Michael Hlinka: Momentum of stock market rally is questionable
- May 12, 2009 9:22 AM |
- By Michael Hlinka
Money Talks is a business column from CBC radio.
By Michael Hlinka, CBC business columnist:
Last week, the Toronto Stock Exchange broke the 10,000 mark. Some people in my business assigned particular importance to this event. Others didn't, noting that other than 10,000 being a nice round number, there's no real meaning to it.
However, everyone did agree that the market's direction is telling us something … what the message is, however, is open to debate.
One interpretation I heard floated was that there may be light at the end of the economic tunnel. There was a surprisingly strong employment report out of Canada on Friday. There was actually job creation in April, while in the United States fewer people were thrown out of work than had been expected. People losing their jobs doesn't sound like good news, but it's the rate-of-change argument: Before there can be positive growth, the decline has to abate and there's a certain logic to that point of view.
But here's my reading of the recent action in the TSX: The market was badly oversold, and it should never have been below 10,000 in the first place.
How can I reach that conclusion? Actually, fairly easily. When people think about investing, they have two broad choices: They can either put their money into stocks or bonds. Since the world's Central Banks have been cutting interest rates aggressively, the return you make on bonds - particularly government bonds - has fallen off a cliff. And we know that stock markets have a manic-depressive quality to them - their highs are generally too high and their lows almost always tend to be too low.
What I'm saying is that 10,000 seems about right for the TSX, at least right now.
Where do the markets go from here? My guess is that it's sideways over the next few years … and here's why. The economy will eventually start to grow, slowly, as all the monetary and fiscal stimulus starts to kick in. But at the same time - and this is very important - inflation is going to rear its ugly head sooner than you might think.
I don't know if you heard the recent comments from Tim Horton's CEO, but he warned that price increases are around the corner. When I walked out my door this morning, I saw that a litre of gasoline was perilously close to the $1 mark. According to Statistics Canada, even shelter costs are going up. All these increases will contribute to inflationary pressures and weigh down the stock market.
Look, don't get me wrong. I'm as happy as the next guy that the Toronto Stock Exchange is hovering around 10,000 instead of 7,000. But I'm not particularly hopeful that it will go much higher, at least in the foreseeable future.
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Comments (10)
If it wasn't for near-zero interest rates, 'quantitative easing' and all the other form of government cash injections the TSX would be under 4000 by now.
The big question is once inflation rears its ugly head will governments be willing at that point to tighten monetary supply thus exposing what a sham this stock market and commodities 'rally' has actually been?
It is time to review your investments.
The TSX former peak was above 15000 last June 17, 2008. The TSX lowest point since then was 7591 this Mar. 6. That was a decline of 49.6% below the former peak. Last week, the TSX once again hit 10,000. That's 33.6% less than the former peak, but a huge improvement since March, a 31.7% increase over the low.
So the question becomes, is it time to buy or sell equities and mutual funds?
There's no good answer here. It depends on your own investment opinions and philosophy. We are all subject to the same news/blog/investment letter influences. When we read something that agrees with our fundamental opinions, we exclaim "Yes, I knew it" and take it to heart. When we read something that doesn't agree with our opinions, we think "I'm not sure that's right."
My opinion is this - the market will slide again, and slide to lower levels. I don't think that the North American economy has improved significantly since Mar. 6, certainly not by 31.7%. I don't think it was oversold. I don't know if this recession is the same as former recessions - no one historically saw governments throw so much money in so many directions. I do know that former recessions were always marked by a temporary recovery before the markets went further down, often much further down. The previous short term recoveries were fueled by hopeful persons who wanted to believe that the worst was over, that bottom had been achieved. I believe this has occurred again.
So I sold several stocks taking some profit and will consider selling others. I would rather take some money off the table and live with the chagrin of being too bearish, than to watch the second part of the slide arrive and kick myself for not believing my own opinions.
After deflation comes inflation.
But whatever, if gas prices go up that is good for our economy not bad! We are an oil based economy that relies heavily on oil exports.
When the dollar was at parity with the US dollar, oil price was at a peak. What was that, coincidence?
A strong dollar does not help our heavily subsidized manufacturing sectors, but it sure does increase our wealth/global buying power.
