The Melt-Up Continues: Pros are buying the rally

Sunday, August 23rd, 2009

Barry Ritholtz, CEO of FusionIQ, reminds us that in 1973-74, the market fell 44%, then rallied 78%. He says he is not calling the forecast this time that tightly, but says that before this is all over, the market which is up over 50% currently, may see 60, 70, or 80% before topping out.

The melt-up in the market has caused professional investors a great deal of performance angst over whether or not to re-enter the market more willfully, given the underlying concerns about the economy’s recovery and sustainability of earnings forecasts. Ritholtz says that fund managers are buying the rally, and this is reason to believe the market melt-up can extend higher.

“After starting the week with a big knock, the stock market has resumed its rallying ways, with the Dow closing above 9300 on Thursday while the S&P again surpassed the 1000 level.

“Professional money managers are buying into the rally in a big way, according to a Merrill Lynch Survey of Fund Managers:

• 75% believe the world economy will improve in the next 12 months. That’s the highest level in nearly six years and up from 63% in July.
• Average cash balances have fallen to 3.5%, the lowest since July 2007.
• 34% of managers surveyed are now overweight stocks, the highest since Oct. 2007.
• Risk appetite is also increasing, to the highest levels in two years.

“The contrarian in you probably thinks that signals a market top. But Barry Ritholtz, CEO of FusionIQ and author of Bailout Nation, isn’t ready to call an end to the move. ‘We’ve worked off lots of that oversold condition,’ he admits, but that doesn’t mean the rally can’t continue for some time.

“Ritholtz, who told Tech Ticker in early March we were in for a monster rally, has 1,050-1,080 as an upside target for the S&P 500, with a slight chance it can go as high as 1,200. If the rally does extend to those outer limits, Ritholtz sees the Dow topping out ’somewhere around 12,000′.

“Regardless of your position, long or short, Ritholtz’s key message is to remain cautious. ‘This is a trading rally not a multi-year rally,’ he says. Eventually something’s got to give: ‘We’ve never had six-month period before where we’ve lost two million jobs and the market’s gained 50%,’ he says. ‘That’s simply unprecedented.’”

Source: Yahoo Finance, Tech Ticker, August 21, 2009.

(h/t: Investment Postcards From Cape Town)

Tags: 12 Months, Amp, Anxiety, August 21, Bailout, Barry Ritholtz, Cash Balances, Dow, Earnings Forecasts, Fund Managers, Market Rally, Merrill Lynch, Monster Rally, Outer Limits, Performance Anxiety, Professional Investors, Professional Money Managers, Risk Appetite, Signals, Six Years, Stock Market, Sustainability, Target, Two Million, Vector, World Economy, Yahoo Finance
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Setting the Bull Trap

Wednesday, January 7th, 2009

This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

Long time students of the market will tell you that “the crowd is usually wrong at the extremes”. Judging by what I see, hear and read in the media, the current consensus is that stocks bottomed on November 20th-21st, an economic recovery will begin in the second half of 2009, corporate bonds are a buy, stocks are cheap and the stock market is now discounting all the bad news. This is surely a sign that the worst is likely behind us.

Even though I was looking for a low in the S&P 500 around 750 (it bottomed around 740 on November 21st only to close at 800 the same day), I continue to believe that was a low point, but not THE low point for this bear market. We were large buyers of Mortgage Backed Securities during the Wall Street de-leveraging and have been rewarded with handsome gains, although we began to take some profits on Friday where appropriate.

Corporate bond spreads have tightened during a slow holiday season as well as spreads in CMBS (Commercial Mortgage Backed Securities). Corporate spreads may or may not tighten further as I believe there will be a wave of issuance at every level - Government, Emerging Markets, Corporations, Municipalities, etc. Treasury yields have crashed as the Fed has taken the Federal Funds Target Rate to a range of 0-0.25%.

Stocks have rallied even more to S&P 931 and could possibly make a run at 1,000-1,100 if “performance anxiety” sets in among those portfolio managers that are afraid to miss the rally. We are not afraid of missing the rally because we are absolute return investors and have the luxury of having missed the big down move from nearly 1,600. The managers that are subject to performance anxiety are the same group that managed to a market benchmark only to get tattooed during the downturn.

The Fed is punishing savers and the Prudent Man by manipulating interest rates to zero. You can sit in cash and earn zero or you can be forced out on the risk spectrum just so you can keep up with inflation or your benchmark. Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The funneling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed. But this is sleight of hand, an illusion.

The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card - and with our money no less. They are also setting up the ULTIMATE BULL TRAP - a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.

Click here for Bennet’s full report.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

Bennet graduated from Rutgers University in 1982 with a degree in Economics.

Tags: Absolute Return, Bear Market, Buy Stocks, Commercial Mortgage Backed Securities, Corporate Bond Spreads, Corporate Bonds, Downturn, Economic Recovery, Emerging Markets, Holiday Season, Issuance, Level Government, Mortgage Backed Securities, Performance Anxiety, Portfolio Managers, Prudent Man, Stock Market, Target Rate, Time Students, Treasury Yields
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