Stock Market Rally:

[Moonbox]

I've been watching the TSX a lot recently and I'm dumbfounded by the gains we've seen since February. The index is trading at almost the same levels as Summer 2008 and amidst a severe recession no less. I'm wondering what on earth is encouraging this growth other than what I perceive to be huge manipulations of the system. It's been easy to make money investing since November, but are things about to come crapping back down?

Are the financial write-offs and reduced revenue genuinely perceived to be only short-term? Is there REAL indication that we'll be back to normal within a year or so?

Personally, I think a lot of savvy and less than scrupulous investors are banking off of unjustified optimism with the average investor.

[Bonam]

The massive collapse of the markets was based on exaggerated doom and gloom forecasts, panicked fear, and extreme pessimism. The reality is that most of the companies on those markets are still making money. I have investments in several large companies whose profits continued to rise throughout 2008 and now 2009; their stocks collapsed along with the rest of the economy even though their was no fundamental reason for them to do so.

Now that people have seen the depth of this recession, and seen which industries are hard hit and which are doing fine, some of that irrational fear is receding and people are valuing stocks by what they are actually worth. That means that all those companies who were doing just fine, whose stocks dropped in half in value cause of general fear, are now on the rise back to the levels they should be at.

[Riverwind]

I've been watching the TSX a lot recently and I'm dumbfounded by the gains we've seen since February. The index is trading at almost the same levels as Summer 2008 and amidst a severe recession no less.

I have wondered if central banks are too focused on price/wage inflation and too willing to ignore asset inflation. In this case, the assets are commodities like oil rising as speculators look for alternatives to the US dollar.

[geoffrey]

Be careful with the TSX... it's heavily weighted towards materials and energy, and both have been on a rally in recent months. At $80 oil and $1,000 gold, the TSX is very healthy.

Look at sub-indicies of the TSX and the picture isn't as sunny. Real-estate (REITs, etc.), retail and technology (though that's been doing better lately) are all still way down.

Our big 5 banks were always fine and as a result, they recovered quickly. I still remain concerned with CIBC and I would caution investment in that firm.

Stock prices also move inverse to interest rates... lower rates encourage individuals to pay MORE for an equity... the market hasn't fully priced in the interest rate impacts of inflation over the next 3-5 years. Notably, the 5 year best offer mortgage from the big 5 banks has increased 0.50% in the last week. This is the beginning of the market realising these rates are not priced in. Next will be the markets.

Higher rates increase the required return in absolute terms for the investor to invest in the company. If earnings are stable, to increase returns the price of the stock needs to decline.

If you believe that rates are on the rise signficantly, there are ways to play this into your portfolio. Unfortunately, there is no short bond ETFs in Canada. There is a few good ones in the US though, just be aware of your currency risks. TBT (Proshares Ultra-short 20+ ETF) is my favourite. Just be aware this is a leveraged fund and is highly volatile (high duration bonds leveraged 2x). Do your research and this investment may not be appropriate for your purposes.

[eyeball]

I have wondered if central banks are too focused on price/wage inflation and too willing to ignore asset inflation. In this case, the assets are commodities like oil rising as speculators look for alternatives to the US dollar.

The only wage inflation the central bank has concerned itself with has been at the lower end of the wage spectrum. To put a finer point on what the CB should be focusing on is the rate at which the income gap grows, if the gap becomes to great its pretty clear something is out of whack. The obvious lever is tax the shit out of the ridiculously rich.

As for asset inflation and the stock market rally perhaps pie in the sky still sells better than pie on the plate.

[Moonbox]

Be careful with the TSX... it's heavily weighted towards materials and energy, and both have been on a rally in recent months. At $80 oil and $1,000 gold, the TSX is very healthy.

Really dumb on my part to not thought of that. The DOW is still looking ugly compared to years ago.

[Pliny]

The cat is out of the bag now.

Bernie Madoffs little Ponzi scheme is about to be dwarfed by the biggest in global history. Who's been operating the biggest Ponzi scheme? The American government.

Obama's priorities are how the government is going to provide everything he has promised to the American people. He is concerned about the economy but the people that were running the Ponzi scheme under Clinton/Bush and Greenspan are the same people advising him today. Obama likes the advice because he likes government solutions to things. The problem is, of course, they aren't solutions. And his economic policies certainly aren't change we can believe in - it is the same old, same old - Bush may has well have stayed on for another term.

