Sand Spring Advisors LLC
Tiresome Times
April 23, 2003
by, Barclay T. Leib
A long-term subscriber e-mailed in yesterday and asked "At what level will you change your mind and turn bullish this market?" Our answer was a simple one: Throughout the entirety of the past six months, we have always said that 972-974 remained a possible upside target to finish a C-wave corrective period. The problem is that the market could also fail anywhere short of that level, and on several occasions we have to date mistakingly anticipated it doing so. The market does not absolutely HAVE to get to 972-974, but it might. We have always had to allow for that possibility.
So in answer to our subscriber, we said: "The higher it goes toward 972-974, the more bearish we will get. ONLY significantly above that target would we really start to scratch our proverbial head and wonder if something bigger or different is currently transpiring in the market other than just another sucker-rally head fake in an ongoing bear market. In our humble opinion, we still lack a real final smash of fear and equity loathing.
On a more fundamental note, the best snippet of research that we have read in the past two weeks has come from Bridgewater Associates, and reads:
"Recently we have seen a flurry of optimism that the economic recovery is accelerating, triggered by good earnings reports. This is despite overall economic numbers remaining sluggish. Why the discrepancy? Which one (earnings or economic stats) is painting the real picture? Since economic growth and earnings growth are connected, it's easy to account for the differences. In a nutshell, earnings growth has picked up because margins have expanded (mostly due to costs being cut and temporary write-downs ending), not because sales have improved. As we tally them up, last quarter's sales of companies that have reported are down about 4% from the prior quarter and up 3.9% (i.e. about 1% real) from the past year, which is broadly in line with the sluggish GDP growth numbers. While expanding margins is a good thing, it is not indicative of improving economic conditions and shouldn't be extrapolated into the future via P/E expansion."Well said! Elsewhere in that same piece, Bridgewater talked about the 20-year build-up in advance spending caused by the constant lowering of interest rates rates:
"Investors thought they were getting a lot richer because their investment assets were going up in value, so they borrowed and spent a good portion of these prepayments of future income. Rather than recognizing that they would have lower investment returns in the future, they thought that the high investment returns were indicative of what they should expect in the future. Now they are coming to terms with the prospect of low investment returns, sluggish growth and high debt levels. [The] self-reinforcing process [of advance spending of future resources] is coming to an end because interest rates are approaching 0."Well said again!
Non-subscribers are invited to access our March 23rd article, "Dealing with Irrationality & The New Age of Aquarius: Malkiel Out; Sornette In," together with other past articles, by signing up for a quarterly Sandspring.com subscription below.
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