get new supply online with estimates as high as ten years. How much bigger do you think China's and India's economies will be by then? As long as the stock market is rising, so will oil and gas. It's been that way since 2001 and I see no reason for this trend to change.

As of writing this article, oil has been stuck in a $105-106 range for the past few weeks even as the major indexes have zoomed higher. This cannot last. Either stocks have to fall or oil has to breakout. I predict the later, and Oil is poised to pop $4-5 in a single week on even the faintest whiff of bullish news. You will wake up one morning and crude will be up $2. That's how these things work. They pop without much warning, on not much news. Since 2009 asset classes inflation has been synchronized and one easy way to make money in this bull market is to buy the asset class that is underperforming. One one week it could be gold. The next, oil or stocks or treasuries.

On the other side of the political coin, Obama can't rightfully take credit for the whole bull market. Correlation doesn't equal causation. If Bush had been given another four years the market and GDP would have still rallied. It's a coincidence it bottomed shortly after Obama took office. It's TARP (created by Bush, Paulson, and Bernanke) that saved the economy and then Obama took office a few month later. There is no evidence to suggest monetary policy would have been different under four more years of Bush than Obama, due to fed independence.

The 2012 election will be the costliest ever, and the most negative. THe majority of Americans are still feeling pessimistic about the economy, which doesn't bode well for Obama. Surging gas & oil prices, surging living expenses for things like insurance, education, energy, food, healthcare, a resurgent Iran, and the perception that average Americans are being left out of the greatest economic boom ever doesn't help. Unless you own stocks for the long term, are a web 2.0 or a Wall St. player, or own Silicon Valley real estate you probably can't perceive this economic boom. Long after the dow crosses 15,000 dollar stores and auto parts dealers will remain as popular as ever as millions of Americans permanently shift gears to a lower standard of living. This is the so called 'downward mobility' that will define many generations to come. At the same time, the economy will still be booming in terms of consumer spending, profits, exports and earnings. Foreigners rich off the BRIC boom will easily compensate for any consumer weakness in America, especially for luxury items. Total spending will not fall because Americans will go further into debt to compensate for the surging living expenses, hence to total spending will rise.

The global economy is autonomous, and the wealth created uneven with an unfathomable wealth amassed for a select few and stagnant wages for almost everyone else. We have a bifurcated debt system where large caps, the US government pays virtually nothing on its debt and small biz, and main street pays huge interest on unfavorable terms with no negotiating power. It's unfair, that's how the system works.

Fears that policy makers are leading America down a slippery slope of socialism or communism by preventing failure and picking 'winners and losers' have been prevalent since 2008. These fears are unfounded for a couple reasons. Capitalism, the fee market is thriving everywhere. Look at pinterest, for example, a company that was created in 2010 and is now the fast growing website ever according to Comscore. How about Facebook or Apple? Bank bailouts didn't stop these companies, and thousands of others, from being successful. In fact, it helped by infusing liquidity, in the process creating a more conducive environment for investment.

The government has bailed out a few banks, but these companies were indeed too big too fail. The economic consequences of NOT bailing them out would have exceeded the monetary cost of the bailout . However, what is being overlooked is that 600,000 businesses are created every year, and 80 percent of all small businesses will fail within five years. To say that the government is somehow preventing failure is absurd. There is no systemic risk from letting these tiny businesses fail.

The very fact that Americans are allowed to risk their financial security on an endeavor that has an eighty percent chance of failing is the antithesis of the socialism or communism that so many fear.

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The market is in a sweet spot where even bad news can be bullish because it increases the odds of further easing. The sectors that outperformed since 2009 (large cap tech, retail, commodities) will continue to do so. Avoid the supposed 'low-risk' sectors like utilities, healthcare and consumer staples. Expect all dips to always be bought, Dow 15,000, AAPL $1,000/share, Oil $140, Gold $2,000, more debt, low taxes, low interest rates, a lot more pain at the pump and many more quarters of strong profits & earnings.