Young and Invested

(Part 1 of 2)

The market is said to have its own personality. It teaches investors lessons when they get arrogant and provides them with hope when things seem like they couldn’t get worse. This personality is affectionately called Mr. Market.

Mr. Market’s moods are currently being affected by a very interesting interplay of dynamics brought to fore by the various governments’ interventionist policies attempting to shore up the poor economy. Which dynamics will eventually lead the market forward is anyone’s guess, but I attempt to present here the major factors at play, without putting forward too much analysis and leaving the final assessment to the reader

In this first edition, I cover the top 5 reasons which are held up by market participants as justifications for being long and bullish of the market.

Top 5 reasons to be BULLISH

“I’ve still got my house and my company is now hiring!”

Employment, sentiment and home prices are some of the most important indicators of economic health these days. Many of these “economic fundamentals” seem to have turned their respective corners. Employment, seen as the most important (but lagging) indicator, peaked in March with weekly jobless claims touching roughly 670,000 and the most recent numbers hover around 550,000. Consumer sentiment, a direct indicator of the optimism/pessimism that consumers have about conditions, also bottomed in Feb-March at around 25, while the latest reading came in at 70.2 (above the all important 50 mark). Even the much maligned housing market seems to improving, with the Case-Shiller home price index improving for the first time in months to 132.64 in Q2, 09 (while still being down 14.9% year-on-year).

“Just look at those Asians”

The closest thing to a strong recovery has been visible clearly only in the Asian economies. In Q2, 09, India’s GDP expanded 6.1% year-on-year, while China’s expanded 7.9%. Amongst the Asian tigers, Hong Kong’s GDP grew at an annualized rate of 13.9% in Q2 from the previous quarter; South Korea grew 9.7% by the same metrics; And Singapore grew … wait for it … a whopping 20.7% annualized. As a point of reference, Singapore’s GDP was down 14.6% in Q1 sequentially and annualized, Hong Kong was down 16.1%. Talk about a V-shaped recovery! The regional stock markets in Shanghai, Mumbai, Hong Kong and Singapore have followed a similar trajectory. If Asia is where all the potential for future demand is, then this is a pretty good sign.

“What goes down…”

… Must come up; But hardly anyone was astute enough to be buying into the market when the March 9^th lows were made. As a result, all those people missed the early part of a huge rally. Even after the market had rallied 30%, investors were confused about the solidity of the trend and debates raged about “bear market rallies”. Since then, most investors have already bought into the market at some point or are waiting the next dip to buy in. Due to this, the market has seen every marginal correction being bought into by money on the sidelines jumping in, causing an upsurge as is obvious in the chart below. This was very obvious in July, just prior to the Q2 results. This mentality has lead to the “higher highs and higher lows” observed in all the major indices since March, creating the strong uptrend. The argument holds that the un-invested capital on the sidelines will continue propping up the market on dips.

“Q2 blew away expectations”

73% of companies that reported Q2 results beat analyst expectations ahead of their announcements. Results were not as bad as the investors expected them to be. But does that say more about the results or the expectations? It’s an open question, but Mr. Market liked what it saw, as companies were able to beat targets on their bottom lines. The initial March rally was sparked by positive Q1 results while the subsequent Q2 results in July helped bring the major indices up another 17%.

“I’m still buying Japanese”

Global trade is seen as the life blood of the modern global economy and that life blood was drained in the last months of 2008 as the financial world came crashing down. That is why many of the export-oriented Asian economies had such a hard landing. However, those numbers are now looking up. In July, US exports were up 25% annually after reaching a low in April, while the US imports (driving Asian exports) were also up 29%. Another major indicator of health of global trade is the Baltic Dry Index (BDI) which tracks international shipping prices for dry bulk cargoes, such as raw materials. The BDI is one of the purest leading economic indicators because it provides indications of the demand to move materials of production and also because the BDI does involve any speculative players. While off its recent highs, the BDI has also risen to 2,431 from its December lows in the 600 range.

Disclosure: Long the market

Last 3 posts by Shishir Nigam

• When Correlations Collide - March 7th, 2010
• Is the United States an “Emerging Market”? - February 28th, 2010
• It’s Time To Accept The C$ At Parity - February 21st, 2010