Relative Value

A quick review of some traditional markets will give us some insight into where the value is hiding.

Stocks

A quick trip to S&P's website will allow you to take a historical look into some price/value relationships of the index.

based from the close of 5/29 of 903.47:

P/E EPS Yield Less Div Yield

EPS TTM 130.75 0.76% -1.62%
EPS 3 yr 18.02 5.55% 3.16%
EPS 5 yr 15.94 6.27% 3.89%
EPS 10 yr 18.56 5.39% 3.00%

P/B = 2 (end Q1)

The dividend yield is currently 2.39%, which means on the ttm basis, the S&P 500 payout is actually over 100%, a clearly unsustainable path. Even the more favorable 5 yr smoothed average is still slightly overvalued.

FINVIZ Screen

I ran a screen out of a possible universe of 6,731 stocks. The criteria were as follows:

Dividend Yield over 2%
P/E under 15
P/B under 2
Current Ratio over 1
Debt to Equity under 1
Sales Growth 5 yrs >0
EPS Growth 5 yrs >0
Return on Equity >10%

The criteria weren't overly conservative but conservative nonetheless. The screen resulted in 97 matches. This is just 1.4% of a large universe, suggesting widespread attractive common stock investments are lacking despite the monumental 40% lower values from the peak in 2007.

Daily Bond Yields and Key Indicators Data as of 28-MAY-09 Moody's Daily Long-term Corporate Bond Yield Averages Utilities Industrial Corporate Aaa NA 5.75 5.75 Aa 6.41 6.44 6.43 A 6.60 6.94 6.77 Baa 7.83 8.27 8.05 Avg 6.95 6.85 6.90 Moody's Daily Treasury Yield Averages Short-Term (3-5 yrs) 1.18 Medium-Term (5-10 yrs) 2.78 Long-Term (10+ yrs) 4.31

So called "Aaa" corporates have a fair yield of 5.75% and the highest yielding treasuries are at 4.31%.

The Question Posed

Stocks on a 10 yr smoothed basis offer a "deficit of safety" next to Aaa corporates and long treasuries that looks like this:

S&P EPS Yield 6% deficit of safety to Aaa corporate bonds
S&P EPS Yield 20% margin of safety over long dated treasuries

However, this doesn't take into account dividends. When factoring yields and margin of safety only reinvestible earnings should be considered since that is what determines future earning power. On the adjusted basis

S&P EPS Yield 91% deficit of safety to Aaa corporate bonds
S&P EPS Yield 43% deficit of safety over long dated treasuries

Either case Aaa bonds are clear winners. A word of caution! Rating agencies are an utter failure in model. It is advised that before rushing to buy bonds to study long term earnings records of the companies and to look for adequate earnings to interest coverage (maybe 3x's + at least), conservative capitalization structures, and little indication of "funny" accounting or nonrecurring items. Treasuries still have some attraction vs. stocks, especially if fear returns to markets.

The debate now is whether growth returns. This debate I'l leave to individual investors but my own opinion is there will be little in the department of revenue drivers in the economy for the foreseeable future.

Deflation & Government Bonds

The central concept of this post assumes that the US is and will remain in a deflationary trend for sine time to come, regardless of outspoken calls of hyper-inflation or severe inflation from many. If deflation ends sooner than expected, than the consequences of the investment thesis described here will end in losses.

During times of deflation there are few investments that prove suitable for long-term investment, but among them are government bonds. The two examples illustrated here are the US during the 1920's through 40's and Japan from the late 80's until the present.

If you were a buy and hold investor in the 1930's and your investment happened to be long dated government bonds, you made money:


The spike in yield in 1932 corresponded to the bottom in the stock market, but US government bonds still proved an excellent investment for many years to come. The DJIA on the other hand, tested the emotions of investors with opportunities and tragedies throughout the same time frame.


The yield curve grew steep from 1930 to 1932, signaling the end of the plunge in markets.


What's most interesting is that the action in the yield curve was dominated by changes in the long end of the curve. In other words, the shortest end of the curve never recovered to normalcy, confirming a new bull market had not yet been sparked, but only short cyclical bull markets within a bear.


