U.S. retail sales fall for the three consecutive months.  Chairman Bernanke disappoints the easy money crowd during his Congressional testimony.   Weekly jobless claims come in much higher than expected. Companies miss big on the top line yet their stocks move higher.   Sovereign yield curves in the  European periphery moving toward inversion.   Equities keep moving higher and higher.  WTF?

Nobody knows for certain and we’ve learned to run from those who think they do.  Here are some of are our thoughts and observations of what is driving the markets.

1)       Market was sold out.  Trading the thee macro swans  — Europe, China, and U.S. slowdown – caught too much fast money leaning the wrong way and real money under allocated to equites.  A dearth of real sellers has forced the shorts to cover, bringing the major averages above technical levels that has now generated buy signals for the fast money crowd and convincing them the swans are priced.

2)      Massive capital flows into the U.S..  The U.S. equity market is providing leadership for global equities.  We don’t have the data x/dollar strength but we hear anecdotal reports of big money flows into the U.S., which generates even more liquidity in domestic markets.  The flooding of the capital markets  is “lifting all boats.”  Kind of feels a bit like the environment after the Russian debt default in 1998 when the U.S. market was flooded with safe haven capital flows.

3)      The Bernanke Put.  Markets know that the Fed will be there to backstop any large equity sell-off and feel more confident about buying risk assets.

4)      Swan fatigue.  Investors and traders are tired of being negative about Europe and worried of a China hard landing.  They are now picking up U.S. stocks, where earnings appear to be holding up better than expected.   They assume a fiscal deal gets done in Washington.

5)      Positive long-term prospects for the U.S..  Last week’s Economist had a very positive article on the long-term prospects for the United States, titled The Comeback Kid.   They note the healing in the housing market;  an expanding export sector;  and a structural upgrade in U.S. competitiveness due to the exploitation of shale gas.  Thus, the “bullish on America”  trade is back.

6)      The Power of Zero.  As the saying goes,   “John Bull can stand many things, but he can’t stand two  zero percent,”   the flows get going.   Investors appear to be suffering “cash fatigue” as they fret over receiving a negative real return on their cash savings.  Equities look cheap to high grade bonds and buying Treasuries, which are gummed up by the Fed’s Operation Twist and the safe haven trade, is riskier than  “ walking in front of a steamroller to pick up a dime.”

7)     Romney polling better than expectations.    The latest NYT/CBS poll shows the President and Governor Romney in a dead heat.  In our opinion, the equity market would rally on the perception of a Romney victory.

8)    All of the above.   This gets our vote.

Whatever the reason(s) for the equity market strength the question is – is it sustainable and healthy price action?

We don’t know and think of an analogy from NASA’s finest moment.  Did anyone think Apollo 13 could make it back to earth just after it blowing out the oxygen tank which crippled its service module?  Many didn’t at the time and much had to go right.  So to it is with equities right now.

We respect the price action, acknowledge our ignorance, afraid of being too long, are almost always intellectually bearish, have been ground up in the choppy action, and think the market is range bound.   A close above 1375 on the S&P500 ratchets up the new range to 1375-1415.  The market moves fast on news so we view must hold support at 1360, the 100-day moving average.

There you have it, folks, our interpretation of the shadow puppets dancing on the side of the market cave!

 

(click here if chart is not observable)

Category: Markets

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14 Responses to “Why Are Equities So Bid?”

  1. CANDollar says:

    Given the above is it more likely we go up or down 20% from here?

  2. Orange14 says:

    I predicted that S&P would go up 15% for the year back in February or March when this topic came up. I think there is a chance for that to happen and if one is selective on which equities to put money into things can go quite well. Certain retail is doing exceptionally well and the leveling off or slight bump in housing is good for appliance makers and other building related stocks.

  3. warren.buffett says:

    ok, not a single point about the fact that S&P 500 companies are earning 7% on Equity. (even if you assume 0% growth for the next 10 years, it still beats 1.5% 10 yr treasury)

    No wonder 99% of even the ‘smart’ traders don’t get value investing

  4. Greg0658 says:

    sorry can’t help it .. lol
    how about lady justice with miniature scale pasties :-)
    this is a predominantly mens magazine site
    http://en.wikipedia.org/wiki/Lady_Justice

  5. ramk204 says:

    Put option sellers in tbtf dont want to payout so they take it up as usual. notice that the ones that moved up most were the ones that dropped most nke crm lulu

  6. kaleberg says:

    My guess is zero fatigue. It led to a big rally in the early 90s. The stock market usually rises during a severe recession as best I can tell.

  7. cognos says:

    Howabout SUPER LOW MULTIPLES?

    Bridgewater noted recently, SPX dividend yields are above UST10… Only happened 1X in 50 years… which was in depths of 2008.

    Take GOOG… the company has tripled (3X) earnings since 2007… yet the stock is DOWN. Its growing 30% and yet 15X multiple net of cash… Hmm.

    I know how that works out.

  8. Futuredome says:

    Unadjusted claims were far below the “seasonally” adjusted claims that looked jacked. I am hearing from my company, they no longer look at the seasonally adjusted numbers anymore.

    Another big theme is rising capital flows which suggest the economy has accelerated so far in July.

  9. ricecake says:

    Just repeat after you mostly. Stocks won’t drop until:

    1) the corporation not making money.

    2) the corporations need lots of capital to increase production so they need to issue lots of shares for sell.

    3) the foreigners take their money and run. (So far just the opposite is happening. Foreigners bring their large sums running towards the U.S.A shore. For example, the rich Chinese are lining up to get their American capital investment immigrant status while their country is investing in the U.S market.)

    4) New wave of Panic selling (but most of panic selling already done in 2008 – 2009. Those people were out of the stock market long time ago. The people are still in the market are not likely to panic sell.)

    5) Black swan finally appear unexpectedly cause new wave of panic selling. But What and where is that crushing forces? And When will it happen?

    Europe is a chronic case will drag on and on and on for years to come until everyone falls into sleep and ignor them. China is aggressively exploring their 3rd world export markets like in Africa and the south America as well as their own internal market. China is slowing down but think they won’t crash. So it’s a globalized anemic recovery lead by the U.S.A. No one is robust but no one drop dead suddenly….. until one does. But when? It can be a very wait and perhaps not for one to see it happen in one’s life time.

    Don’t mind not making lots of money as long as there will be no inflation. Inflation will certainly kill the honest moderate savers living.

  10. victor says:

    So, with all our warts, we’re still Rome? must be the air and the geography: to the North and South friendly neighbors, to the East and West…fish.

  11. quaternion says:

    Northern-tier European equity (and credit) markets have also been on a tear since early June, so that pretty much rules out any U.S. exceptionalism-based explanations. Unless the equity markets know something economists don’t know, I’d say 1 and 6 are the most likely explanations. I doubt that anemic interest rates are suddenly causing a stampede into equities because they’ve been anemic for years.

  12. warren.buffett says:

    or how about record corporate profits?. I can’t believe idiots write an entire article about S&P 500 without a single mention of the word profit(s)– you know the most fundamental, basic factor that you use to ‘value’ an asset.

  13. Market Panic says:

    Actually none of the above.

  14. gptmary says:

    basically correct and this is because all these factors influence everyone and has a great impact