Is this current stock market rally the real thing?

1. To Our Clients and Friends,
It is Friday (at last!), and the Dow Jones Industrial Average has decisively broken
8000 again, ending the week at 8083. Does this week’s rally signal the end of the
bear market and the beginning of a real recovery? Should we be considering a
reentry into the equities market so as not to miss the familiar “V” that has followed
every bear market in recent memory?
That is the “Question of the Hour” – the question not only you, our clients and
friends, have been asking us, but the question we are constantly mulling over
ourselves whenever the market rallies.
As we have explained and emphasized consistently, Silver Oak’s ship is always
anchored to its internal “navigation system” – a set of principals which guide us in
arriving at every investment policy decision. Its essence is that it is most important
to us to be able to understand the underlying causes and rationale for what is
occurring, rather than simply observing the phenomenon itself. We have, on many
occasions, attached articles and commentary for your information by economists and
independent thinkers with whom our thinking resonates.
One such example is a recent simple statement by Barton Biggs, former chief global
strategist at Morgan Stanley: “I am a child of the bull market.” He elaborated by
noting that he has always bought on dips on the expectation that stocks would
always move higher. Bill Gross, Co-CEO of PIMCO, commented in his recent
commentary that we are all children of the bull market (it is all most of us have ever
known until now); “ but one fostered by leverage, deregulation and globalization that
proved unsustainable in its excesses.”
We can readily observe each of those factors is operating in full reverse now…not a
fertile basis for a sustainable, historic bull market in stocks. (Yes, globalization is
actually contracting as country after country is in greater need of deploying its
resources at home than of investing them abroad. It seems that the main thing
being exported these days is debt!)
Among others, we are struck by a recent commentary by Simon Johnson, professor
at the M.I.T. Sloan School of Management and co-founder of the global crisis Web
site www.BaselineScenario.com. (You may go to the site, or to the NY Times site
Room For Debate – “Bear Market Rally: What Does it Mean”
http://roomfordebate.blogs.nytimes.com/2009/04/10/bear-market-rally-what-does-
it-mean/?hp for the full article and more commentary.)
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2. “Some stock market rallies are reassuring. Others provide at least temporary
respite. And a third kind, more commonly seen in emerging markets, actually
expose deeper underlying problems and contribute to a further downturn…
We seem to be experiencing this third kind of rally in the U.S. right now. Equity
prices are up sharply, but the debt market continues to indicate a high
probability of default…
The equity market rally, paradoxically, creates conditions in which the
government can consider letting a major bank default. Of course, this situation
arises also because the administration is low on bailout money, and Congress
has lost patience with all the “rescue” efforts since September and is not inclined
to provide more.”
~Simon Johnson
(4/10/09)
On balance, we do not believe that the thesis that “the stock market is a leading
indicator and therefore it must be telling us something” is enough to hang our hat, or
your money, on. We do believe that this rally was instigated by some surprisingly
good news from banks (underlying source of those operating earnings
unsubstantiated, though), and the G-20 Conference in London where global leaders
reached consensus on addressing the crisis with fiscal stimulus and financial
regulation. These two factors, as Nicholas Bloom (economics professor at Stanford
University and an associate at the Centre for Economic Performance, London School of
Economics) pointed out, have helped reduce uncertainty. And so far, nothing has disturbed
that euphoric feeling of greater certainty that investors and markets seem to cherish.
We believe that we now live in an uncertain world, and that certainty will not rise to the
level of real confidence until the systemic fundamentals dictate it. We will therefore stick
to the fundamentals that we observe, and try, with an unjaundiced eye, to allow our
independence and objectivity always guide our research and the investment policy
decisions that directly affect your financial well being and peace of mind.
And, as always, if you have any questions at all concerning this letter, please do not
hesitate to call us.
Best personal regards,
Eric & Joel
Eric D. Bruck, CFP®
Principal
Silver Oak Wealth Advisors, LLC
12121 Wilshire Blvd., Suite 1300
Los Angeles, CA 90025
Tel. (310) 207-4800
Cell (310) 890-2610
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3. Fax (310) 943-0398
Reply to: ebruck@silveroakwa.com
Website: www.silveroakwa.com
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