The Gap Open

Whew!  Tough travel week, and I have tons of catching up to do. As soon as I sift thru all this email, I have a few posts nearly finished in the queue.

As to market, let’s see if today is the start of the long awaited / hoped for Summer rally. The prior gap opens haven’t held; perhaps this one might.

More later . . .

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  1. Blissex commented on Aug 14

    «Whew! Tough travel week,»

    Ohi ohi… If you have been air-travelling, especially internationally, in the past week, lots of sympathy from your readers!

  2. Lorenzo commented on Aug 14

    Speaking of Gaps, I notice that the gap up on 7/24 in $comp has not been filled. hmmmm

  3. ss commented on Aug 14

    Now on the table for the bears to consider is pension reform, which will generate automatic defined contribution plan enrollment, could bring more money into equities, as increased money flows into 401(k) accounts. Although this is not unlikely to affect things overnight, overall this should be positive for equities over time.

    Another floor for equities, along side of low PE’s, huge cash, massive LBO/M&A funds, etc.

  4. Andy commented on Aug 14

    ss: low PE? What low PE?? 8 is a low broad market PE. We at 8 yet? Or are we celebrating being at 17 (pulling a number out of the air) times current year earnings?

  5. M.Z. Forrest commented on Aug 14

    Considering we have a negative savings rate, any decrease in wages would reduce consumption. This would decrease corporate earnings, and that would reduce stock prices. The increase in contributions would add additional monies to the market, but it won’t significantly cause stock price increases due to the aforementioned.

    Ironically, the same Republicans who think it is a great idea to remove deferred compensation from companies also believe it is a great idea to increase deferred compensation amongst the employees themselves. The only difference between pensions and dbp’s is that in the former case the employer is legally liable for the funds they invest. In the latter case, employees are turning over their hard won compensation to a bunch of folks who at worst will have to say, “Sorry,” if they screw up, and the sorry is just a courtesy.

  6. Bob A commented on Aug 14

    And on the ironic track… the same Republicans who preach trickle down economics want to keep down lowest wage earners who make only $5.50/hour and spend every cent they make. Seems a little curmudeonly increase in the minimum should provide more of a boost to the economy than the miserly $100 tax rebate they gave to the masses.

  7. ss commented on Aug 14

    Andy…pe’s are BELOW the average since 1965…period.

    MZ..predictable partisan comment…not relevant to my point in the post….(another souce of demand for equities)… “supply” steadily drops.

    Barry…how about a study of supply and demand in the equity market? Costant buy backs, LBO’s and M&A trumping new stock supply?

  8. Craig H commented on Aug 14

    Want low P/E stocks? Buy the homies. Then watch the P/E’s go even lower until they just vanish like Keyser Soze.

  9. RW commented on Aug 14

    I’m guessing this gap up may hold for a little summer rally but am not putting any heavy bets on it as I don’t think it will last much more than a week if that. The Fed seems to be goosing this with additional liquidity but I just don’t see any guts to this market, no signs of real sponsorship, and I’ve become such a terrible cynic that if someone were to tell me the only reason for the goosing was to try and stave off a crash until the November elections it wouldn’t elicit more than a shrug.

    M.Z. Forest, the change in pensions seems consistent with the times, no reason to expect loyalty any more so might as well make the plans portable but at the very least there ought to be an economics and investment course required in high school to give people a fighting chance to hold on to what they’ve earned. Otherwise it’s the same old Republican same old: Privatize the profits and make the liabilities public.

    But what’s distracting me even more now is this further evidence the Republicans are actually soft on terror:

    “As the British terror plot was unfolding, the Bush administration quietly tried to take away $6 million that was supposed to be spent this year developing new explosives detection technology.”

    “…U.S. and British authorities had a significant disagreement over when to move in on the suspects in the alleged plot to bring down trans-Atlantic airliners bound for the United States. …In contrast to previous reports, the official suggested an attack was not imminent, saying the suspects had not yet purchased any airline tickets. In fact, some did not even have passports.”

