Wednesday, August 04, 2010

Low volume, slow rise continues

U.S. equities continued their rise today. Volumes have been low and data points have been mixed. Not to question good news, but why are stocks showing such resilience after the April to early July slide. Here are some possible reasons:
---Congress is not in session; less despair, fewer loose lips.
---The Gulf leak is plugged, surface oil is dispersing and no longer makes for good photo ops. The damage is likely still considerable and the extent of it is unknown, but the daily reminder of our helplessness is gone. It's almost as if God said "fire Tony Hayward and I'll let it stop".
---European financial news has calmed down, the Euro has come out of its dive, and bank lending spreads have come back in. Since most of Europe is now on vacation we don't know what this means.
---Based on the aggregate of second quarter earnings reports, U.S. productivity rates continue to improve. Since this is the result of getting by with hiring as few people as possible and running inventories at the leanest levels possible due to fear imbedded by the financial crisis of '08/'09, we can't say whether these productivity gains are sustainable. They don't necessarily translate into a growing economy but they do make individual stocks look good on a stand alone basis as long as an investor has his macro blinders on.
---With no yield of consequence to be found in bond land, and perhaps heightened risk as well, and with liquid, safe securities paying nothing, stocks with dividends and with growth potential look attractive.
---One could guess that some hedge funds and mutual fund complexes are buying into and building up favored stocks slowly and discreetly in preparation for the retail investor finally jumping back into stocks this fall out of both boredom and desperation.

With the volatility that we have seen in recent weeks, it is a reasonable expectation there are more zigs down and zags up in our near term future. I'm rooting for the zags.


Anonymous Kevin said...

Hey John,
The zags are coming. This market will go up. Money will chase yield and opportunity. Even PIMCO is divesifying into equities. Politics has so clouded the dialogue about equity valuations that no one risk saying that stocks are cheap. Just think, in recent days stock have fought off big dips and bad data. That says something and that is that there are investors buying.

Cheers, Kevin

12:38 PM  

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