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Mark's Market Blog

3-27-10: Irrational Exuberance

By Mark Lawrence

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Thursday something interesting happened. The market opened up, rose up to its highest level in well over a year, then dropped and closed down on the day. Friday was the same thing, but not quite so high in the morning. This is a very bearish signal, one would normally consider that the market had topped and it was time for a correction of several percent, perhaps even 10% or more. But I don't believe it. There's still liquidity out there looking for a home, and the average investor is quite bearish. These are not the signs of a market top. I expect increased volatility for several days, most likely followed by a bit more climbing. After all, the primary goal of the market is to separate people from their money, and to do that it has to surprise us, not behave as expected.

S&P 500 September 29 2009 to March 26 2010

It's now considered safer to lend money to Warren Buffett than the U.S. government. The debts of Berkshire, Procter & Gamble, Johnson & Johnson and Lowe’s are now trading at lower interest rates than U.S. government debt. Meanwhile, the International Monetary Fund on Sunday issued a debt warning for advanced countries, including the US and most of Europe. The world's wealthiest nations are facing a level of indebtedness not seen since after World War II.

The US and S.Korea are having military exercises, and therefore it's time for N.Korea to condemn this as an act of war. This time was different. Their "dear leader," Kim Jong-Il, has had a stroke, is showing his age and is not expected to last a lot longer. It appears the jockeying for his job has started. So this time N.Korea threatened a nuclear attack on S.Korea if the exercises proceeded. Also a S.Korean navy ship was holed, broke in half, and sunk, killing apparently at least 45 crew. No one is willing to call this an attack by N.Korea, but it rather obviously was.

Obamacare passed. In one sentence: Everyone will be required to have health insurance, but it won't be provided for, instead you'll have to buy it (the poor will get some subsidies), and the insurance companies won't be able to exclude folks with pre-existing conditions. Apparently that took 2000 pages to codify.

Companies are already announcing that their healthcare premium costs are going through the roof. A few examples:

Analysts predict the economy will expand about 2.5 percent this year. Growth would need to be 5 percent for an entire year to bring down the unemployment rate from 9.7% to 8.7%. Don't expect unemployment to improve this year.

In last 1996, Yale Economist Robert Schiller, famous for the Case-Schiller Housing Index, had lunch with Alan Greenspan. During this lunch he called the stock market behavior "Irrational Exuberance." Two days later Greenspan used that same phrase in a speech, and it's now famous. Below is a chart of XLF, a synthetic stock that tracks the DOW financial index. Lets look at the last few days. A week ago Friday, several corporate bonds started trading at lower interest rates than US government bonds, indicating that the US government is no longer considered the most secure investment there is. Financials went up. Monday the Greece bailout fell apart, threatening several major European banks. Financials went up. Tuesday, a BofA spokesman gave a press announcement explaining why BofA's Lehman Bros style of balance sheet manipulation is actually ok. You might recall that the bankruptcy of Lehman Bros set off the financial panic in 2008. Financials went up. Thursday, N.Korea threatened nuclear attacks on S.Korea and Japan. Financials went up. It's said that bull markets climb a wall of worry, but this bull market is swimming up Niagara Falls before our very eyes. Don't blink, you might miss something very exciting.

Financial Index September 29 2009 to March 26 2010

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