    Actually I don’t so much believe the Republicans are soft on terror as I am coming to believe they have found it too useful a tool in expanding and maintaining power to be in any hurry to systematically deal with it. In this particular case the rushed timing of the UK bust suggests they wished to put a different spin on the defeat of their good friend in Connecticut while tossing up a trial balloon for a new PR campaign. What was Rove’s latest ad hominem now, “Defeatocrat?” Man these guys are real geniuses.

    Now I’m so depressed I think I’ll just go ahead and sell some more into this little rally we’ve got going here, then fasten my bourbon IV and pack it in. Wake me up in November.

  10. Barry Ritholtz commented on Aug 14


    We have had 14 quarters of huge M&A, substantial Dividend Increases, enormous Stock buybacks, plus a dozen Qs of double-digit year-over-year earnings growth.

    Yet, markets have made little progress.

    That implies another factor is at work — in my opinion, its the ongoing P/E compression.

  11. ss commented on Aug 14

    Yes PE’s have compressed…as the Fed inched us closer to recession, raising rates for 18 months…and energy prices put salt into that wound. Let’s see what it looks like without that rate hike headwind, eh?

    When all this cash comes off the sidelines, Eco 101 (supply and demand) will clearly drive equities higher, imho.

  12. Barry Ritholtz commented on Aug 14

    There were trillions on the sidelines throughout the 1990s — and it never came off the sidelines !

    A better measure of market fuel would be margin increases . . .

  13. ss commented on Aug 14

    I do not follow your logic at all in that statement.

    You’re suggesting the 1990’s bubble was from thin air…not cash spent? hmmmm.

  14. babycondor commented on Aug 14

    If there were trillions on the sidelines throughout the ’90s and it never came off the sidelines during the most phenomenal bull market of all time, wouldn’t that be “dumb money”?

  15. joe commented on Aug 14

    Regarding cash on the sidelines, if I’m reading slide 6 correctly, it appears that cash and short term securities as % of assets in equity mutual funds is at or near a 22 year low.

    I’m also curious if anyone has seen data overlaying peaks in M&A activity with future market performance. I’m skeptical that company managements are any different than investors and thus would guess that there tends to be a frenzy in M&A at or around market tops. Barry, ever seen a chart that looks at M&A volumes vs say next 12-24 month market returns?

  16. ss commented on Aug 14

    Mutual fund cash has been falling for a while….but that’s not what I’m referreing to. Cash and short term (liquid) levels (outside funds) are very high historically…and charts I’ve seen put that at a high percentage of the total value of the Wilshire 5000.

    I’ll try to find a recent look.

  17. BDG123 commented on Aug 14

    Well, for God’s sake, give him some credit. He finally got off of this “Don Hays is bullish” and “We are repeating 1994-1995” jibberish. Now at least he did some thinking and came back with a new one: PE’s are cheap.

    That is simply not true at all. Plus dividend yields are near a channel of one hundred year lows. Let me give you a little secret. It’s easy to calculate and it paints a pretty little picture even you can understand. ***See, I didn’t even call you any names like retard, dipshit, idgit, dummkopf, dolt, clueless or any other hateful term as you accused me of but I never did. I said Don Hays won dummkopf of the year award for investing in tech and telling people to stay clear of energy this cycle. I’m just being patronizing like you are with everyone else on this board. Does that feel better? Btw, I’m just being funny so laugh instead of getting defensive. Of course, I could ignore you but what fun would that be? I’m not big enough or mature enough to rise above your Napoleonic postings.***

    Anyway, plot an annual ROC on the PE multiple of the S&P. You’ll know when to go long and do it hard and you’ll know when to be cautious. We spent most of the 1970s with a single digit multiple. Now, you could just do that in your head but pictures might resonate better for obvious reasons.

