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The Case For And Against Fundamentals

4 August 2009 No Comment

The stock market rally has been fierce.  I continue to point out specific stocks that are ridiculously over valued at this point, yet as soon as I speak, the stock goes up more.  So what’s the deal?

The problem is that the stock market can easily trade on momentum and technical indicators, ignoring fundamentals completely, for a lengthy period of time.  The old adage that the market can be irrational longer than you can be solvent definitely seems to apply to today’s market.  During the late 90’s tech boom, the market stayed irrational for years!  Those attempting to short the over inflated stocks got killed unless you executed it right at the top (which is very difficult).

As I mentioned in the article, Place Your Bets On The Direction of America [Aug 2, 2009], there are many stocks pricing in a robust recovery of the consumer.  Unless Americans begin flocking to Las Vegas and buying up new toys like boats and RVs by the droves, many stocks are in for some pain in the future.  The problem is that we don’t know when that will materialize in the actual stock prices.  Unless we get Clunkers for RVs, Clunkers for Vacations and everything else (which these days probably wouldn’t be surprising), I’m still wondering how the consumer bounces back?

A Few Notes On Employment

Tied to consumption is employment.  Remember, for a robust recovery we need a huge increase in consumption.  Our economy is 70%+ consumption.

Even in the last few days, I’ve heard stories from people I’ve met or people I know personally of their previous employer and the boom days.  One person mentioned his construction company that had over 100 employees a few years ago (now only has a handful).  Also, I know numerous people who worked for major mortgage companies that don’t even exist anymore.

My question is, what companies fill the employment void from all of these stories? I have a job, but my company has fewer people than we did a few years ago (and I don’t see major hiring in the future at this point).  A slow down in layoffs is good for our economy, but if you make your opinions based on stock market activity you’d think we were in a hiring boom!  Again, where does the increase in jobs come from?  Government sector?

My guess is that this rally is based on the easing of bad news, but has overshot to the upside predicting a robust recovery.  I think that any level of recovery will be anemic at best due to a lack of job growth.  This lack of job growth will keep consumption down for years which doesn’t bode well for our general economy.

Trade this markets momentum if you know what you’re doing, but I’d be very wary of investing heavily on the long side at current levels.

If you want to short, just make sure you have the cash to back it out so you can withstand a continuing of the rally in the short term.  We gotta figure the market will pay attention to fundamentals at SOME point.  The only thing that makes me nervous with that is the government’s printing press.

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