Tale of the Bull - aka Bovine Scatology

Recently an international news wire service interviewed this hedge fund manager who also writes < or has ghost written > an occasional article for a well known international financial publication.

As readers of previous articles on this site know, Guido is not optimistic about either the US economy or stock markets. However, I do pay attention to opposite opinions to see if I am  overlooking something or otherwise may be incorrect in what I've surmised and concluded. It is very important, my friends. to have a completely open and fluid mind in the investment world. In these times, like Genghis Khan, we must be able to mentally turn on a dime.

So Guido listened to the five reasons this "expert" gave for a bull market. Oh my goodness.  I was astounded at the paucity and silliness of what he had to say. If this is best the bulls can do to guess another 3000 point move up on the Dow < which this hedge fund manager is predicting >, I can only say of them -

"Theirs not to make reply"

"Theirs not to reason why"

"Theirs but to do and die"  -  Tennyson

Here are his five reasons -

1. People are optimistic - Well if he means by optimistic the consumer sentiment index, that has been  moving up and down like a berserk cardiogram for the past six months. People have always been optimistic in the midst of a crash. After all who wants to admit that they've screwed up and are about to go broke. People were also optimistic during the collapse in the 1930s < remember the song "We''re out of the Red" ? > During the dot con bust several years ago, during the South Sea Bubble deflation that even suckered Issac Newton to invest, during the Mississippi bubble in France that some sixty years later brought on the French Revolution and Napoleon's little escapades. So by all means, all you optimists, stay optimistic.

2. "Bank yields" / profits are doing great - And why shouldn't they do great. They've had the mark-to-market accounting rule suspended so they don't have to report their losses on literally trillions of  CDOs and bad paper no one wants. And instead of making loans to boost the economy, they have rigged trades in Treasury obligations with the Federal Reserve to guarantee them fat profits. < The T bond scam I read in Bloomberg > Really, I'd be very surprised if they had other than killer earnings.

3. "Inventories are slashed / workers are being laid off"  - This money manager thinks inventories are at such low levels, that business has to replenish stocks. Which really begs the question, if business people are so optimistic and anticipate increased sales, why did they let inventories run down in the first place? Might it be they are having a terrible time moving what inventory they have? < Lack of inventory can be self fulfilling. Fewer goods for customers, fewer choices, fewer people being motivated to buy - particularly in bad times.>

As for workers being fired, I don't think any more comment needs to be made. Fewer workers, fewer consumers, fewer sales, lower profits -- "Hey, lets lay off even more workers to keep our profits up"-- In other words, beggar thy neighbor.

4. "Residential housing has bottomed " - Yes the prices and sales have upturned slightly. But then as one investment advisor told me,  nothing moves in a straight line. The best that can be said  is that it's too early to tell if things have bottomed. Guido guesses this uptick in the housing market is due to the hefty  tax credit offered on the purchase of a personal residence.

Mortgage delinquencies and modifications are going up dramatically. A flood of foreclosures is being anticipated that would cause a superabundance of homes dumped on the market. It wouldn't surprise Guido if some of this tax credit was being used as part of the down payment, courtesy of bank financing, with the new buyer picking up the dud mortgage the bank already has on the property. Who knows, maybe its' even the same owner. And who says the buyer has to live in the house? The tax code? Heh, the banks may say flippantly, who cares about the tax code? Go give Tim a call. < This is just speculative thinking going through Guido's mind. I haven't actually seen any of this. But then I haven't looked for it either. >

5. "The Federal Reserve is friendly to the stock markets" - Bernanke's been friendly to the markets for the last several years. Look where it's got us. By all means number 5 has to be my favorite reason. < Please stop me from laughing. I can't breathe >.

However there was one thing the fund manager said that could be construed as positive. Only 10% of the Federal stimulus has been spent. Actually it's about 15% as of August 31. But why quibble about a mere bagatelle of $30 billion or so, when you're spending trillions directly and indirectly.

The details of the stimulus package would take another article to write about. Suffice it to say, Guido thinks most of this will have a temporary effect, with little long term benefit, like Omar Khayyams'  "snow upon the desert". The same end result occurred in the 1930s with more enlightened programs.

There are a myriad of  topics and points concerning various factors  that are effecting the US stock markets and economy. Space  and the call to dinner  prevent me now from further elaboration. Hopefully, in several future articles, I will be able to go into the detail they deserve.

In America, enjoy the upcoming holiday my friends. Please be safe.

< As always, this article is in no way a recommendation or investment advice. It is for information purposes only. >