And why should our dollar be worth less than the currency of an essentially bankrupt country (USA)?
I like Hlinka's article. But I feel that the market is becoming immune to bad news and becomes far to inflated on better than expected bad news. I think developing a plan to investing in a market with rapid inflation will be the key to success.
I don't believe anything any expert says anymore. We're in the biggest economic collapse since the great depression and most economists didn't predict it until it was practically upon us. Now we're supposed to believe talking heads like this guy know what's going on? Somehow NOW they can predict the future but they couldn't a year ago? Economists are like weathermen, they're great at telling you what happened yesterday but they have no clue where things are a week from now.
The 30s depression saw more than a half dozen strong up and down swings before the market stabilized at 11% of it's original high. People bet on the recovery in the absence of strong evidence and they lost their life savings doing it. People are doing it again.
I'm not too upset, having nothing means I've little to lose; it's a levelling of the playing field for me. Still, we see:
Companies breaking even instead of profiting
States like CA, with sales taxes down 50%
Steady job loss in our greatest trade partner
Banks raising capital instead of lending
Stress tests based on circumstances worst case scenarios we've already passed... I could go on.
We've a long way to fall, and the stock market will not hold strong while everything else resets. The great depression ended when the system's flaws sufficiently corrected. Why should this be any different? Do we really expect the system to just start working again despite our knowledge that the flaws aren't corrected?
The only green shoots I see are being rolled up and smoked. People are on an artificial high, forgetting reality within their dreams. They'll come crashing down like an addict on withdrawl when they realize what was broken is... well... still broken.
So if the market isn't going higher, at 10,000 then it will have to head lower ! People are in it just to make a fast buck, so if it waxes and wanes for long enough, someone will come out with bad news to get things falling, so the short sellers can make their moves. That's just the way it works... How long could it go is anyone's guess but I think 8500 for the TSX isn't out of the question, but that's just my opinion as a stock amrket observer over the past decade or so.
Many have smuggly commemted on the so called lost decade when describing the events of the nineties and the Japanese markets.
Our markets achieved the 10,000 break through in late 1999. We are a decade later bouncing around those same levels.Our markets are not even reflecting inflation.Even the 15,000 high point is a very modest gain.
If the market can not protect the investor from inflation will the markets die?
My bet is that over time the markets must be hedge against inflation and before 2011 we will reach 20,000.
I guess I am an investing neanderthal.
In the past I have seen inflation lead to higher prices and higher profits in dollars (not necessarily profit margin %).
Higher profits usually leads to higher stock prices. Also rising interest rates beat the hell out of bond prices soooooo.
Why are we shying away from inflation like it will hurt stock prices???
Just asking, sometimes a bit of inflation is a good thing. Think about the damage Governor Coyne did, we all would have been better off with some more inflation rather than his interest rates and tight credit policies.
For those who don't remember him, look it up in your history books, around the end of the 50's and early 60's.
I agree with many of the comments on this page. My theory is banks were at fault for creating this financial crisis, and they were punished in the markets. TARP line of credit from the US gov't was used to save the big banks from collapsing the system. Now banks have almost maxed out this TARP line of credit, and issued stock recently at much higher and inflated prices. Hmm, makes you think, why did the financial sector lead the way to this recent market rally in an economy which is still declining in growth?? I too think that this was a necessary, but well organized plan with government's to help clear up the private sector's financial greed and mistakes that occurred in lending practices since 2001 by North American banks that caused the bursting of the housing bubble that led to a decrease in wealth and consumer spending habits that has affected GDP dramatically. I think that something that took almost 8 years to burst, will take more than just 5 months to correct itself. The Obama camp has a great marketing firm of some sort (in my opinion) and I commend them for that, as it sells its' false hopes to the public on a currently strong economy (as they have in the past couple of months), growth is growth, but rewarding firm's for meeting drastically reduced analyst profit (due to this recession) targets through cost cutting measures in the forms of laying off people (that is why unemployment will be rising for much more longer time which will affect spending and confidence), but noticing that majority of firms reported declining sales, housing sector over supplied with homes very little people are buying, and companies going bankrupt increasing, these are not all good signs.