    With earnings the most cyclical in fifty years, that E in PE is NOT sustainable and not sustainable to the point that cyclical companies are boosting earnings more than any time in my life time. That is, unless we’ve broken the business cycle. Since global economies are predisposed to boom/bust cycles because of how they are managed, that is a very, very, very low probability. And, isn’t that what it’s all about? Probabilities? Putting yourself in the best position given the probabilities?

    Even if you thought 1994-1995 was a reasonable likelihood, the probabilities are not with you. So, until you receive more clarity, why do you buy stocks on the way down? DOH!

  18. JDamon commented on Aug 14

    BD, would yo conceed we have a wee bit more demand for equities here in 2006 vs what the demand was in equities in pre-1994? Wouldn’t this inflate P/E ratios some? Maybe 4 -5 point? S&P is at around 14 – 15 now. 5 years ago it was double that number. So, are you saying a solid P/E is around 8? So, we are in for a 50% fall in the S&P (to around 600 or so)?

    Do you really think politicians/Fed, etc. will let the market fall that far? If you think the Tech wreck cleaned peoples clocks, you ain’t seen nothing till we lose 50% of the S&P. Pension funds, 401(k)’s, etc. would all be toast. Basically America would be in total financial ruin. Is that really the obvious way this ends or is that a remote possibility? I go with Remote.

  19. BDG123 commented on Aug 14

    You are surely smart enough to figure out what I am saying. I believe 880 on the S&P is likely a done deal we just have to see. Beyond that, well, markets historically swing from very, very overbought to very oversold. The markets never got cheap in 2002-2003 so the purge hasn’t been accomplished. Markets overreact. Period. Too far on the upside. Too far on the downside. They don’t just tend to correct to statistical means.

    And, if you think the Fed or the US government has the tools to stop us from a correction or severe recession, all you need to do is look back five years to an 85% decline in the Naz. Or seventeen years ago to the last consumer recession where we had the S&L debacle and housing mess. If they couldn’t do it five years ago, why will they be able to do it now?

    Retirement toast? And? Look at the bright side. You will be more healthy than our parents and grandparents so you’ll be able to work till you are 90. Just at the time that pension funds are turning over more monies to unregulated hedge funds and our buddies over in the banking industry had eighty year old regulations controlling some of their ability to do stupid things overturned. ie, Glass Steagall.

    Let’s just wait and see as opposed to predicting. But, for those who think we are going to drop into October then start anew, you need some stronger ganja. If we attempt to do that, the liquidity will just head right back into oil and commodities and reset the inflationary cycle before it has had a chance to cleanse.

    That said, America would far from be in financial ruin. But, you simply cannot have twenty years of imbalances created by the same people making the same malinvestments and expect the Fed cutting interest rates is going to save us. The Fed is doing their best but they aren’t going to pull a rabbit out of their ass. Just remember, when you are so sick you think you are going to hurl, you’d better start backing up the truck because you are going to likely get the discount of the millenium.

  20. JDamon commented on Aug 14

    What is the timing for the S&P to be at 880? Also, you didn’t address my question about higher demand for equities leading to slightly higher P/E ratios than in the past. What are you baking in as a P/E ratio for the S&P to fall to 880?

    How would you play the impending disaster? Gold? CD’s?, Oil ETF’s? Overseas a safe place to ride out the storm and would you avoid small caps like the plague?

  21. Mark commented on Aug 14

    Did I miss the elusive Summer Rally? Was that it between 9:30am this morning and noon?

  22. tjofpa commented on Aug 14

    Looks like we’re gettin a BAD PPI # tomorrow.

  23. JDamon commented on Aug 14

    Bad meaning high I would assume?

    I still can’t tell if the market wants high growth, high inflation or wants low growth, low inflation? Obviously it doesn’t want low growth, high inflation, but it seems to be pricing this scenario in.

    Is stagflation a realistic possible outcome?

  24. Bynocerus commented on Aug 14

    Pray for a retests of the lows if you’re a bull. This bullshit has gotta stop before any kind of meaningful rally can take place.

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