Various Bears See a Hibernation Period Ahead

Good Evening: After digesting the negative implications of last Friday’s jobs report — the one detailing the loss of more than half a million jobs in November and almost half again this figure after factoring in the revisions — investors decided to look on the bright side on Friday. Hopes for more urgency on the policy front fueled a dramatic reversal on Friday, and those hopes were confirmed over the weekend when President-elect Obama announced a large stimulus package would be the first priority once he takes office. And, following huge rallies overseas, U.S. equities staged another broad advance today. The action of late has prompted more than one thoughtful bear to consider hibernating for a while, thus giving me some comfort about my own recent decision to be short term friendly and long term skeptical about U.S. stock prices.

With Friday’s job loss statistics still fresh on folks’ minds, and with no economic news out today, President-elect Obama picked an opportune moment this weekend to announce his stimulus plan (see below). The details still need some fleshing out, but his plan seems to rely more on infrastructure spending and job creation than did the last round of stimulus. Not only was Mr. Obama’s message well received by stock investors in the U.S. and abroad, it also seemed to spark some interest in commodities. Stories of oil tankers being hired out by Shell and others to store crude oil at sea for later delivery at higher prices on the futures curve, as well as whispers from OPEC about more reductions in output, led to buying in the entire crude complex and its related equities. Mr. Obama’s plan also put wind in the sails of the infrastructure stocks, and the major averages opened some 2% to 3% higher in response this morning.

Some doubts surfaced along the way during today’s session, and the indexes waxed and waned around their opening levels during the middle of the day. With two hours left to go, though, the lows were in and the rally resumed. After soaring to gains of nearly 5%, the major averages backed off 2% before closing with a late bid. The indexes logged gains of between 3.5% (Dow) and 4.5% (Transports and Russell 2000). The bout of profit taking that struck the Treasury market on Friday continued again today, although with less vigor. Yields rose between 1 and 5 basis points in jagged fashion across the coupon curve. As for the dollar, its recent strength never did bring it back to the heights seen when stocks bottomed on November 21, and today it fell broadly against its competitors. The weakness in the greenback, as well as the aforementioned firmness in crude oil, finally brought some figurative rain to the previously parched commodity sector. Only natural gas sat out the party as buyers hoisted the CRB index to a gain of nearly 5%.

After each push to new lows in November, I became less bearish toward U.S. equities, finally proclaiming a neutral stance after the impressive reversal on November 21. I actually became short term friendly on December 1, the day of last huge downdraft in the major averages. And while I maintain this cautious optimism for now, I don’t really expect an epic move higher. Just a nice, tradable rally. Such a move will help alleviate the bulge in negative sentiment built up this fall (see Great Depression, etc. article below), help work off a very oversold technical condition in the markets, and allow investors to judiciously prune underperforming stocks from their portfolios. I think the single best strategy to employ during the holidays and into January might well be buy/writes. I don’t recommend this strategy for all stocks (nor for all investors!), but it may work well for stocks that one would not mind either owning or getting called away after a nice gain. It may be a bumpy ride along the way, too, since there will be bankruptcy announcements (a la Zeal’s Tribune company), earnings pre-announcements (Fed Ex and TX this afternoon), and more downbeat economic news. In general, however, stocks should benefit from a desire among investors (many of whom have built up sizeable cash positions) to see a new administration succeed.

I could be wrong about this call, and Mr. Market could slip on a banana peel at any time, but at least I’m in pretty good company. Lazlo Birinyi, who’s been bearish — particularly with regard to financial stocks — for over a year, now spies a bottom. Barry Ritholtz, who’s been bearish for years and consistently warned about the dangers of the housing bubble, told Barron’s readers over the weekend that he is also looking for a nice bounce. Like me, Barry cautions that we saw “a bottom” in November, not necessarily “the bottom”, and his interview was the most frequently read article on Barrons.com today. And finally, Bill Fleckenstein has decided to close his short fund. Bill’s decision is more of a lifestyle call than a market call (he, too, sees trouble ahead next year once this rally fades), but he will indeed soon be hanging up his short-only spikes. More than anyone I know, Bill called the credit crisis of 2008 in detail long before most investors sensed even a whiff of danger. He won’t be denying the world his foresight, either, since he will be continuing his excellent Daily Rap (www.fleckensteincapital.com) while he prepares to set up a vehicle (with Fred Hickey) to take advantage of the bargains he sees being served up next year as the economy worsens. Well done and good luck, Bill. Unfortunately, I think you and Barry will both be proven right about the dangers that lie ahead once this rally runs its course.

— Jack McHugh

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Stocks Rally Worldwide, Dow Hits One-Month High on Obama Plan
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4ieRPJ34pW8&

Obama to Spur Economy With Infrastructure Investment
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ao_8cZPMC0cE

The Great Depression, Japan, China and Quantitative Easing
&http://research1.ml.com/C/?q=NuMJbVD1f2jltljEpgrEYA%3D%3D&r=patedi

Birinyi Says Investors Should Lose ‘Bunker Mentality’
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNfia.F49Ixs&

A Leading Bear Turns Bullish, Sort of
http://online.barrons.com/article/SB122852213723784245.html

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