Notice the shorter term treasuries didn't recover significantly until the late 40's at the onset of a new secular bull market in stocks and bear market in treasuries. What is even more significant is just how long rates remained very low, a deflationary trend.

US Government bonds remained bullish for a long time despite persistent and large deficits and stimulus programs.


Just as now, US public debt was growing at a rapid pace at the same time.

Before presenting how this compares to today, let's consider Japan's deflation as well.

Richard Koo Presentation

Publish at Scribd or explore others: Fiction art poetry

Fast forward to slide 15 within that document. Japan spent up huge deficits for nearly 20 years and grew its debt to GDP to now almost 200%, yet an investor in 10 yr JGB would have profited nicely.

Recently, Japan's credit ratings were downgraded, but there was no panic sell off as yields on the 10 year were recently quoted at 1.43% and the yield curve remains normal.

Let's fast forward to today. The situation is not exactly the same for the US, but many similarities co-exist. Recently there has been a large sell off in the long bond as equity markets rallied. Also, similar with the other two examples, the yield curve steepened throughout the equity market sell-offs. In this case, the yield curve has remained steep throughout, a bizarre phenomenon that may be sending a false signal.

The main difference between America post 1929 and Japan post 1990 is the public debt starting point and deficit spending starting point. Referring back to Steve Keen's chart above, you can see the US has a much higher starting point now than in the two preceding cases. Also, the US has large amounts of unfunded liabilities and has been deficit spending for some time. The deficits are expected to grow for 10 years +.

The fear is the US is next in line to lose its triple A rating, and soon. All in all, its a non-event that will trigger a knee jerk reaction in probability.

The question is, will the deflationary trend remain intact sparking investors to seek safety in return and capital of US treasuries? The evidence presented above is compelling and suggests the answer is yes regardless of an equity market bottom. Fundamentals of the economy and the equity markets remain impaired and show no signs of improving, just declining at a slower pace.

On a final note, please read Bob Hoye's recent article Great Depressions Are So Methodical. Bob is a market historian of sorts and has interesting parallels of 1929 to 2008. It sort of hints at another year and a half of severe contraction in the economy and equity markets.

Sitting On The Fences

Since the panic melt down of the market in March, investors have seen quite an impressive melt up of the markets since then. This begs the question, Where does the market and where do investors stand?

What Has Changed?

When asking the above question, the most important things to look at in this recession are credit conditions.

The TED Spread has improved dramatically since its severe spike in 08'.


The Yield Curve is Steep and yields on the long end have been steadily climbing as have TIPS, which are now at 2.125% on the 10-year (geez, if investors really feared inflation, wouldn't TIPS be higher?).


Mortgage Rates are steadily dropping, but have ticked up slightly in the past month:
(from Bloomberg)

	CURRENT	1 MONTHPRIOR	3 MONTHPRIOR	6 MONTHPRIOR	1 YEARPRIOR
30-Year Fixed	4.97	4.88	5.27	6.07	5.76
15-Year Fixed	4.63	4.61	4.92	5.73	5.36
5/1-Year ARM	4.54	4.78	5.58	5.9	5.23
1-Year ARM	4.61	4.74	5.36	5.63	5.9
30-Year Fixed Jumbo	6.31	6.35	7.06	7.42	7.12
15-Year Fixed Jumbo	5.92	5.75	6.18	6.68	6.47
5/1-Year ARM Jumbo	5.11	5.19	6.1	6.08	6.04

Corporate bond yields have also improved from their highs in March.



Unfortunately, my access to CDS data is limited, but here is a chart from Bespoke Investment Group:

Spreads have come down from their panic highs, but are still elevated even above the early 08' levels, and CDS speads have been deadly accurate in predictive ability.

The stock market rally has been world-wide, with the Dow Jones World Stock Index having rallied nearly 40% from its lows.

What all of this data is telling us is risk appetite is returning and along with it an appearance of recovery. Is all of this sustainable? Have we embarked on permanent recovery?

