Houston, we have a problem. Stocks cannot rally on good news. This is not a good sign for those who are over the global economic crisis and want to get on with their lives.
The Dow rallied over 250 points around the two o'clock hour, then sold right into it. It rallied back a bit in the last 15 minutes. This, despite several pieces of good news in the last two days:
--Fannie Mae & Citi announce mortgage forbearance.
--China stimulus package.
--Libor keeps dropping.
Finally, with the government backstopping everything, one would think the risk is a little less than it was a month ago. Yet here we are, testing the October lows!
What's up? Yes, there are a lot of redemptions, but don't kid yourself. If anyone smelled an imminent, sustainable rally, there would be a lot of money around. Fast.
They don't. That's the problem. The smart money things thinks stocks will not rally significantly until the end of next year. They are in no hurry, because they don’t believe this is the final lows. Therefore they can sell every rally for a while.
Where is money going? A lot of traders seem to be looking to buy high-grade bank loans. Think about it: some are yielding 15 percent, trading at 60 cents on the dollar. Do the math! Twenty-five percent returns! Problem is, no one can buy them because they have to pay cash and the securities are not liquid.
The dilemma for stocks was addressed last night by Nouriel Roubini, the Professor of Economics at the Stern School of Business, and now well-known for his dire predictions about the consequences of excess debt (much of which has come true).
He spoke at a very well-attended BTIG gathering last night, for nearly an hour. I asked Professor Roubini whether the Obama team had contacted him and asked for his advice, and what he felt needed to be done. He said the Obama team had not contacted him, though he had spoken with several members of the team over time, but there were three important steps that were needed:
1) fix the financial system;
2) enact additional stimulus programs, initially $300 to $400 billion, largely in infrastructure programs; and
3) reduce the debt burdens on households.
Importantly, that is exactly what Fannie Mae and Freddie Mac did today: announced plans to reduce the debt burden on households.
He noted that the stock market was in confusion because of the inability to make a concrete prediction about where 2009 earnings would settle out, and indeed the inability to determine what P/E ratio should be appropriate in this environment.
He noted that estimates for 2009 earnings in the S&P 500 had gone from roughly $95 to as low as $60. Price/earnings ratios have been equally confused, with some believing a 10 multiple appropriate, others 12 or higher.
What this means is that estimates on the S&P 500 can come in as low as 600 (!) to 800 or a bit higher. The S&P is currently about 900.
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