Confidently Skeptical

“All you need in this life is ignorance and confidence, and then success is sure.”

-Mark Twain

In writing the March 6, 2009 Early Look (when the S&P 500 was at 683) I used the following metaphor for how most people feel about the US stock market:

“It's human nature to lose confidence when you become seriously ill.  You feel worthless and it feels like anything you say is meaningless and everything you do is pointless.   Everything you do is just plain wrong!  Yes, that is ANXIETY!  Anxiety robs you of your personality, kills your confidence and thus, you lose your identity.” 

The good news is your confidence and personality gradually return, building up in layers, until eventually you feel like the person you were before you became ill.  In the end, you grow into a stronger person. 

So over a year later that is where we find ourselves.   After the government spent trillions of dollars we don’t have, we are stronger, more confident and no longer anxious.  The statistics are remarkable - the S&P is trading at 1174 - up 74% from the March lows and the NASDAQ is up 90%. 

The most bullish thing a market can do is go up, and yesterday we had yet another higher high.  As the technicians say, “the S&P 500 remains within an entrenched up channel.”  Yesterday, the S&P 500 was up 0.7% driven by the slightly better than expected existing home sales (although the absolute pace is anemic), the continued firming of prices in the steel sector, and improving trends in Semiconductor and Machinery names to help support the RECOVERY trade. 

In just a year, we went from a state of high anxiety to a state of confident hopefulness that events and trends in 2010 will be favorable. Market performance is telling us that there is a "public confidence in the economy."  That statement seems so ironic when the public has no confidence in the current administration, and FED officials and the Treasury cannot even admit to the extreme level of indebtedness of the US government. 

There is actually little confidence, exemplified by the confidence numbers.  The ABC consumer confidence numbers declined last week to -44 from -43, and according to a Bloomberg survey, by an almost 2-to-1 margin the average American believes that the economy has worsened rather than improved during the past year.

As negative as every consumer survey is, the performance of Consumer Discretionary (XLY) constituents speak to a consumer that says one thing and does another.  From Tiffany’s to Red Lobster, the trends are getting better, not worse.  The market is headed higher because corporate profitability and cash flow are improving as every CEO finds him/herself in a save-my-butt-and-improve-profitability situation.   

If you are in the camp that interest rates and inflation are headed higher, on the margin the improvement in corporate profitability will slow.  We have been very careful to pick our spots in what to be LONG in this market, and that is not going to change.   We are better off today, relative to the high levels of anxiety back in March 2009, but there are enough global MACRO issues that could cause another ANXIETY attack at any time.

While we shorted the S&P 500 last week, I’m thankful we covered the position on Friday.  As we wake up today, we are now officially at ZERO percent allocation to both US and International Equities. 

Overbought is as overbought does!

Function in disaster; finish in style!

Howard Penney

Managing Director

Confidently Skeptical - Obama HC2