This Rally Has Legs

Assuming that the market doesn’t fall apart today (down 120 points now but I think it may even close positive), today will mark the single best week we’ve had in the market since late December and for the first time in a long time I’m seeing some constructive market internals (new highs/lows, advances/declines and up volume/down volume). Maybe most importantly, the financials are looking better than they have in some time. Without a strong financial industry it is impossible for the stock market to move higher because it is impossible for the economy to recover. Goldman Sachs and Morgan Stanley led the way out, and now others are falling in line behind them. Trust me, the worst is not over in the financials, or in the market, but for the first time since last September I see some signs that the worst case scenario may be off the table…at least for now.

Of all of the government programs, the one that seems to have the most merit is the TALF plan. The Term Asset-Backed Securities Lending Facility (TALF) is officially operational as of today and is structured the way that all government programs should be. In short, the plan gets credit moving in a “public/private partnership” that only works if the private market (private investors) participates. If I was still an active investment advisor, I would absolutely want to be involved in the TALF with my clients. Very little risk and tremendous upside. So, while we still have massive credit risks in the economy, the success of the TALF would at least give us a roadmap for lessening our reliance on the secondary securitization market, which has all but dried up. Because this is where 90% of loan activity winds up, changes here were incredibly important.

So, here’s where we are. I think this rally has legs and that we could see the best bear market rally in months. Since last week we’ve seen a 15% move higher and before it’s over I wouldn’t be surprised to see the Dow at 8000…and possibly even 9000, which was the January high. This kind of move will only happen if a) short selling rules are enacted and b) changes in mark to market accounting take place. Personally, I see the changes in mark to market accounting as a band-aid but it will definitely buy the banks more time…which will extend the stock market rally.

Remember, these bear market rallies happen very quickly and then can stop on a dime. If we see the banking dominoes start to fall in Eastern Europe then this rally will end very, very quickly. This is the wild card that we should all be watching closely. I’m not predicting 9000, but the fact remains that we are due for a significant bear market rally. Industry insiders tend to act as one and there is no question that the fear of missing a big move higher is motivating the hedge fund and mutual fund industry to jump back in with both feet, being the lemmings that they are. Let’s participate with them…cautiously…and then get re-positioned for the next leg down in this bear market.

Finally, I will be at WMI’s 8th Wealth Conference from tomorrow through the 28th so any updates will be sparse. I look forward to seeing many of you there…this will definitely be our best event ever, which is really saying something.

Kip Herriage

Editor, VRA