My last post of any significance ( way back in January ) discussed how long-only managers professionally simply could not afford to repeat the mistake of 2009, which was underexposure to risk assets. I predicted that they would buy all pullbacks and that the market would enjoy a healthy first quarter.
That post proved prescient as the January pullback set the spring for the extraordinary run to 1200 we have just experienced. Clearly, big long-only managed money wants in to this market.
But that prediction was 3 months ago and we must now re-assess and possibly re-adjust by asking ourselves the very tough question to what extent is this market the product of artificial factors, and to what extent is it a real discounting of a healthier economic future which may be in the works ?
All bull markets contain a healthy dose of kool-aid -- the kind spiked with hallucinogenics, not rat poison. Capitalism itself would not be possible without the wild dreams of some.
What I find most interesting about this market is the high numbers of very smart & experienced bearish observers whom this market has consistently proven wrong. To me, this is the quintessential Wall of Worry.
It is not the permabullish raving capitalists, nor their close cousins the Wall Street sell-side brokerages ( who have a vested profit interest in climbing markets ), nor the herd popular media, nor the general public which tends to worry in a bull market.
Rather, those who worry are the long-only money managers, anyone doing buy-side research for them, and of course most of the independent professional analysts & advisors -- who tend to be contrarian in nature because they rightly distrust Wall Street so much. ( Some distrust the US Government just as much -- but let's save that for another post ! )
What these people worry about is that a rising market is not properly discounting information which they can not yet see. In other words, they worry that the market is wrong.
This market has consistently disproved nearly all of their worries. And that is a sign of a healthy bull market.
This market has proven adept at correctly anticipating improvements in the real economy : from much improved global corporate competitiveness ( shedding underproductive labor, thus improving productivity ), to a rising trend in corporate earnings, to continued reductions in leverage, to effectiveness of government measures in stimulating the banking industry, to heightened manufacturing and replenishment of inventories, to recovery in retail sales due to impressive buying by the "haves", to stabilization in the housing market ( albeit weak for some years to come ), the list goes on.
High unemployment will not stop this market because the economy is not driven by the unemployed. What is happenning is that the US is shifting to become more like the rest of the world. The post-WWII period was highly unusual in world history in that a single nation led and enjoyed a disproporationate share of the fruits of industry & technology. Now, that is changing and the US is moving towards tax-rates & structural unemployment percentages more in-line with those considered normal in the advanced nations in Europe.
Every independent advisor I subscribe to is calling for a pullback soon and most probably we'll get a nasty pullback at some point. But this bull is real because the economic recovery is real -- gradual & halting, but still real. The market has correctly anticipated this recovery and done so in the face of the most incredible barrage of worry in history.
Remember that the crash of 2008 catalyzed the most extraordinary run to safety in modern history, and that cautious money is only gradually making its way back into the land of risk.
But inexorably investment monies will return to the norm of seeking the highest risk-adjusted returns, as pensions, endowments, and the large mutual fund families which manage the bulk of retirement savings will gradually continue to become more riskophilic and move money out of safe assets ( cash, repos and other short-term lending, treasuries , high quality corporates, munis ) and into equities.
This trend should continue for some time, and it might drive a slower but continued bull for the rest of 2010 as predicted by reigning hedge-fund guru Leon Cooperman.
It is natural to critically analyze a unidirectional market and it is natural to worry, but worry should not stop one from participating in a powerful trend which has been going on too long and too strong to simply be an artifice of government stimulation or markets manipulation.
True, insider selling is high, but this market has been on a tear and those with hefty profits are naturally taking some off the table.
I am a buyer of any significant pullback. The crowd should outsmart the remnants for the remainder of the second quarter.
