[Bargain No More]Is it time to get real?

We went into the weekend mainly in cash but with a few speculative bearish bets (see Weekend Wrap-Up) even though the Wall Street Journal is screaming at us in today’s headline (huge type, above the fold): “World Regains Tast for Risk – Stocks, Currencies in Emerging Markets Soar; China’s Stimulus Spending Kicks In.” Gosh Uncle Rupert, that is good news for the masses. Why is it though, that the on-line readers are greeted with “Stocks are No Longera Steal – By Most Measures, Stocks No Longer Look Cheap?“

“The market is a little bit extended,” says stock-market strategist Subodh Kumar, of Subodh Kumar & Associates. “Where it goes from here is going to depend on how quickly things really improve as opposed to getting less bad.” Getting worse more slowly was our theme of the past two weeks. Now that we’ve pushed that party to the limit, it’s time to take a more realistic assessment of where we are. While earnings beat very low expectations, many companies did so by slashing costs and reducing inventories. This led to a draw in inventories which economists have been calling a positive but – what if the 2M people who lost their jobs in Q1 in order to reduce the costs don’t come running back to the stores to buy things in Q2? What if their families don’t? Now we’re talking 6M less consumers, 2% of the US population, that may not WANT the inventories you are planning to replenish.

Economic modeling is a tricky thing but the model on which the bank stress-tests was based in is rose-colored, to say the least. As I pointed out last week, many Financial stocks are already over-extended with forward earnings expectations priced in that anticipate a return to earnings they had in 2007 by next year. This is RIDICULOUS. First of all, the lending environment has changed so considerably that there’s virtually no chance at all we’ll get back to those levels for many, many years. Second of all, even in 2007 the financials never earned what they claimed to earn in 2007 – the earnings turned out to be bogus – based on fantasy valuations that led to TRILLIONS in losses and write-downs yet, somehow, people are giving GS et al money as if those highs are just around the corner and the losses never happened. Insane, irrational, stupefying…. it’s hard to…
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