Oak Street Wealth Management's Market Commentary 1-10-2011

Gluskin Sheff - It is an amazing commentary on human behaviour that I was forgiven for having been more focused on bonds and gold during those go-go leveraged years of 2003-2007, and then treated like a hero after the financial system collapsed under its own weight of dramatic excess. It goes to show that in the final analysis, as much as it hurts, not to be involved in a speculative rally that sees the market surge more than 80%, it is much much tougher to actually experience a correction in the other direction. For the time being, it takes extreme courage and resolve to not jump on the bandwagon (“don't fight the Fed”) and buy “the market” at current expensive pricing points. As far as equities are concerned, make no mistake, we are in the throes of an intense bear market rally, which is likely at the very late stage. Nobody will know to get out at the peak and as we saw in late 2007 and into 2008, many of the “longs” will be trapped. Bear market rallies are not the same as secular bull markets — the former are to be rented, the latter are to be owned. Those claiming to be adept market timers today that have been and are staying long will be repeating the same mistake they made three-years ago. Gluskin Sheff - Well, while we are still not drinking the Kool Aid that the Fed has spiked in its punch bowl, only a fool would say that this overextended market can't become even more extended in coming months. But this is a highly speculative market and it is amazing now how analysts, economists and strategists have been so quick to raise their earnings, GDP and S&P 500 price targets for 2011. Barron's - Thursday's mere 0.22% decline in the Dow was its largest drop since Nov. 30, followed Friday by a 0.19% dip after a modestly disappointing jobs report–an almost unbelievable and, to some, suspicious stretch of calm. Perhaps this still affords the bulls the benefit of the doubt, a typical tape reader's take on a market that refuses to pull back, even when overbought and lacking the nourishment of much stronger economic news. And, yes, this action suggests that any sharp correction–which should come as no surprise, except that it will when it arrives–won't be the bull market's Waterloo. Still, strategist Doug Cliggott of Credit Suisse notes that the past two calendar quarters each showed gains of a bit more than 10%–two of only 16 individual quarters in 30 years to log double-digit gains. Combined with a stubbornly upbeat investor consensus, this suggests that it's not the moment to be barreling into the market. Barron's - Momentum has also been a force. The S&P 500 hasn't closed beneath its 50-day average in more than four months —a feat seen just once in the past decade, in 2003. The U.S. stock market ended 2010 with a 12.8% gain but is up 20% in the year's final four months. The past 30 years or 120 quarters have produced only 16 quarters where the S&P 500 rallied 10% or more, and two of those lined up back-to-back in the latter half of 2010. And after more than two years of steering money from stocks toward bonds, investors have put more than $6.5 billion into stock mutual funds since mid-December, as they yanked $4.7 billion from bond funds. Two weeks do not a new trend make, at least not yet, but it complicates the logical decision to pull back from stocks. Gluskin Sheff - This is not the 1949-66 secular bull market that was underpinned by troops coming home and spurring on a baby-boom that would unleash years of tremendously strong domestic demand growth. The demographics in the U.S.A. are now downright poor — just look at the ratio of the working age population to the total population. Nor is this the 1982-2000 secular bull market that saw the central bank usher in years of disinflation (the current one is trying desperately to create inflation!) and a wave of innovation that saw the mainframe, the personal computer, the Internet, and then the smartphone, a boom in the capital stock that enhanced structural productivity growth and led to sustained gains in private sector economic activity, which by the end of that secular bull run, allowed the government to actually start to record budgetary surpluses. What is the major innovation today? The iPod? The iPad? Facebook? These may be fun, but they don't do much to promote the growth rate in the nation's capital stock or productivity. Conclusion - We'll let Gluskin Sheff drive us home since they've taken us this far... “The masses only see the returns, they do not see the risks that are nearly invisible to the naked eye. But we see the risks. We assess them; we measure them, and we benchmark the returns against them. I recall all too well that 2003-07 bear market rally — yes, that is what it was . It was a classic bear market rally, and did last five years. I was forever skeptical because what drove that bear market rally was phony wealth generated by a non-productive asset called housing alongside wide spread financial engineering, which triggered a wave of artificial paper profits. I knew it would end in tears ... sadly, I didn't know exactly when. I was constantly defensive in my investment recommendations at the time and there was a huge price to be paid for being bearish when there is a bull on your business card, trust me on that one. We have been patient and will remain so, with an eye towards maximizing risk-adjusted returns, not merely gross nominal returns, which are the only ones that get reported. Remember those returns only count if they aren't ultimately reversed by excessive greed. At the current time, we believe our clients are well served by our strategies.” Regards eddie