Apr

5

Home builders. Companies typified by Toll Brothers are up about 50% this year and the S&P home builders index is up 50% vis a vis its July 2007 levels. It is reasonable to think that just the way these stocks led the general market down, from 700 circa July 30 2006 to 200 on Nov 2007, that they will lead on the upside.

Evility. One of the evilest things in the world for a short is to see the a market go up 4% or 5% cumulatively up four days in a row, and then finally give them that one pull back down just one point or 1/10 of 1% the way the S&P did this week. It sets up to make all direction of change systems completely useless the next few days.

Ignorance. One of the greatest mistakes a businessman can make is to assume he is smarter than the market. An art dealer close to insolvency believed that if a Jeff Koons could sell for $30 million then old masters like Rembrandt were vastly underpriced and he bought them up on the principle that he would prove the market wrong. He ran out of capital and his Las Vegas partners took over the inventory. Has happened in many other fields.

Fed Model. The differential between 10 year yields and the earnings price ratio of 4.5% has to be the highest in history and that would predict the greatest market rise of the last 20 years, in the next year. And that's what Abbey Cohen based her predictions on. And it's a shame that she stopped making those forecasts just when they were so valid.

Employment. There is much talk about how when the market reacts well to bad news, it is good for the market, e.g the unchanged market on the 75,000 loss of jobs. By the way, I find the unemployment rate much more meaningful because at least both the numerator and the denominator have the same faulty seasonal adjustments and guesstimates of new jobs created by new businesses not yet seen. However, there is also the beaten favorite syndrome which comes up much too often in these cases, where what was supposed to happen the last race happens the next time out.

Stefan Jovanovich adds:

Regarding the home builders: the market's ability to forecast the unknown continues to amaze. Somehow it knew a month ago that the Senate Bill written this week would extend the tax loss carrybacks from two to four years for the home builders. If the bill is approved, the cash from the refunds may save the better companies from balance sheet collapse. Since the builders' inventories are actually shrinking (see Calculated Risk's March newsletter), an optimist could believe that the industry is about to pull out of its dive before it augers into the ground.

The household employment survey had far better numbers than the headline statistics. If you stripped out the American Axle strike and the construction sector, the decline in private employment was negligible. The one meme that is not being forecast is a mild recession. Therefore, as George C. Scott aka General Patton once said, the Germans will make a winter attack.


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