A Brief Review Of The Fundamentals:

Stocks - S&P 500 level

With 95% of companies having reported 1st quarter numbers, the results aren't pretty despite "better than expected" earnings releases. Sales are down 13% YoY, with 123 beating last year and 340 falling short. Silly how so few pay little attention to those oh so important top line numbers. The spread between operating earnings and reported is enormous, despite FASB 157 adjustments. Operating earnings are down 64% YoY. S&P estimates Sep 09' as reported 12 mos. EPS will be negative for the first time ever! Let's recap my P/E overview at 919:

2009 forward annual P/E = 32.23
TTM P/E = 61.79
3 yr trailing P/E = 25.16
5 yr trailing P/E = 17.60
10 yr trailing P/E = 19.53

Got value? Now consider if we knock the price down to 500:

2009 forward annual P/E = 17.54
TTM P/E = 33.60
3 yr trailing P/E = 13.69
5 yr trailing P/E = 9.58
10 yr trailing P/E = 10.63

Not pretty.

Unemployment

8.9% at the fudged U-3 level, but 15.8% on the realistic U-6 level, with no sign of easing, especially considering dealership closings will flood the unemployment gates.

Commerical and Residential Real Estate

The Fed released charge-off and delinquency rates today.

Delinquency rates were 7.13% for all residential and commercial loans, get this, an increase of 101% year over year.

Residential stand at 7.91%, Commerical at 6.4%, credit cards at 6.5%. The total delinquency rate reached its peak of 7.47% in 1991 for comparison.

Charge-Off rates decreased from Q4 08' from 1.74% to 1.57% for residential and commercial loans. Ironcially, the decrease was in the commercial arena, in which fundamentals are deteriorating rapidly. Residential charge-offs are still increasing and credit card charge-offs are rapidly increasing, 63% year over year.

Housing

Starts came in today at lower than expected numbers. This is good news, since last I checked there were still huge inventories (not counting shadow inventories and condos) still around 10 or 11 months supply, with 5 being considered normal. US Housing Starts At Record Low:

Compared with the same month last year, housing starts were down 54.2% and permits down 50.2%.

Analysts were surprised by the weak numbers.

"It's just as I said a month ago - I can't imagine that housing starts and permits can get much weaker than they are. And you wait a month and they get weaker," said Hugh Johnson, chief investment officer at Johnson Illington Advisors.

They will continue to be weak for some time, until inventory is worked off, with a few false jumps here and there. Any increase in starts and permits must be viewed as negative.

Government

The rally in not only stocks, but credit instruments, commodities and other asset classes like REIT's and precious metals is truly awe inspiring. Why do I say this in connection to government? Because the Fed has had a big hand in it (I suppose) and the Obama team is planning anti-capitalism measures.

Taxes - Tax Increases Could Kill The Recovery

The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama's proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut.

But those are false tax cuts in which no one's tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government's new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP.

Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices.

CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. Since the amount of cap-and-trade tax rises with income, the cap-and-trade tax has the same kind of adverse work incentives as the income tax. And since the purpose of the cap-and-trade plan is to discourage the consumption of CO2-intensive products, energy or means of transportation by raising their cost to consumers, the consumer-price increases would be the same for a 15% reduction in C02 even if the government decides to give away some of the CO2 emissions permits.

But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households. According to the CBO, households in the lowest-income quintile spend more than 20% of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5% on those products.

The CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed. The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20% by 2020 and by an incredible 83% by 2050. As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.

The next-largest tax increase -- with a projected rise in revenue of more than $300 billion between 2011 and 2019 -- comes from increasing the tax rates on the very small number of taxpayers with incomes over $250,000. Because this revenue estimate doesn't take into account the extent to which the higher marginal tax rates would cause those taxpayers to reduce their taxable incomes -- by changing the way they are compensated, increasing deductible expenditures, or simply earning less -- it overstates the resulting increase in revenue.

Since the projected revenue from this source is already designated to be used for Mr. Obama's health plan, some other tax increases will be needed. Moreover, Mr. Obama's budget characterizes the projected $634 billion outlay for health-care reform as just a down payment on the program. The budget notes that there would be "additional resources and new benefits to be determined with Congress." Those additional resources would no doubt be even higher taxes.

The third major tax increase is the plan to raise $220 billion over the next nine years by changing the taxation of foreign-source income. While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland. The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.

Not mentioned here are the possibilities of capital gain and dividend tax increases, silly soda pop taxes and any other ideas that might be floating out there.

