Friday, March 13, 2009

Market Will Reward Real Value Going Forward

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Stocks rallied again yesterday and are doing so again this morning. Deconstructing this rally can provide investors with a lot of useful information going forward. While much of what it is taking place so far is short covering, some of that can turn into sustainable price increases and some of it can't. The market is also showing a clear preference for value over growth and hard assets over future promises, which makes perfect sense in a down economy with impending inflation.

The biggest up moves have been seen in the financial stocks. Many of them have massive short positions and in such cases any little piece of news can cause a big rally. It is also quite easy to have a big percentage gain if your company's stock was as low as 97 cents as Citigroup was. A move to 1.85 (the price as I write this) means a rally of over 85%. In the very short term, the big money is in the financials (if you trade them, watch them like a hawk). Nothing has really changed in their underlying value however. Many are still essentially insolvent, even if they haven't been fully nationalized yet like AIG, FNM, and FRE. Interestingly, bankrupt AIG, Fannie and Freddie are still trading and are in the pennies. They have not participated in the rally. You can expect many of the financials to come right back down and at some point to stay there.

Commodity stocks have also had nice rallies in many cases, but nothing like the financials. The represent extreme value and the possibility of sustainable action in long term (many of them actually bottomed sometime between last October and December and made a bullish divergence with the rest of market by not going to new lows in the recent sell off). In most cases they own large deposits of oil or metals, as opposed to worthless pieces of paper. These will not only maintain their value, but increase it at rates faster than inflation. In contrast to these hard asset stocks are growth stocks, which frequently have very limited real assets but are valued based on their future business. These are the stars in long term bull markets (think tech stocks in the 1990s), but are put on the back burner in long term bear markets. The IBD 100 is good proxy for this group. It has underperformed the market indices in this rally and this is not surprising. The days of easy money in this group are not likely to return soon.

Like all rallies off the bottom, the first down move will be important. Minimally, you don't want to see the recent lows broken and you would like to see the low of the first down move put in by next Friday and then a rally follow that. If the market breaks the lows from last week, a drop to the next major support levels is likely. This will almost certainly happen in the future, but doesn't have to happen right now. Long down moves in bear markets are frequently interupted by nice rallies on the upside.

NEXT: Today's Economic Lunacy

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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