Saturday, March 8, 2014

Does Washington deserve a little credit for the bull market? Yes, actually...

What if I told you that President Obama, with a little help from the Republican-controlled Congress, deserves some credit for what has become one of the longest and strongest bull markets in stocks in history?

Well, if you're a devoted Democrat, I suspect you (save for my suggestion that Congress deserves a pat on the back) very much like the sound of that. Of course if you're a loyal Republican, you think I've pretty much lost it. If you happen to be a committed Tea-Partier, you think I should be committed, literally, and right away. If, however, regardless of your political bent, you read all of my stuff (if you happen to be that one subscriber), and connect a few dots, while you may not agree with my opening line, you get where I'm coming from.

Here's what I'm talking about:

I'm guessing that I've featured the following John Templeton quote at least a couple dozen times since I started blogging back in 2009:

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

I wrote the following a week ago last Friday. As you read the bit about short interest (a measure of the extent to which traders are betting on a decline in stocks) and short-sellers (SSs) themselves, think about last week's 480 point spike (from down 250 points intraday on Monday to up 230 points at the close on Tuesday) in the Dow:
Well, yeah, short-term I’d say we’re way overdue for a correction (that’s 10-20% down), but the rise in short interest doesn’t, in my view, in anyway suggest it’ll happen in March or April. In fact, it kinda suggests not (don’t hold me to that).

You see, a rise in short interest is essentially a rise in pessimism. And pessimism is generally a good thing for a bull market, in that it means that there’s lots of folks who’ve yet to join the party. Party’s go longer when new guests keep showing up. It’s when everybody’s arrived that you know the end is near. I mean you can’t party forever.

Plus, you should see what happens when short-sellers capitulate. In fact, you’ve already seen it a number of times over the past 5 years. It’s those days when, out of the blue, the Dow jumps like 300 points. Those are (can be) what they call “short-covering rallies”. It goes like this:

SS borrows 100 shares of ABC and sells them for $100 per share (for $10,000). ABC rises to $125, SS panics and buys them back for $12,500 and returns them, depocketing a not cool $2,500. He bought them back at that point because he was afraid of losing everything he’s got if ABC turns into Google and goes to $1,200 per share. Imagine what the market does when lots of SS’s panic and cover their short positions (buying stocks like mad) — yep, it goes up bigtime.

So then, to the extent Washington folly has led to Wall Street pessimism,  Washington maybe deserves a little credit for the amazing resiliency of today's bull market.

Now, going deeper, here's something I wrote last Thursday:
Politicians, lacking the vision, the passion, the instincts, the integrity and the skin in the game, cannot even begin to deploy capital in a profitable, economically-stimulating, job-producing, life-improving manner. Which brings me to my main point: Not only has government’s meddling not stimulated the U.S. economy, as Fortune stresses below, it has, alas, hindered it:

"How much is Washington dysfunction harming the U.S. economy? Policymakers’ disaccord could be doing major behind-the-scenes economic damage. According to economists Juan Sanchez and Emircan Yurdag├╝l at the St Louis Federal Reserve, U.S. companies are hoarding loads of cash specifically because of policy uncertainty. As a result, corporate spending habits could be costing the country millions of jobs."

So what's so good for stock prices about CEOs' woeing over Washington? Well, for starters, policy uncertainty has, in my (and others') very strong opinion, kept industry from expanding (yes, that's bad, but stay with me). Regulatory uncertainty---fearing some government agent, with a chip on his shoulder, will come a knocking, and knock the sound out of their balance sheets, and their expansion plans---makes for very tight-vested CEOs (stay with me). Therefore, rather than investing in the capital and the people it'll take to bring the next great idea to market, corporate America has made efficiency its primary focus of late. The results being healthy balance sheets, huge profit margins and, consequently, higher stock prices.Yes, government imprudence has led to corporate prudence.

Now, all that said, and as much as we all love bull markets, our present state (save for the stock market) remains a, historically speaking, pretty sad state of affairs. Yes, that gloomy assessment has, along with inspiring the scrubbing of corporate balance sheets, engendered a level of pessimism that has kept a supply of money out of the market sufficient---to this point---to buy the dips and propel the averages to all-time highs. But of course you can only enjoy so much of a bad thing. Sooner or later, a persistent bad thing has to lead to, well, bad things.

The rate of gain in productivity can only accelerate to a point. Sooner or later CEOs will have to take some risk if this economy is to gain some real traction, and if, most importantly to them, they're to keep their shareholders engaged.

Now, as it currently stands, I maybe have some good news: The Fed is gradually pulling in QE, and, if CEOs meant what they said at the start of the year, we'll see a pick up in capital expenditure (business expansion) as 2014 unfolds. The latter is what could indeed propel the economy to a growth rate that, given where we've been, begins to make sense. Which, at a minimum, would confirm what record stock prices are telling us: that things are about to get better. 

Dang! I really wanted to close right there. But, sorry, I just can't leave you on such a hopeful note: That maybe good news notwithstanding, anyone who professes to know the future---of the economy or the financial markets---should indeed be committed. There are simply too many (uncountable even) moving parts---far too many dots to connect. I.e., while I remain hopeful---while I believe we're nowhere near exhausting the marvel that produces the goods, services and opportunities that'll make 2014's vast amenities good sport for our grandchildren---again, no one can know the future. 

So, on that note, I'll leave you with quotes from two of history's most sincere economists/philosophers:

F.A. Hayek"

"The curious task of economics is to demonstrate to men how little they really know about they imagine they can design."

And Adam Smith:

"The natural effort of every individual to better his own condition is so powerful that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations."

I guess I left on a hopeful note after all...


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