The other most obvious government blunders are going on in the financial sectors now, where rules change daily and lies, deciept and fraud are the name of the game. Most striking here is the moral hazard created and forced industry consolidation, neither of which is good for taxpeyers of the sector in general. Taxpayers can't even count how many dollars they've committed to such fraud because Fed auditors don't know.

Health care costs are set to skyrocket. Don't believe me? America Requires A Dose Of Health Care Reality:

Last week, after meeting groups representing hospitals and insurance companies, Barack Obama announced a breakthrough on reforming US healthcare. It was “a historic day”, he said. The providers had made “an unprecedented commitment” to curb the system’s costs, running at 16 per cent of gross domestic product. They had agreed, he said, to reduce growth in healthcare spending by 1.5 percentage points a year, enough to save $2,000bn (€1,480bn, £1,320bn) over the next decade.
...

Cost control can and should be part of the answer, but not the larger part. Too much is expected of a new emphasis on preventing illness, bringing information technology to bear and reforming the way services are delivered. All these should be done – to improve outcomes and value for money. Experience suggests that they will do little to curb spending.

The deepest of these delusions is believing that subsidies to make health insurance near-universal will pay for themselves, through fewer visits by the uninsured to expensive emergency rooms rather than relatively cheap primary-care doctors and nurses. There will be some savings of that kind, but wider insurance will raise the consumption of health services. That is the idea, after all. No health-policy scholar I am aware of believes this change will come close to paying for itself.

Near-universal healthcare will require higher taxes. The administration said so in its budget, setting aside a “downpayment” of $600bn over 10 years. Most analysts think that comprehensive reform will cost $1,500bn or more. Even without healthcare reform, Mr Obama’s long-term budget does not balance. So count on it: US taxes are going up.

I recommend reading the rest of the article. What is obvious, Obama's administration is set out to do the same capital killing central planning that Hoover and FDR carried out in the depression era, but even grander!

Monetary Stimulus

There have been huge sums of money forced down the throats of banks to keep their pulse at the minimum to be technically among the living. There's a possibility some of this liquidity is finding its way into the capital markets in search that phat yield. Just a theory, and I'm not the first to postulate that. Frank Shostak, a respected Mises scholar, has recently written on the topic, Obama's Stock Market Mini-Bubble:

According to the historical data, the yearly rate of growth of liquidity bottomed at negative 16.6% in May 1929. Yet it took a long time before the S&P 500 responded to this. It took over three years after the bottom in liquidity was reached before the S&P started to recover. The stock-price index bottomed in June 1932 at 4.43.

The time lag between the bottom in liquidity and the bottom in the stock market has been shorter in more recent history. Thus the yearly rate of growth of liquidity had bottomed at negative 5.7% in September 2000. It took twenty-five months before the S&P 500 bottomed at 815.28 by September 2002.

The current bear market that started in October 2007 was preceded by a peak in the liquidity rate of growth in June 2003 — a time lag of over four years. The yearly rate of growth of liquidity stood at 7% in June 2003. The S&P 500 climbed to 1,549.38 by the end of October 2007.

Observe that at the end of February 2009, the S&P 500 closed at 735.1 — a fall of 52.6% from the peak in October 2007. The yearly rate of growth of monetary liquidity hit bottom in January 2008 at negative 6.1%. By the end of April, the yearly rate of growth of liquidity stood at positive figure of 24.9%.

Please go and read the entire piece, there is much more to learn and consider. I will leave you with a part of his conclusion that speaks volumes:

We suggest that, at present, if the pool of real savings is still in trouble, then we are unlikely to have a sustained economic revival. If anything, all the rescue packages and all the massive pumping by the Fed has made things much worse as far as the underlying economic bottom line is concerned.

This in turn means that, despite lofty liquidity, bad economic fundamentals might force investors to direct their money towards other assets, such as Treasuries — and gold. If our assessment regarding economic fundamentals is correct, then the underlying downtrend in long-term Treasuries is likely to stay in force while the price of gold is likely to easily surpass the $1,000 mark.

