MARKET COMMENT October 2, 2009 REALITY BITES BULLS Economic reality is meeting bullish enthusiasm and the results are disappointing and upsetting. Bulls were expecting the economic recovery to continue and gain more steam. However, the reality is an economic recovery is going to take some time. Another negative we take away is stock prices are much too high. It would be interesting someday if the mainstream financial media would represent PE ratios on the basis of GAAP (Generally Accepted Accounting Principles) or reported earnings versus operating earnings. In the latter case operating earnings deflate PE ratios making stocks sound cheaper than they are. Volume today was higher again on selling than previously when buying. Breadth again was negative. ...

I am expecting a significant stock market correction at any time.

If you’re a regular reader of my columns, that won’t come as a surprise to you. And I’m not alone in that camp either. Analysts, strategists and investment directors all over Wall Street have been hesitant to put new capital into the markets.

For example, one hedge fund manager told me that he just can’t buy stocks at these levels - despite complaints from his partners who expect him to be fully invested.

And a technical analyst friend reports that the vast majority of his institutional clients are bearish.

And why not? We’re still hemorrhaging jobs… housing still stinks… and U.S. retail and food sales plummeted 9% in June, compared with June 2008.

But the market keeps going up.

This is what is known as climbing the wall of worry. Let me explain what this means - and what it means for us when it

...

For investors who had money in the markets last year, October 2008 is a month that will not soon be forgotten. In those 31 days, the S&P 500 – a major indicator of the stock market at large – fell almost 17%, reversing the gains of the previous five years.

But as the markets work their way back into health and investor confidence continues to creep up month after month, we risk throwing away the lessons of the Subprime Crash of 2008:

Lots of very intelligent investors got embroiled in huge losses last year. Bernie Madoff fleeced scores of wealthy, well-informed investors – many of whom lost everything they had built up over a lifetime. The collapse of some of the biggest financial institutions, including Lehman Brothers and Bear Stearns, thinned out the Wall Street crowd by the millions. And underperforming fund managers hit close to home

...

I’m confident that the trend for REITs will be down through the end of 2009. That’s why I suggest buying the UltaShort Real Estate ProShares ETF (NYSE: SRS. Current price $18.52) as a way to profit from weakness in the REIT sector. But fasten your seatbelt! SRS will be volatile!

REITs may appear cheap, but they are very dangerous to hold right now. A basic tenet of corporate finance is that a company or a sector is only creating value for shareholders if its return on invested capital (ROIC) exceeds its weighted average cost of capital (WACC). If its WACC exceeds its ROIC, it is destroying value. This describes the situation facing the REIT sector for the next few years.

Most REITs cannot float unsecured debt at anything less than 10% or 12%, so their cost of capital is high and rising. At the same time, due to the

...

I’m confident that the trend for REITs will be down through the end of 2009. That’s why I suggest buying the UltaShort Real Estate ProShares ETF (NYSE: SRS. Current price $18.52) as a way to profit from weakness in the REIT sector. But fasten your seatbelt! SRS will be volatile!

REITs may appear cheap, but they are very dangerous to hold right now. A basic tenet of corporate finance is that a company or a sector is only creating value for shareholders if its return on invested capital (ROIC) exceeds its weighted average cost of capital (WACC). If its WACC exceeds its ROIC, it is destroying value. This describes the situation facing the REIT sector for the next few years.

Most REITs cannot float unsecured debt at anything less than 10% or 12%, so their cost of capital is high and rising. At the same time, due to the

...

Finally…we’re back in London. We left at the beginning of April…went to San Diego and Los Angeles…then to Buenos Aires and Salta…then to Paris for a few days.. and now we’re back. London is cold and rainy…just like we left it. Not exactly home…but it will do. But what’s this? The City seems to be winding down. All those hot shots in the financial sector aren’t so hot any more.

In the space of just ten years, the percentage of GDP generated by the financial sector almost doubled – from 5.5% in 1996 to 10.8% a decade later. But now the whole sector is shrinking…along with bonuses…payrolls…and expense accounts.

And since Britain counted so heavily on the financial high fliers and their money…the whole country seems to have gone into a funk.

Tax revenues are collapsing. Deficits are soaring. The U.K.’s national budget deficit is already at 12%…about even with the United

...

Here we go again…The market had its best week since November. And just like that, there is chatter of light at the end of the tunnel.

Could the market actually be bottoming or near bottoming? Could the economy be showing signs of recovery?

Sorry. It’s going to take a lot more than consumer confidence edging up in March. I want to see…

Manufacturing increasing. It went down by 18 percent last quarter. I guarantee you that it’ll keep going down next quarter. Non-defense capital orders increasing. They went down 5.7% in January. Productivity increasing. It went down in the fourth quarter. Too many workers standing around doing nothing as plants ratchet down production. Auto sales increasing. GM, Ford and Chrysler suffered through another month of sales falling 41 percent compared to this time last year. Retail sales increasing. They dropped “only” 0.1 percent in February – hailed as a sign of better things to come by several ...

Stocks stage huge rally, but will it hold? Key levels to watch, and some historic perspective… Libor continues to ease; famous Wall Street CEO explains why credit still isn’t flowing… John Williams on the “true cost” of the U.S. financial crisis, with charts to prove it… Byron King with an “exploding” foreign resource market…. Plus, a stinging critique of I.O.U.S.A., and one thing you must do before voting Nov. 4.

The Dow logged its second best one-day point gain, 889 points, in its even more storied history yesterday:

Percentage wise, at 10.8%, the rally ranks sixth. The S&P and Nasdaq trundled alongside the old lady like puppies.

After finding a new “credit crisis” low on Monday, traders on Wall Street snapped back with vengeance. But it’s not the higher highs we’ll

...

We’re treading water. Wherever I go these days, as soon as people find out I work in investing they want to know what I think of the market. My answer is the line above, “we’re treading water.” As hard as it is to believe, most of the damage this bear market’s done to stocks occurred before 2008 even began (hat tip to Greg Feirman of Top Gun Financial for pointing this out).

Between its peak of 1,562 on October 10, 2007 and its intraday low of 1,270 on January 23, 2008, the S&P 500 declined roughly 20%. Since then, the S&P 500 has been largely range bound between 1,250 and 1,400. As I write this, the market just closed at 1,274, virtually the same level it hit back in late January. Like I said, we’re treading water. In light ...

Be careful how you define “neglected.” The most common adage amongst investing commentators and pundits is to go “against the crowd” or be “contrarian” with your investments. On the surface, this is great advice. To produce truly outstanding investment results, you need to invest in a particular investment or sector before that idea catches on. And if your reason for buying something is because it’s already up triple digits… you’re probably too late. However, it’s important to define the concept of “against the crowd.” For most people, the concept of being a contrarian involves buying investments that have little if any coverage from the mainstream financial media. After all, if the Wall Street Journal or Financial Times isn’t writing about it, few people should know about it, right? Wrong. Large publications like the Wall Street Journal and Financial Times are typically very, very late to the ...