Setting the bull trap

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This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

Long time students of the market will tell you that “the crowd is usually wrong at the extremes”. Judging by what I see, hear and read in the media, the current consensus is that stocks bottomed on November 20th-21st, an economic recovery will begin in the second half of 2009, corporate bonds are a buy, stocks are cheap and the stock market is now discounting all the bad news. This is surely a sign that the worst is likely behind us.

Even though I was looking for a low in the S&P 500 around 750 (it bottomed around 740 on November 21st only to close at 800 the same day), I continue to believe that was a low point, but not THE low point for this bear market. We were large buyers of Mortgage Backed Securities during the Wall Street de-leveraging and have been rewarded with handsome gains, although we began to take some profits on Friday where appropriate.

Corporate bond spreads have tightened during a slow holiday season as well as spreads in CMBS (Commercial Mortgage Backed Securities). Corporate spreads may or may not tighten further as I believe there will be a wave of issuance at every level – Government, Emerging Markets, Corporations, Municipalities, etc. Treasury yields have crashed as the Fed has taken the Federal Funds Target Rate to a range of 0-0.25%.

Stocks have rallied even more to S&P 931 and could possibly make a run at 1,000-1,100 if “performance anxiety” sets in among those portfolio managers that are afraid to miss the rally. We are not afraid of missing the rally because we are absolute return investors and have the luxury of having missed the big down move from nearly 1,600. The managers that are subject to performance anxiety are the same group that managed to a market benchmark only to get tattooed during the downturn.

The Fed is punishing savers and the Prudent Man by manipulating interest rates to zero. You can sit in cash and earn zero or you can be forced out on the risk spectrum just so you can keep up with inflation or your benchmark. Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The funneling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed. But this is sleight of hand, an illusion.

The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card – and with our money no less. They are also setting up the ULTIMATE BULL TRAP – a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.

Click here for Bennet’s full report.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

Bennet graduated from Rutgers University in 1982 with a degree in Economics.

 

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9 comments to Setting the bull trap

  • Great post from Bennet Sedacca!

    You are absolutely right on the hyper-inflation comment: this zero interest rate policy combined with the save-them-all bailout packages are going to have exponential effects in inflation in the long term.

    Best Regards,

    Dax Speculator

  • Once again, Bennet has described a very clear picture of what is really taking place. If everyone looks at the conditions present in most all socialst governments today there would be a public outcry that would reach our career-politicians on the hill.
    In my own little manner, I am going to attempt to advantage in the near term “BullTrap”, and remain nimble. Is there anything else to do?

  • PdP:

    Nice post; good to see other points of view and that don’t definitely fit into the “buy, buy, buy” mode

  • Mr. Obvious

    Whether you read the excerpt above or the complete report, there remains more to be told. Regarding the crowd and the “current consensus,” it may be that the 11/20 bottom, etc. is the consensus among Street strategists, but it’s hardly THE consensus among others. There’s more to the consensus than the media, the same group that invented the cover story phenomenon.

    For starters, the weekly American Assoc. of Individual Investors survey, in its what-did-you-do (not what-do-you-think) section, showed that group of investors reducing its allocation to equities to 1987-present lows (42%), while increasing cash to a record high for the period (coincidentally, also 42%). Speaking of cash, money market holdings as a percentage of the Wilshire 5000 index reached a record high level (41.8%) since Ned Davis Research began tracking the data in 10/1980.

    In addition, sentiment among investment advisors, tracked by Investors Intelligence is at low levels, as well. To be fair, sentiment has rebounded considerably from lows of earlier in the year. However, Ned Davis Research’s (NDR) take on this indicator is to use a 3-month smoothing of the readings (bulls/bulls + bears). That version of the indicator is plumbing the depths seen in 1994, 1990, and 1980-82.

    P/E valuations based on trailing 12 mos. earnings make stocks look cheap. I’m relying on data from NDR, again, here, but its calculation of median P/E based on 12-mos. trailing EPS is 12x, considerably below average. Trailing 12-mos. EPS can be especially volatile, but even Robert Shillers P/E smoothing of 10 years shows that metric approaching the average since 1940. Yeah, yeah, since when does mean reversion stop at the mean.

    I happen to agree that the present bounce is probably a bear market rally–and one that’s getting long in the tooth, not the beginning of a secular bull, but I’m willing to look at more evidence than this report provides–and suggest others do, too. Not every bull is an idiot. Now, long-term, buy-and-hold bulls are another story.

  • Mr. Obvious

    And another thing . . .

    One item that concerns me and that could have been used to support an equity correction being overdue are equity put/call ratios, which do show a great degree of complacency. Add that to the MOSAIC of indicators you consider.

  • […] has summary and report – talks about MBS – Setting the bull trap – “The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card – and with our money no less. They are also setting up the ULTIMATE BULL TRAP – a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left,” said guest contributor Bennet Sedacca. –  Investment Postcards from Capetown  […]

  • […] has summary and report – talks about MBS – Setting the bull trap – “The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card – and with our money no less. They are also setting up the ULTIMATE BULL TRAP – a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left,” said guest contributor Bennet Sedacca. –  Investment Postcards from Capetown  […]

  • Frank W

    Yah, Bennet, but when everyone is a seller and no one is buyer, that’s the bottom of the market, isn’t it? Thanks for the hot tip! As for the advent of Socialism in America, it evidently happened in the ’30s with FDR, thank God and bless his heart, when you couldn’t find a one cent piece at a bus stop, according to my father. As for the merits of Ayn Randism, where you suspend all the rules and let all the arrogant and unsociable bastards just do anything, well Ben, we just had that. They call it Capitalism coupled with self-regulation. Want some more, bunkie? Wasn’t this recent episode enough for you?

  • […] Sedacca (Atlantic Advisors Asset Management) warned as follows in a guest post entitled “Setting the bull trap“: “The Fed has declared a war on savers, a war on prudence and provided the ultimate […]

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