I share those views as well. Mr. Shostak is keen to note the pool of real savings must increase still. Viewing it graphically can help:

There are years of savings to make up for. If Mr. Shostak's views are correct, then this rally will have limits, and eventually risk appetite will dwindle, instead flowing into "safe" treasuries and gold.

I outlined my own argument for deflation in Debt, Wealth & Keynesianim, however I left out a big piece of the puzzle, derivatives:

The amount of outstanding contracts linked to bonds, currencies, commodities, stocks and interest rates fell 13.4 percent to $592 trillion, the Basel, Switzerland-based bank said yesterday. That’s the first decline in 10 years of compiling the data. The amount of credit-default swaps protecting investors against losses on bonds and loans fell 27 percent to cover a notional $41.9 trillion of debt.

$592 trillion is a staggering figure. To believe only a 13.4% drop in notional value when other assets, including housing have all fallen more in percentage terms will resolve the derivatives issue is a bit optimistic.

In Summary, to answer my initial question - "Where does the market and where do investors stand?" - the jury is still out on how much longer the rally will last, but there is very little reason to believe this rally is anything other than a liquidity/risk driven bear market rally. But with such terrible fundamentals, how can it be sustained? The credit improvements are encouraging, but one has to wonder with so many headwinds how market driven many of the credit readings are.

Important Sentiment Update

This is an Insider Score update, interesting results. Is this rally sustainable or the long haul?

MIT CRE: Moody's Real CPPI Update

It's been awhile since I've updated the MIT CRE: Moody's Real CPPI and with CRE finally catching on in the mainstream let's take a look:

The RCA Database

The commercial property index is based on the RCA database which attempts to collect, on a timely basis, price information for every commercial property transaction in the U.S. over $2,500,000 in value. This represents one of the most extensive and intensively documented national databases of commercial property prices ever developed in the U.S.

Latest Results

April 24, 2009 update: The latest results of the Moodys/REAL CPPI show a return of negative 0.6% in February for the all properties national index.

The results are not pretty through April. Much like residential real estate, supply and demand is all out of whack, creating an inventory overhang that drags prices down further. These data are not representative of the entire CRE market. Strip malls are most likely not included here due to the sheer $ size of properties researched being so large. Also, just wait until the GGP fallout is updated.

Fundamentals Still Negative; Markets - Reaching The Boiling Point

Fundamentals, though slowing in the pace of deterioration, are not improving.

Consumer Credit Falls At Fastest Pace In 18 Years:

WASHINGTON (AP) -- Consumer borrowing plunged in March at the fastest pace in 18 years as Americans put away their credit cards and hoarded cash amid the worst recession in decades.

The Federal Reserve said Thursday that consumer borrowing dropped 5.2 percent in March, the biggest decline since an 8.1 percent fall in December 1990.

In dollar terms, consumer borrowing plunged by $11.1 billion. That's the largest dollar amount on records dating to 1943, and more than three times the $3.5 billion drop that economists expected.

The borrowing category that includes credit cards dropped 6.8 percent in March after a 12.1 percent plunge in February. The category that includes auto loans fell 4.2 percent after rising by 1.2 percent in February.

My sentiment is the pace of consumer credit contraction will continue to stay strong into 2009. Not included above is consumer mortgages, a much larger share of consumer debt.

US Banks Race To Fill $74.6 billion Stress Test Hole:

WASHINGTON (Reuters) - U.S. regulators told top banks on Thursday to raise $74.6 billion to build a capital cushion officials hope will restore faith in financial firms and set a course out of the deepest recession in decades.

...

The relatively modest size of the hole discovered by regulators carrying out the tests, which were based on an "adverse" economic scenario, led to both applause from investors who believe the worst is over and skepticism among those who think the examination wasn't rigorous enough.

Modest??!!!! Fed Sees Up To $599 billion in Bank Losses:

The federal government projected that 19 of the nation's biggest banks could suffer losses of up to $599 billion through the end of next year if the economy does worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves.

Incredible! Worst case scenario $599 billion more losses...better raise 12.5% of that to cover those losses [wtf?] Does this include off-balance sheet items that FASB is set to bring on to balance sheets near year end? That worst case scenario projects 10.3% unemployment by the end of 2010. Granted, weekly jobless claims have slowed pace slightly, but are still over 600,000. The April unemployment report will be released tomorrow and 8.9% is expected. Is there worst case scenario really worst case?

