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A reader posted a video of strategist who laid out his argument for why he is bullish on the market (click here to see the video), and apparently made a good call on the market turning in March. I also saw the market turning in March, but was not prepared for the extent of the turn, which seems t have been unprecedented. My issues with the points in the video center around the fact that the strategist ran through all of the symptoms of the cause of the problem, but has not addressed the problems directly. The continued existence of the core problem of asset devaluation is my problem with believing this is a bull market. I can't say stocks won't go up in price, but actual value is not increasing. As a matter of fact, I still see it on the decline. Therein lies the problem and the danger which puts us at risk of a crash. The real estate situation (the impetus of the market drop) is arguably worse now than it was in March when the market allegedly bottomed.

The strategist puts emphasis on accounting rules measuring the bottom. As BoomBustBlogger Shaunsnoll said, "saying a dog has 5 legs doesn't make him a five legged dog!" Accounting rules aren't the same as actual profits and money!

Spreads and other metrics are improving because those improvements have been directly purchased by governments around the globe. At this point, if those purchases cease, spreads will blow out again because the economic drivers behind the spreads are still weak and the real assets and property drawn upon by so many derivative assets and levered products are still falling back to

equilibrium, Despite this large scale government purchase, the problems that created the perceived need for the purchase are still extant, and getting worse - not better. Real estate prices are still trending down, and the categories and geographies in which they are trending down are spreading widely and rapidly. Interest rates, both government and mortgage, are now inching upward to the high point at which QE has started, showing that hundreds of billions of dollars have been sucked into a black hole, to bring us right back to where we started from. The Fed will never win a battle with the global equity markets.

Higher rates, with all other things remaining equal, means lower property values. It is my opinion that values will continue to fall until they reach equilibrium, which is the level they would have been at had they appreciated the historical 2 to 3 percent a year and also in line with historical income and rental yields. Those levels are still significantly below where it is now. As long as financial institutions hold levered products tied to these real estate values, they will continue to lose money. They will continue to be sparse in lending. The securitization market will remain dead, and consumers and corporates will be reluctant to borrow, unless they are poor risks that shouldn't be lent to in the first place. Remember, this recession was sparked by a real estate implosion, not unemployment, not (at least initially) credit spreads, not interest rates, not accounting rules, not retail sales, etc. All of these metrics were humming along quite dandily until the real estate bubble popped. Well, it is still popping.

I have scanned over a thousand companies to go long on, and the strongest companies with the brightest prospects are not really participating in this rally. The weakest companies with the most diminished prospects are flying through the roof. That is not value and money pushing this market higher, it is momentum trades and quite possibly manipulation. This is not the stuff of sustained value creation. This is the same fake money of the dot.com bubble or the recently past 10% down, no income loan, "McMansion with two Hummers in the driveway" days! 

I just don't see it as sustainable until the prospects of real money are visible. I don't even have to see the money yet, but I will have to see the prospects of money, not changes in accounting rules, or proverbial green shoots growing in the back yards of foreclosed housing. I'll have no problem going long on strong companies, but as it stand, thus far only those who needed welfare or were on life support are truly benefitting from the rally. Crunch the numbers, and you will see that even under optimistic scenarios their earnings power and balance sheet do not justify the rise in share prices. 

Companies belonging to industries with many red attributes have logged triple digit gains in the last few months. Companies with green attributes haven't come close to registering comparable performance despite the fact that they have much brighter futures and are much stronger in the here and now!

 

Industry

Balance Sheet Quality

Revenue Drivers

Margin/Pricing Power

Macro Outlook

Regulatory Enviroment

Leverage

/Gearing

Commercial Banking

Poor

Reduced (securitization)

Reduced, less competitiom but still over-banked

Marginal

Significantly Tightening

Significantly Reduced

Investment Banking

Poor

Significantly Reduced (securitization)

Reduced, but competition has diminished in certain areas, ex. Fixed income

Marginal

Significantly Tightening

Significantly Reduced

Homebuilding

Poor

Significantly Reduced

Non-existent

Poor

Neutral to negative (mortgage lending)

Significantly Reduced

REITs/Real Estate

Poor

Reduced

Non-existent

Poor

Neutral

Significantly Reduced

Biotech

Moderate to Strong

Highly variable, but strong companies are very strong

Strong

Bright

Expect some belt tighteing to eliminate medical costs from new admin, but niche providers may benefit

Neutral

Financial Transaction/Processing  Services

Neutral to strong

Neutral to strong

Strong

Neutral

Neutral

Neutral

Education

Neutral to strong

Strong

Neutral to strong

Slightly negative to strong, depending on the niche

Very favorable

Neutral to favorable

Heavy Machinery/Industrial/Manufactring

Poor to moderate

Poor to moderate

Poor to moderate

Poor

 Neutral

 Neutral

Asset Management

Poor to moderate

Poor to moderate

Very poor

Poor to moderate

Poor to moderate

Poor to moderate

Retail

Poor to moderate

Poor

Very poor

Poor

Neutral

Mediocre