This Rally is Real

“I’m feelin' groovy”

I like this market, and I have liked it for weeks. I know that it is dangerous given the uncertainty, but I like it. I guess I can’t take the trader out of me even after all of these years. Yesterday I started to write a blog about the reasons why I like the market and failed to post it. Could I or anyone else have predicted what would happen in the last couple of hours of trading? No way. But here is why I like it and why I believe days like yesterday will continue to happen and why this rally is real.

1. Companies are dirt cheap. I know, I know, I have said this to you over and over again but it’s true. When you have companies trading at multi-decade lows or with price to earnings ratios in the single digits, companies that are some of the best in this country with record dividend yields, it has to make you think.

2. Did you see the commercial paper figures for Monday? Since the Federal Reserve started the Commercial Paper Funding Facility on Monday, whereby it is purchasing short term paper from corporations directly to help provide liquidity while banks are not as aggressively lending, $67 billion dollars of paper was issued. Compare that with the daily average for the past couple of weeks of $6.7 billion a day. The Fed is doing exactly what it wanted to do and what it needed to do. You can give the Federal Reserve 100% responsibility and thanks for yesterday’s rally. When guys in bonds and equities saw that number get released, the markets were off to the races.

3. Yesterday the Consumer Confidence numbers were a disaster: a 41-year low, the third largest point drop month to month on record. Consumers are scared. They said the prospects for income growth over the six months were abysmal and as a result we saw the most negative reading ever. The respondents said they expected fewer jobs in the future jumping substantially in this survey also to the third worst reading on record. What does this tell me? The consumer is worried and rightly so. Did you know that the savings rate in this country got to a fraction above 0%? Do you know what the savings rate will be at the end of this year? 2%. Do you know what the savings rate is projected to be at the end of next year? 3%. What does that tell you? We are learning from our mistakes. Too many of us have been too highly levered. It’s not just Wall Street and the banks -- everyone of us spent more than we should have. When I see a record low sentiment reading about consumer confidence the contrarian or trader in me loves the market even more. Why? Capitulation.

4. We keep talking about seeing a lot of volume behind a move as an assurance either on the upside or downside that the market will continue to go lower or go higher. The volume throughout this selloff has been very light. Everyone believes that we need to see serious volume to confirm the direction this time. I am not entirely convinced. This selloff is different. Short sellers were banned for much of this selloff, option activity throughout that period was off the charts, the credit default swap market was booming on the downside as people placed negative bets on companies by purchasing insurance against risk of default. All of these vehicles contributed to a low-volume selloff and don’t think for a minute that a move to the upside may happen in a flash without the record volume. People are using other vehicles and will continue to in these markets.

5. The Fed meets today. Frankly I couldn’t care less. I am not entirely convinced that it will cut rates by half a percent as everyone suggests. I am looking forward to the ECB’s meeting next Thursday the 6th. It will cut rates. That matters. The ECB is way too far behind the curve and it needs to get with the program. When Japan hinted yesterday that it would consider cutting rates a quarter of a point when its interest rate is at half a percent, that is a wake up call to the ECB and Bank of England that they have been too slow. Remember dollar vs, yen and euro vs. yen. Remember the rally we saw in the yen over the past week. Yesterday the yen vs. the dollar and vs. the euro gave back 5% and 6% respectively.

6. Next week is election week. The uncertainty and the length of this election have worn everyone down and certainty is just around the corner. Historically, in past election cycles when the economy is in the dumps and the market is under pressure in September and October, November turns out to be a good month.

7. This Friday is year end for mutual funds. The redemption levels have been unbelievable. Just look at Blackrock’s quarterly earnings a couple weeks ago. Look at the redemptions at Morgan Stanley. Once we get past this Friday, we can look ahead and managers at funds can build anew and take advantage of this weakness to build their portfolios for next year. Will all the money sitting on the sidelines come back right away? No. But oh my goodness, there is a lot of money sitting in money market funds, short-term treasuries and certificates of deposits. Watch out when they come back.

8. The G20 meeting on November 15 will be after a new President is chosen but it will be constructive. If you watch the dialogue between European leaders, Asia and the U.S., they are setting us up for some surprises. Will they be good? I don’t know. Will they be about more regulation and one standard governing body? Probably. Will that get done with the U.S.’s blessing? No. We will not allow an international regulatory body to control our capitalistic pursuits. We haven’t really gone off the deep end. This is not 100% socialization as some suggest.

So what should we be worried about? What could burst my bubble?

1) Unemployment data will be released next Friday. The Friday after Election Day. It will be ugly. Forecasts are for the unemployment rate to get to 7.5% by the second half of next year. This report for October will be particularly bloody because of the credit freeze that caused many businesses to lay people off.

2) If the election were so close and we saw another 2000 scenario where the election was not decided officially until December, that would wreak havoc on the markets. I don’t think that will happen but that would be the worst case scenario.

Make no mistake about it, volatility is here to stay and we have a lot of big headwinds to address, but I like to look at the long-term and I think we are setting ourselves up for some good news. When George Soros says half to two-thirds of the hedge fund industry will no longer exist, I feel for the people who lost their jobs or will lose their jobs, but if they didn’t see this coming, they were crazy. They were living in the wild west and led us to where we are today. They have just as much blame to take and their de-leveraging has killed this market.

Tell me what you think. Am I nuts? Am I missing the point? Are you bullish? Are you bearish? Why?