Commercial real estate will tip the scale further than "worst case" can measure. Consider Rising Special Servicing in CMBS:

The pillaging in Commercial Real Estate has hit a new high. Real Point is reporting that CMBS loans are accelerating their special servicing deterioration yet again. The total amount of CMBS in special servicing has hit $24 billion, after a staggering $3.8 billion increase in April.

April marked the third straight month in which more than $2 billion of loans were transferred to special servicers, in a sign of continued market weakness. Loans get shifted when they become delinquent or are at great risk of becoming delinquent. With lending markets remaining muted, an increasing number of loans are being shifted because they're unable to refinance before they mature.

The number of loans in special servicing has also breached a milestone, hitting 2,062 loans last month, up 237 loans from the previous month.

Not surprisingly, the bulk of weakness continues to be in the 2005-2007 vintage (the very vintage that, to CMSA's chagrin, was excluded from the most recent amendment of TALF - but fear not Bernanke has got a few more aces up his sleeve).

Most frighteningly, the special servicer total excludes the impact from bankrupt GGP, which as Zero Hedge previously noted, put 164 properties in bankruptcy, and according to BofA, $14.8 billion of CMBS loans are backed by GGP properties. Assuming at least half of these loans become "special serviced" the CRE landscape is about to get a much more bloody shade of burgundy.

I encourage all to read the rest of the article. This supports Commercial Mortgage Delinquencies Rising to 11-Year highs:

The percentage of loans 30 days or more behind in payments rose to 2.45 percent, Trepp LLC said in a report. The delinquency rate was more than five times the year-ago number, Trepp said. The New York-based researcher’s records go back to 1998.
...
Commercial property values fell 21.5 percent through February from their October 2007 peak, according to Moody’s Investors Service.

Properties bought in 2006 are now worth on average 11 percent less than their original price, and those bought in 2007 are worth almost 20 percent less, Moody’s said.
...
Mortgages on rental apartment buildings posted the highest delinquency rate of securitized commercial property loans in April, rising to 5.24 percent from 3.86 percent in March, Trepp said.

And what of the market? In the face of green shoots, the market has gone from over-valued to even more over-valued. Consider these P/E scenarios using yesterday's close of 919:

2009 forward annual P/E = 32.23
TTM P/E = 61.79
3 yr trailing P/E = 25.16
5 yr trailing P/E = 17.60
10 yr trailing P/E = 19.53

Got value? Now consider if we knock the price down to 500:

2009 forward annual P/E = 17.54
TTM P/E = 33.60
3 yr trailing P/E = 13.69
5 yr trailing P/E = 9.58
10 yr trailing P/E = 10.63

At 500, assuming those 2009 earnings esimates are reliable [sic], there would be considerable value in the market.

However, as a long term investor you're left wanting; you want yield. As of 4/30/09 the S&P had an indicated yield of 2.49%. There's more value to be had in treasuries with 10 yr yields now back at 3.3%, do I smell the possible fear trade returning soon? Interesting, the $TNX has made a near perfect 61.8% retracement from its October 08' highs and a 50% retracement of the June 08' highs.

Back to the S&P500.


Long term bearish trend lines are still in tact, so a new bull market has not been triggered considering that. Also, we're at a Fibonacci confluence zone. What that means is from the view point of larger retracements, we're reaching a 38.2% retracement from the May 08' highs and a 38.2% retracement of the 2007 September highs. Ironically, the first retracement is also where the 200 day moving average rests. In Elliott terms, I'm still charting one more primary wave 5 down left.

Volume on this last leg up has been impressive, but has it formed a new trend?


Average daily volume on the last leg up has only been 10.8% higher than the last leg down. Impressive, but not significant enough to suggest the new trend is up. If my expectations are correct, then the next leg down will experience significantly less average daily volume, maybe 50% less. Final leg downs, even leg downs that make new lows, nearly always end on lower volume.

No matter which way you look at it, technical, fundamental or relative, this rally just doesn't add up to anything more than a head fake. Unfortunately, there are years of excesses to be removed from the system in terms of both valuations and debt.