The market has been desperately trying to correct itself and of course the government has been attempting to save us from any correction. The government is interested in continuing to allow the same mismanagement of resources and mal-investment that has been occurring with policies of bailouts and stimulus packages, basically in order to save some jobs. The governments actions have, since Clinton, been an attempt to create economic stabilization. They have done nothing but create bubbles and Obama is staying on course. Will there be another bubble? Where? Where can another bubble be created? I think they have run out of options.

I just read the latest from Peter Schiff. If you want a vision of the future you should read it. I can post a link if anyone is interested. He has it mapped out just like he did on the latest real estate bubble and economic collapse when no one else saw it coming. Basically, no one saw it coming because of the "moral hazard" (important term) created by government guarantees and assurances. Remember Barney Franks in 2006? According to him everything was fine, no need for concern whatsoever.

Eyeball - your focus on an income gap is rather myopic. Government policies maintain an income gap, if anything. Market corrections are the only thing that will do anything close to resembling closing income gaps.

I have wondered if central banks are too focused on price/wage inflation and too willing to ignore asset inflation. In this case, the assets are commodities like oil rising as speculators look for alternatives to the US dollar.

Is this the next bubble?

Oil will definitely become more expensive as the dollar becomes less valued.

We aren't seeing inflation right now because prices are too high. We are seeing a drop in the price of some commodities, e.g. cars, and real estate because they are overpriced. We are not in a period of deflation. If inflation is defined as an increase in the money supply so deflation is a decrease in the money supply. There is definitely no decrease in the money supply and once government spending starts to filter into the economy we will start seeing some high inflation numbers with a devaluation of the dollar, and the way that Obama is planning to spend, a devaluation of the American dollar on the global market that makes it very undesirable to hold. Hyper inflation will be the order of the day.

I heard a Financial advisor say there wouldn't be the hyper inflation like that which occurred in the 20's when Germany went through it's currency devaluation because they just printed the money and kept on printing. They don't do that today. Well, that's true they don't just print money but they have created enough debt that there is some concern whether it can be paid back. This concern alone will devalue the dollar especially as the debt increases. The dollar used to be backed by the the gold standard and limited what government could create. If they printed too much they got inflation. Now if they create too much debt since it isn't backed by anything there is reason to be concerned about being paid back. The debt is only sustainable as long as there is a confidence in future production. That confidence is waning with the recent collapse in the market. Result hyper inflation. I suppose if you are into currency trading, foreign currencies look good and foreign investment might be a prudent course of action to look into.

Anyway - Obamanomics is a disaster. In the collapse of the market in '29 Hoover intervened in every possible way he could which proved to be a disaster. Roosevelt continued with further intervention and nothing really improved the entire course of his administration. Back then socialism was in vogue, so Roosevelt was given a free hand and Hitler and Stalin were held in esteem. At a time when Europe is losing it's liberal proclivities and moving to the right Obama is taking America to the left. Rather paradoxical but maybe we'll meet in the middle somewhere and reach a palatable synthesis. One where we have learned that Politicians are no replacement for Entrepreneurs and consumers in managing how a market evolves. Politicians are not good businessmen. If they were they would be in business.

[Moonbox]

At a time when Europe is losing it's liberal proclivities and moving to the right Obama is taking America to the left. Rather paradoxical but maybe we'll meet in the middle somewhere and reach a palatable synthesis. One where we have learned that Politicians are no replacement for Entrepreneurs and consumers in managing how a market evolves. Politicians are not good businessmen. If they were they would be in business.

I agree and it's too bad Bush paved the way for Obama. If Bush hadn't been such a disaster Obama probably wouldn't have had a chance with this crap.

[Pliny]

I agree and it's too bad Bush paved the way for Obama. If Bush hadn't been such a disaster Obama probably wouldn't have had a chance with this crap.

Nor if the American revolution had not occurred.

It isn't a matter of right and left, Obama or Bush. It is a matter of centralizing power which every administration has contributed to since Teddy Roosevelt. Some President's have slowed the progress of socialism and some have accelerated it. The creation of the Federal Reserve and the departure from the gold standard were important events and contributed greatly to concentrating power in the hands of the federal government.

Obama hasn't learned the of the failings of socialism but I have an idea he is about to do so.

[Tawasakm]

I can post a link if anyone is interested.

