Responding to My Bearish Enemies with the Bullish Take

Monday, August 02, 2010

Gordon Ramsay yellingLast week, I was lucky enough to have an article of mine published on Yahoo! Finance. I wrote "Put Your Rally Caps Back On, Long-Term Bull Advance Resumes" to offer my five reasons for being bullish right now on the US equity market. The title of my article was changed to "Put Your Rally Caps Back On: 5 Reasons the Long-Term Bull Will Resume" which I think was to the detriment of what I was trying to argue but what can you do. But, after reading the comments I feel like I've just been bitched out by Gordon Ramsey!

Interestingly, my article was met with a backlash as about 25 people vehemently disagreed with my conclusion. While many just called me an idiot some offered their arguments. Rather than jump into a fray on the site, I thought I'd take some of the comments and respond to them in my own forum so I have control over the content and it doesn't just degrade into name-calling. I have clearly underestimated the level of bearishness as people legitimately think I'm insane for having hope and believing in this recovery, albeit a slow one. Anyways, here's a few comments, there's plenty more but I thought these were worth responding to in order to spell out my line of thinking.

DonK: "This guy is dreaming! The earnings reports from all companies are fake. Earnings were achieved by layoffs, salary reductions and other cuts in expenses. A true recovery will happen when employment returns."

Fake is a very weird way of describing the beginnings of a cyclical recovery in private sector earnings. All recoveries must begin with cost-cutting and productivity enhancements. Yes, hiring must pick up in the long-term but any investor should realize that they will have missed a huge chunk of gains if they wait to invest until then. Speculators are never paid by investing when the outcome is obvious, they must believe when others do not and ultimately be right.

Roscoe: "This guy is either drinking way too much of the Wall St. koolaid or trying to conjure up sell points for a rally. Either way, file this one in 'C' for cheerleading section along with the daily diatribes from Wall St cheerleader Larry Kudlow on CNBC."

Cheerleading? I was just short as I described in the article. And what's wrong with being a cheerleader? I always liked those pom-poms though you probably wouldn't want to see me in a skirt! Alligator alligator, eat 'em up!

Just Me: "WHERE IS THE JOB. This article is @#$%!!! Give us JOBS and we might consider reading an article like this."

I wish I could give you a job, seriously. Being unemployed is an absolutely awful situation but investors must realize that jobs are a lagging indicator. The equity market can rally even with a slow economy because corporations can grow earnings rapidly despite slow overall growth in the short-term. Businesses are slow to fire and even slower to hire employees. But that dynamic flexibility is what makes the capitalist system the most adaptive and typically quickest to recover from slumps.

Long Island Jack: "Wall St. has become a joke. Over reaction to both good and bad news is driving the market. There will be plenty of both for months to come. There is nothing in sight to drive the US economy back to where it once was. Until there is we can't have a true bull market, just a lot of runs, up and down, with traders trying desparately to time both sides."

It is foolish to ignore the incredible recovery in corporate revenues and profits. High volatility is a result of uncertainty and these have been uncertain times but that is precisely why investors have the potential to make money. When others panic and you can keep your eyes on the long-term picture, there is opportunity. GDP numbers have been encouraging with 3.7% growth in Q1 and Advance readings showing 2.4% growth in Q2. Yes, the government has played a big role in this growth but the business outlook is picking up and thawed credit markets will go a long way to fueling future investment.

Adaml: "Was this the same guy that wrote a convincing argument about Elvis been alive on the National Enquirer?"

Now that's just an awesome comment!

Mao: "I don't buy these arguments...

1. Earnings are growing: Compared to what? The disaster of last year or the real growth phase of 2006-07?
2. Commodities are strengthening: Sure, but not because of US demand... buying US stocks won't give you the gains of emerging markets
3. GS and BP have stabilized: Sure, remember Nikkei post 1990 crash? That is where we are heading due to lax fiscal policy and persistent debt..."

Yes, earnings are growing sequentially. Remember, the US equity market is still 29% off October 2007 highs so we're not comparing to 2006-07. The relevant comparison is sequential in deciding whether to make an investment today or not. Commodities are strengthening because of increased demand. Most large and many medium-to-small companies in the US are global and will benefit even if the demand is not coming out the US. GS and BP stabilizing is a clue to a major catalyst to the downside subsiding in the short-run. This is simply a timing mechanism. Everyone is on the Japan train but we are a much larger, more resilient economy.

Bill: "Considering stocks are nominally back to where they were in 1997, and much, MUCH lower in real terms thanks to currency devaluation, I'm not sure which "long term bull" you're referring to."

Typically a greater than year long rally of 80%+ would qualify as a long-term move. It is definitely in vogue to talk about the lack of returns over the last decade but we're talking about a highly anomalous time in history.

The technology boom in the 90s created such incredible advancements that I believe we have not scratched the surface of what's possible particularly with the internet. And, the last two years have been harshly cleansing of the entire private sector and corporations are emerging much leaner and meaner. Massive productivity improvements, high cash levels, a hungry workforce
and the massive technological power created in the last two decades could lead to some of the greatest economic growth we've ever seen. Sure, this may sound like nonsense but how come we never have anyone tauting the highly optimistic scenario? Only doom and gloom gets airtime.

Disclosure: Long SPY.
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