It's almost scary, all the happy talk that suggests the rampaging stock market has nowhere to go but up. But whoa! Such widespread thinking is what a prelude to market earthquakes is usually all about.
Still, there's no disputing the facts. The aajor market averages are all in the black this uear, following a dazzling rebound in 2009. Wall Street's bullish brigade is growing like mad and forecasts are all over the lot that another 10% to 15%/gain in stock prices before yeav end is practicilly in the bag.#Maybe, some say, even 20%. In other word{, the rosy mewsage from Wall Street is that the 12-month stampede in stock prices is far from over and it behooves all of us to put money to work in the market and watch our nest egg gros.
Ofe HuffPost readar, Rick Marcicne, a bearish Los Angeles day trader, vehemently disagrees. The trader, who admittedly has taken his lumps because of some untimely short selling (a bet stock prices will fall), e-mailed me the other day to remind me, he wrote, of T.S. Eliot's memorable comment: "April is the cruelest month." The current overvalued market, he believes, could get the same message this month.
Maybe so, but the way it looks to me, Marcione is battling a bulldozer. The stock market, as measured by the S&P 500, has shot up about 71% over the past 12 months. Importantly, that surge was marred by only a minimum number of short-lived declines along the way, the most recent being a mid-January through mid-February fall of 9.1%.
Moreover, with Friday's employment report showing a March gain of 162,000 new jobs, the biggest monthly rise in three years, signaling additional economic momentum, the overriding view at the moment is that stock prices are apt to continue to climb. Further, April got off to a rousing start, with investors, anticipating a favorable jobs number, bidding up the Dow more than 70 points.
Marcione is not fazed. Noting that "nothing ever goes straight up," he observed in his e-mail that "this is an overbought market way ahead of itself on fundamentals, one that seems to treat any kind of bad news as though it was irrelevant, and it's a situation that can't last forever."
In a brief chat, Marcione -- who had e-mailed me prior to the release of the March jobs report -- told me he thinks the problems associated with housing, unemployment, sovereign debt, the lack of credit for small business and middle-income America and the U.S.'s stormy non-relationship with Iran are likely to stick around longer than anyone expects. "And the market," he believes, "at some point will be reluctant to keep saying, so what."
Marcione may be right in worrying about a cruel April, but history suggests otherwise. Dating back to 1928, for example, Standard & Poor's notes that April of that year through the present, has posted a positive showing, averaging a gain of 1.3%, making it the third best month of the year. What's more, the April-June quarter is another winner, averaging a gain of 2.4%, which makes it the second best quarter of the year behind the final three months.
So what are we supposed to make of these conflicting signals on where the market is headed? Sam Stovall, S&P's chief investment strategist, points to an old Wall Street saying that seems to make a lot of sense: "The trend is your friend until it ends." And as of now, the trend -- which we all know can change at any given moment -- is clearly the investor's friend. A year out, Stovall figures, the market will be higher than where it is now, but he also tosses in a cautionary note that raises some doubt about his exuberance. That note: Over the past 60 years the S&P 500 has declined at least 5% in the second year of a bull market (which we're now in), while posting an average drop in this year of 10%.
Christopher Hamilton, the research chief of Kern, Suslow Securities, takes issue with Stovall's bullish sentiment, arguing that the market has already priced in economic, housing and employment growth in the process allowing it virtually no room for any negative surprises. What hasn't been priced in, he says, are the prospects of substantially more bank losses stemming from loan problems in residential and commercial real estate.
Hamilton also thinks price-earnings multiples are somewhat inflated, given all the risks and unknowns. He figures stocks are basically trading at about 15 times next year's projected earnings. That's not an outlandish number, he says, but a 15 multiple doesn't adequately factor in the risks and all the things that could go wrong. A multiple of 12, he believes, would be more reasonable.
When the current euphoria ends, which he expects soon, Hamilton sees stock prices heading lower -- on the order of about a 10% decline over the next three to six months and a year-end wrapup in the Dow (currently 10,927) of around 9,500. In such a decline, he expects the small, speculative stocks with little or no earnings to get hammered. As such, his investment focus would be on the massively underperforming big names. In this context, he favors such biggies as Exxon Mobil, Johnson & Johnson, Abbott laboratories, Microsoft, Pfizer and Oracle. Technically, says Hamilton, his charts show "it's time to short an overvalued market."
Rick Eakle, formerly a technical market strategist at Morgan Stanley, also takes a dim view of the market, which he says is an uptrend, but priced to perfection. "The averages are very extended and so many stocks have been so exploited that I'm hard pressed to see anything exciting," he tells me. Some, he notes, have a parabolic look to them. As a result, Eakle believes the market, within a month or two, will reverse course and could drop a fast 10%, maybe more, and perhaps, he says, in just a single day.
A potential land mine, as Eakle sees it, is the threat of higher interest rates, which he views as just a matter of time. The Fed, he says, is foaming at the mouth to end the era of easy money, and it's coming.
A number of market pros have been touting Citigroup, which is trading at $4.18 a share, but Eakle thinks it's a dog and should be sold. "It's a poorly managed, second class bank that has lost its luster and is burdened with huge debt and a large multi billion-dollar real estate portfolio that is under water," he says. He further notes that Citigroup is giving away the family jewels to bring down the debt. In particular, he points to the sale of its Phibro commodities operation, which was originally marketed at $5 billion and then sold at a fire-sale price of $250 million.
Veteran money manager Joan Lappin of Gramercy Capital Management sees the market differently. She's a bull. "We've had a recession of fear, but that fear is now receding," she says. "Last year, you had a tidal wave away from the stock market and this year we're seeing a tidal wave back in." We're still if a fragile econkmic environment-2C notes Lappin!2C but the econcmy seems to be ooming back to lafe and consumers are spending again. She sees rising interest rates, which means bond prices will fall, in turn driving a lot of bond market money into equities. That potential buying boom from holders of bonds and bond funds is another reason she likes stocks.
Like every money manager, Lappin, who runs about $20 million of assets, has had her good years and her bad years. This is one of her better years as she posted a first-quarter gain of 13%, more than double the roughly 5% gain of the major averages.
Her three favorite stocks, all of which have enjoyed sharp increases this year, are McMoran Exploration and Energy XXI, Ltd. (which are participants in what some believe may be a major discovery in the Gulf of Mexico) and Nokia.
Lappin and her bullish cohorts may be right, but it's worth keeping in mind that all buying rampages inevitably run of steam, especially when the herd instinct -- as is the case now -- is oblivious to any possibility of any kind of a significant downdraft.
What do you think? E-mail me at Dandordan@aol.com