I am most certainly interested

[eyeball]

Eyeball - your focus on an income gap is rather myopic. Government policies maintain an income gap, if anything. Market corrections are the only thing that will do anything close to resembling closing income gaps.

My focus is also on the power that attends wealth - power and wealth are pretty much one and the same thing after all. The corrections that usually closes this particular gap are not usually very good for wealth or power. I wonder what the governments policy will be for that if and when it happens?

[Pliny]

I am most certainly interested

Here you go. Enjoy it!

Peter Schiff

[Pliny]

My focus is also on the power that attends wealth - power and wealth are pretty much one and the same thing after all. The corrections that usually closes this particular gap are not usually very good for wealth or power. I wonder what the governments policy will be for that if and when it happens?

They are not similar and complementary but force will override wealth and the only agents of force are government. All other force not delegated by government is criminal. Wealth alone is indefensible. It requires lawyers and accountants but that only works if government is overseen. As it is supposed to be in a democracy.

What corrections are you talking about? Government or market corrections? Government corrections never do close the gap. Market corrections will redistribute wealth all by themselves. Unsustainable businesses are not bailed out in a free market. It would have been too bad for all those union jobs but they painted themselves in a corner. most of them would find work in other companies taking up the slack but the CEOs would have trouble finding work with the reputation of managing a company into the ground - but that is only if there were a free market.

Edited June 22, 2009 by Pliny

[Tawasakm]

Here you go. Enjoy it!

Peter Schiff

Now that truely was very interesting. I wonder if I will see a major shift in world power in my life time. Thanks again.

[Pliny]

Now that truely was very interesting. I wonder if I will see a major shift in world power in my life time. Thanks again.

I don't know if there is going tobe a major shift in power or if America is just being brought in line with the rest of the socialist world.

I think the currency is under attack, or am I to think American economists and high financial potentates haven't noticed their policies will be grossly devaluing the American dollar.

I live in Canada and I find it rather annoying that our government is interested in keeping our dollar low with respect to the American dollar so they will buy our exports. They could easily keep our dollar low by keeping our printing presses going as fast as America is selling it's debt.

Is it a push for a common North American currency?

I find socialists in general to be economically illiterate. There are socialist economists of course and they like to use the ignorance and good will of their lessers for their own aggrandizement and power over the masses. Obama is a socialist and economically illiterate - something that does not bode well in the leader of the most capitalist and affluent nation in the world. I must say that Bush was economically challenged as well, in my opinion, and although he attempted to cut spending and taxes he couldn't get his administration to curtail themselves. He especially had trouble in his last two years when the Democrats took control of the house.

Anyway, it is an interesting scenario. We may be just witnessing a centralization of global power for the "collective" good of the planet. Upsetting theocracies would of course be a part of that. Are the powers that be killing two birds with one stone by bankrupting the world's policeman in it's wars with Iraq and Afghanistan and shaking the theocratic stranglehold of Islam in energy rich mid-eastern nations.

We should have very mixed feelings about this. On the one hand, Islam which has retained the power to use force and create theocratic states and has stifled development and social and humanitarian progress in certain areas of the world will be modernized but freedoms and liberties of the individual in other areas, North America in particular, will be lost.

I may be way of base on this but that is the opinion I have formulated. There are things that are resistive to the centralization of global power. One would be theocracy and another nationalism and individualism. I see these things being undermined in general. Although I don't agree with theocracies because they would be restrictive of liberty and freedom I can't agree with stifling individualism to become one with the world being a cog in the wheel of a big co-operative for the good of all - I think that would be tyrannical and as Mark Steyn says, "Tyranny is whimsical."

Edited June 22, 2009 by Pliny

[August1991]

Funny.

G&M ROB 22 June 2009:

The return of optimism

It wasn't long ago that executives saw only clouds on the horizon. What a difference four months can make. A relatively sunny view prevails this quarter...

Reuters 22 June 2009:

* TSX sinks 3.23 percent to 9,955.43

* World Bank forecast cut hurts commodity prices

* Manulife shares tumble 13.5 percent (Adds details, quote)

By Jennifer Kwan

TORONTO, June 22 (Reuters) - Toronto's resource-heavy main stock index fell sharply on Monday morning as commodity prices dropped after the World Bank cut its 2009 growth forecasts for most economies, dimming hopes for economic recovery.

Of course I have Manulife and while I am largely out of the market, I had edged back in a little over the past few weeks. I just knew it: I'm a cooler.