Saturday, August 29, 2009

Irrational Exhuberance?

One of person I admire the most is Alan Greenspan and these days remind me a lot of him. Does the stock market frenzy is sustained by fundamentals? Are there any signs of recuperation? When someone is ill and shows signs of recuperation does not mean that the virus is away. I think the resilience of the American, German and French economies is quite astonishing but remind two things : first the stimulus package is not forever (remember the balance sheet problem described in the previous article) and second stock prices are based mainly by sentiment.

This sentiment has been nourished lately with some “positive news” but I think is too early to smile and to late to cry. In my belief the economy is on the verge of knowing( maybe one or two quarters away) if the stimulus is enough and the economy will get back on track (which I think it would take at least to the 3th quarter of 2010) or if the demand and supply were not able to change structurally and cyclically (increase and readapt).

The Dow has advanced from 6440 Units (this year low) to 9554.20 Units to date. Even a monkey could do a 50% profit just by doing nothing (if the monkey bought at year’s low, is quite difficult for a human but I think that the monkey has a better chance). I love the rapid rush that the stock market showed in the last three months. I picked some stocks that doubled, tripled, quadrupled or more, but still I’m seeing a lot of greed in the market and when I see ungrounded greed I start to be fearful (to see the perfect example of ungrounded greed , look at AIG’s stock price in the last 4 weeks).

I stay long long long (this means to hold them) on stocks, but I do remain concerned of real operative indicators (scrap metal prices ,FF indexes,inventory turnover, consumer confidence, among others). If indicators do not improve we will see a setback in earnings (increase in some earnings could be caused by a decrease in previous quarter inventories),thus in stock prices. Buying the Dow at 9500 is far better than being on fixed income, in the long run it will outperform.

Time will say if we have a Alice in WonderlandMarket , surrounded by irrational exhuberant sentiment or if we have an articulated, resilient, stable and back on track demand for goods and services aiming to 2007-mid 2008 levels.


No comments:

Post a Comment