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BMO says recovery stronger than expected? Self serving at best!
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by eastvanray | August 13, 2009 at 02:38 pm
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We are in the midst of a low volume summer recovery in the Canadian and US markets. BMO (Bank of Montreal for those of us who still communicate using actual words and not acrinyms) says this is great news. Soon they will be making all kinds of buy recomendations for their brokerage and banking clients. Don't buy.
Consider the following when considering stock recomendations from brokerage houses. Brokerage houses make their money trading stocks and selling underwritings. To do this they need people who will buy or sell when they flick the switch. They don't always care if you buy or sell as long as you generate a commission. People who are unsophisticated about the market are best for this. Especially people who think the market operates as a direct reflection of the economy.
To those investors a growing economy must mean good things for the market, right? Yes and no. If the growth is sustained and produces growing earnings PER SHARE. The problem with this current recovery is that it is likely a "retail rally" (look up the term "odd lot theory" and "greater fool theory").
These proclaimations will likely be followed by retail investors buying up stocks that the institutions bought 6 months ago at 20% or more below current prices. You will be earning capital gains for the banks and their institutional clients. When all the retail sucker money is fully invested who do you think will continue buying? No one. Watch for a correction in the fall when this happens.
This time retail investors will panic and race each other to sell in a falling market. And who will be there to buy at, once again bargain prices? The same people you bought your shares off when the market was cresting....the big players. In the mean time these banks and their public company clients will be offering brand new shares to the public in brokered offerings. That means they are dilluting their share structure, increasing the number of slices in the pie without making the actual pie much bigger. That means that even if you think earnings are going up, earningss per share may, in fact, be going down.
There are too many variables in play here. Massive stimulous packages (bailouts/corporate welfare) that will increase inflation and devalue the $USD. With Canada's largest buyer seeing declining purchasing power they, will be buying even less Canadian goods than today. That will not be good for Canadian (non-mining) companies. The second real estate shoe (commercial/retail) is getting ready to drop, further depressing balance sheets, employment and earnings. Finally we have political instability caused in the US by healthcare reform and a US President who is more George Bush when it comes to the economy (big spending and big taxing) that the US can afford along with the ongoing wars. Finally in Canada we have a minority government and all the instability that creates.
One bright outlook is gold. I am no gold bug and I am not going to make their case but you should look into gold before making any investment decisions.
I hope I am wrong but I have seen it before.
OTTAWA -- While some say the expected sluggishness of economic recovery means the recent stock-market rally is overdone, economists from BMO Capital Markets are looking at things another way.
In a report released Thursday, Douglas Porter and Robert Kavcic wrote that the strength in stock markets might actually be indicative of a coming economic recovery that’s stronger than expected.
The Toronto Stock Exchange’s S&P/TSX composite index — the benchmark of the Canadian stock market — is up more than 40% from its March lows, and the S&P 500 — the broadest measure of U.S. stocks — is up around 50%.
The BMO economists say this rally “has prompted plenty of catcalls and profound skepticism whether equities have gone too far, too fast in what has been deemed the least-loved bull market in history.”
They said naysayers often cite economic forecasts for a “sub-par” economic recovery as evidence that an exceptionally strong market recovery is unjustified. However, Messrs. Porter and Kavcic say such skeptics might want to judge the economy through the lens of the stock market, rather than vice versa.
The BMO report said the decimation of stock markets last fall was an accurate predictor of just how deep the economic downturn around the world would be. It also said an earlier stock rally this spring was an accurate signal that the worst of the downturn was coming to an end.
Examples of better-than-expected economic performance could be seen Thursday as data emerged showing unexpected GDP growth in both France and Germany.
Messrs. Porter and Kavcic said the 50% gain the S&P 500 saw in the 23 weeks following its March bottom is unprecedented in the postwar era and rivalled only by after-recession rallies in 1974 and 1982.
“Interestingly, those two economic recoveries were decidedly strong, with U.S. real GDP surging as much as 6.2%, year-over year, in the wake of the 1974 bottom, and a massive 8.5% in the year following the 1982 equity-market recovery,” Messrs. Porter and Kavcic wrote.
The BMO report cited some concern in investment circles with the approach of September.
“September and October have an extremely well-deserved reputation as a graveyard for many bull markets, a reputation that was all-but cemented forever by last year’s events,” the BMO economists wrote.
However, they also said that in the last 40 years, the S&P 500 has gained as many times as it as declined in this time frame.
The report said investors often go into sell-off mode after taking a harder look at economic prospects as the summer ends. However, this could work in the markets’ favour this year as economic expectations, particularly for the U.S., tend to be improving.
“However,” the report says, “it is fair to conclude that the easy gains have been made, and further advances will have to be earned the old-fashioned way — through a solid recovery in earnings.”
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eastvanray
vancouver, British Columbia, Canada
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at 09:17 on August 15th, 2009
Good advice. Thanks for this.