Monday, May 5, 2008

More data point about Bear market rallies:

Then again u could still be off 10% from here and be broke and not participating in the majestic waterfall ride:

By Michael Tsang and Nick Baker
May 5 (Bloomberg) -- The biggest rally in the Standard &
Poor's 500 Index in more than four years is luring investors to
equities from cash, just as options traders are betting the
advance will evaporate.
The benchmark index for American shares rose 4.8 percent in
April, the steepest jump since December 2003, and through last
week had climbed 11 percent from a 19-month low in March. The
rebound came as Federal Reserve Chairman Ben S. Bernanke
arranged the bailout of Bear Stearns Cos., took subprime-tainted
mortgages as collateral from investment banks and cut borrowing
costs to a three-year low.
Jean-Marie Eveillard, who runs the $22 billion First Eagle
Global Fund, is skeptical the gains can last because the worst
housing slump since the Great Depression will reduce earnings.
S&P 500 companies are valued at 22.7 times profit, the most in
four years. Options traders are paying 63 percent more to
protect against a drop in the S&P 500 than to bet on a gain, the
widest difference since at least 2005.
``It may be a suckers' rally,'' said Eveillard, who is
based in New York. ``Investors want to believe. But if I'm
right, then there's truth to the argument that this is the worst
financial crisis since the end of World War II. The same kind of
reflex is the wrong reflex.''
The S&P 500 gained 1.2 percent to 1,413.90 last week,
adding to the rally that helped the measure avert a bear-market
collapse of 20 percent. The benchmark index plunged 18.6 percent
from its record 1,565.15 on Oct. 9 to its low on March 10.
Cash to Equities
Today, the S&P 500 declined 0.5 percent to 1,407.16 as of
11:21 a.m. in New York trading.
As the advance took hold last month, investors shifted more
than $100 billion out of cash held in money market funds, whose
assets had swelled to a record $3.54 trillion, according to data
compiled by Washington-based Investment Company Institute.
The climb hasn't dispelled concern among traders of U.S.
options. Implied volatility, the measure that calculates
expected price swings of an underlying asset and is used as a
barometer of options prices, shows that many investors are
betting the U.S. stock market will falter.
The implied volatility on options that lock in gains if the
S&P 500 drops at least 10 percent in three months reached 24.67
on April 30, Bloomberg data show. That compared with 15.1 for
options that pay out if the index rises at least 10 percent.
The 63 percent difference indicates the highest demand for
options insurance since at least 2005, according to data
compiled by Bloomberg. A decline of 10 percent from the S&P
500's closing price last week would take the measure down to
1,272.51, below its March 10 low of 1,273.37.
Sucker Protection
``There are pockets in the marketplace that believe this is
a sucker rally, and they're willing to pay a substantial premium
for downside protection,'' said Robert Arnott, whose Pasadena,
California-based Research Affiliates LLC oversees $26 billion.
He said in December 2006 that a bear market was probable.
Nouriel Roubini, professor of economics and international
business at New York University's Stern School of Business, says
the Fed's seven rate cuts since September -- which lowered the
benchmark lending rate to 2 percent from 5.25 percent -- aren't
enough to stave off a contraction and that earnings expectations
are unrealistic.
Investors are currently paying the highest prices relative
to earnings since March 2004 and 15 percent more than when the
S&P 500 reached its all-time high in October.
The U.S. economy expanded 0.6 percent from October through
March for the slowest six months since the 2001 recession.
Meanwhile, consumer spending rose at a 1 percent annual pace
last quarter, also the weakest since 2001.
Profit Rebound
Still, analysts estimate profits at S&P 500 companies will
rise 12.1 percent and 51.7 percent in the final two quarters of
2008, respectively. For the first quarter, 363 companies in the
S&P 500 have reported results, posting an average decline of
13.3 percent. That compares with analysts' projection at the
start of the year for a 4.7 percent gain in the quarter.
``You're going to have further losses for the financial
system and weakening of demand of employment, of earnings, of
profitability that's going to push further down the stock
market,'' said Roubini, who more than a year ago predicted a
housing slump would drag the U.S. into a recession. ``This is a
temporary, bear-market rally.''
ISI Group Inc.'s Jeffrey de Graaf, the top-ranked technical
market analyst in Institutional Investor magazine's survey the
last three years, says the decline in trading last month also
shows investors aren't confident the gains will last. De Graaf
is based in New York.
Trading Slows
An average of 1.31 billion shares changed hands each day on
the New York Stock Exchange, the least since September 2004 and
the slowest for the month of April in six years.
Quincy Krosby, chief investment strategist at the Hartford
in Hartford, Connecticut, which manages $360 billion, is more
sanguine. She says the worst may be over for the economy and the
financial markets saddled with $319 billion of bank losses.
Financial stocks in the S&P 500 have gained 11 percent
since the end of March, the biggest increase among the 10
industries in the index. Meanwhile, gains in railroads, trucking
companies and airlines signal the broader economy is growing and
bolster the case that the stock gains are justified, Krosby
`Past the Downturn'
``It's a validation of investor belief the U.S. economy
will pick up in the next six to seven months,'' she said. ``It's
a sign the market is looking ahead past the downturn. Slowly but
surely, the Fed rate cuts will be working their way into the
Gerard Minack, chief market strategist at Morgan Stanley's
unit in Australia, says that's a mistake. The global economy
will probably worsen, Fed rate cuts will be less effective than
in previous periods and profit growth will disappoint, he wrote
in a note today.
``We are in the midst of a bear market rally,'' Sydney-
based Minack said.
NYU's Roubini also expects additional pain.
There is ``complacency among investors thinking that the
worst is behind us for credit markets and for financial markets
and for the real economy,'' the New York-based Roubini said.
``This is not the year to be in risky assets like equities.''
--With reporting by Eric Martin and Elizabeth Stanton in New
York and Adam Haigh in London. Editors: Chris Nagi, Daniel

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