13. March 2009 by Dan Walkow, CFA, CMT.

Click the chart to enlarge 

Since the low of early November 2008 the Morgan Stanley A Fund has marked a gain of almost 70%. The fund is required to invest at least 80% of its assets in A-shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchange as opposed to the China 25 FXI index fund which is comprised of China shares listed in Hong Kong. Even with this eye-catching return over the past few months it could still be early days.

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13. March 2009 by Dan Walkow, CFA, CMT.

An old saw in  the stock market is that nobody “gongs” the bell to start a bull run or, on the other hand start a bear run, but it has been my experience that at market turn points there often is an event or comment that, when you look back, is seen as the “gong”.

Vikram Pandi, CEO of Citigroup put out an internal memo the other day to his staff stating that Citi actually made money for the first two months of 2009 and was on its way to having the best quarter since 2007. And then, in the past few days other major US banks have come  and commented along the same ilk and have gone further to say that they may not need any more government money.

So the bell has been “gonged” setting up a global rally in stocks over the past few days. Can it continue? Sure, there is a reasonable analytical case that a recovery rally could take the S&P500 Index up to 850 in the shorter term and 1000 or so longer term, which is where the 200 day DMA is now. After all, securities tend to revert to the mean over time and we have been bent over pretty good. Are we out of the woods yet. No! Could we get some setbacks per the doom and gloom crowd, sure. No doubt it will be perceived that this rally will peter out in short order but, as always, the market will try and fool most of the people most of the time, so don’t be surprised if the rally goes longer and higher than you might think!

It would appear that not only have Wells Fargo executives put there money where their mouth is (see my previous post on Wells Fargo) so have Citi executives and they have make a pile in a very short time.

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13. March 2009 by Dan Walkow, CFA, CMT.

Great header on investment blog, Seeking Alpha, “better than bad” retails sales, that is. It really is a matter of expectations when it comes to the stock market. Without getting to into the academic details a simple way to understand how the stock market works is that stock prices and market prices for that matter, “discount the future expectations” into current market prices. Therefore if the world “knows” that things are really bad, and we all know retail stinks, that sentiment is reflected in stock and market prices. Less bad news adjusts prices to the upside to reflect the “better than expected bad news”.  Nice rally today among Canadian and American retailers as these beat up stocks adjust to the “better than bad” news.

 So how about the stock markets in general? Well  it seems pretty bad out there whenever you turn on the TV or you read the paper.  Ask anyone and they will give you a litany of woes of about how bad things are, not just here, but around the world.  It is not like days gone by when there was no Internet and information seeped out via the press and close-in analysts, now everyone knows instantly.

As mentioned on this site ”sentiment indicators” pointed to maximum pessimism by individual investor in recent weeks so we know what expecations are.

As an investor you have to ask the question. ” Is the current news, good or bad” baked  into the price? It follows that a great company or a bad company does not necessarily make a good or bad investment. It really is a matter of expectations.

There are many examples but here is one that comes to mind. I recently wrote up the Ford Motor Company as doing things right. It would seem that the general perception is that all North American auto companies produce junk, their costs are too high, they are badly managed and they are total dunderheads as to optics, flying their corporate jets to Washington. Well if  you take the time to really investigate Ford, for example, you find that they have the number two best selling car in Europe, are set to launch the new Fiesta in China, have lowered the labors costs close to Toyota with recent labour agreements, have reduced legacy health care costs and have not borrowed any money from the government. Allan Malally, CEO of Ford commented that with recent actions now taken, Ford will be able to produce vehicles in the USA on a profitable basis; even at today’s run rate.

So why are short term (3 month)  Ford Canada  Credit bonds trading at 60 cents on the dollar while paying almost 60% on a yield to maturity basis? Something is out of whack here, either Ford will go bankrupt in the next 3 months or it is simply an issue of bond buyers so fearful and expecations so negative that there is a “buyers strike”. What happens if the news is “better than bad”?

No doubt Ford Canada Credit bonds are perceived as a risky proposition otherwise they would not be priced as they are. They are not for everyone but in my mind it is a perfect example of fear driving price which creates those opportunities for astute and risk tolerant investors.

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