Conflicting evidence on the stock market

---- On the one hand:

June 8 (Bloomberg)-- The U.S. has supplanted China and Brazil as the most attractive market for investors as confidence in the global economic recovery wanes in the wake of the Greek debt crisis.

Almost four of 10 respondents picked the U.S. as the market presenting the best opportunities in the year ahead. That’s more than double the portion who said so last October, when the U.S. was rated the market posing the greatest downside risk by a plurality of respondents.

---- On the other hand:

VIX, a rough indicator of market volatility, stands just below 40 signaling a lack of assurance.

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My conclusion:

Market participants are worried about both the domestic rally and the euro crisis abroad, therefore they flee foreign markets while remain skeptical about the next big move here in the U.S. So would it make sense for the rally to pick itself up after the recent declines? Both the S&P 500 and the Dow are down about 6% YTD, and the market is speculating that after a 70% rise (started in March 2009), stocks are due for a big drop, given the still lackluster economic picture overall. What I would like to add is the following:

• Proposed policies showing encouraging attitudes toward euphoria and over speculation : Across the Atlantic over Europe, it is all bail-outs again. Germany last month proposed a ban on short-selling. The Fed has insisted to keep interest rates at where they are. Despite the widely believed necessity of such undertakings, the abundant existence of these policies is in itself something to worry about. They basically show that even the policymakers, supposedly the rational, hardheaded referees of the game, are not happy with a declining market. In any capitalist entities, two things are of ultra importance: opportunity to excel, and the possibility of failure. When the latter is not in place, a bubble is doomed to be built. It is just a matter of time and place.
  
• When the FCIC is blaming financiers for excessive risk-takings, it is forgetting the fact that regulators are paid by the taxpayers precisely to keep such undertakings from happening. While everyone is blaming the banks for this crisis, let's not forget that it was the financial system that broke, not simply the banking system. Banks are a part of the financial system, but after all not all of it. When there is a gang in the neigborhood, we have police to protect us. Wall Street is like a gang, but SEC and the others have not exactly been the stewards that we want them to be. The regulators deserve much of the blames, too. And, I'm not convinced that these same policymakers, who watched the problems matriculate in the first place, have been learning their lessons.
  

What's the direction going forward? I prefer to shun from market predictions, but my view is that it's reasonable, even probably, for the market to continue its rally. This is not to say that stocks are obviously undervalued. In fact, it's quite the opposite. During this rally, low quality, speculative stocks have gone off the ceiling, while the strong, boring franchise stocks have largely been left behind (talking about JNJ, GE, T, LMT). Therefore I think the market is both undervalued and overvalued, depending on which segment we're looking at. That been said, the influence of polices are not only economic, but also psychological and extensive. With the correction, while investors remain indecisive, the attitudes of the Fed and its counterparts matter. A lot. The Fed's mission is to ensure the health of the economy, not the financial markets. However, it is crucial to remember that a bubble's bust can bring the worst detriments to even a strong economy. So far as Bernanke unlearns this lesson, we are doomed for another perfect storm. Sooner or later.

So while we could, let's ride the bubble. It might be speculation. But hey that's what Ben asks for.



P.S. Anyone interested in a pricing method of investing, I recommend watching Jeremy Grantham's recent interview with the Financial Times. Great insights from the experienced legendary investor:

http://video.ft.com/v/79128759001/Apr-19-Jeremy-Grantham-on-bubbles

Yi Gao

Summer Analyst

Analyze Capital LLC