Will This Gift Keep On Giving?

Was last week a gift from the heavens? Is the worst over? These are the questions that everyone is asking himself/herself as we head into a new week with a head of steam and a northerly directional bias. Have the rains cleared, has the lava cooled? Or was last week a sick joke of nature, sort of like the duck-billed platypus? Was it only natural that the markets finally rebounded?

I know I’m supposed to be answering these questions, not asking them, but I have to throw the questions and topics out there before tackling them. The short answer is I’m not sure to any of the questions above, but let’s view them from all sides and see what we come up with.

First, I don’t think there was divine intervention involved in last week’s action. I do believe that there were certain events in America that probably answered a few prayers. (By the way, if those trapped miners in Pennsylvania had been rescued during the week, it would have provided a spark to the action. Though the comparisons are unfair I couldn’t help but think of how decisive the response to the emergency was compared to the Russian attempt to save the Kursk a few years ago.)

The biggest prayer was one seeped in anger and even hatred, and that was for the open arrest of a big-time CEO. When the Regas family was led away in cuffs, the market was already climbing off the mat, but the news supercharged the rebound effort and many speculators that had been waiting patiently found themselves in a position where they had to jump first and ask questions later.

It almost makes Americans come across as Huns, but the blood lust was at the top of many disgruntled investors wish lists. Still, that wasn't the type of gift that has a very long shelf life. It was a momentary situation that only whets our appetites for more. However, investors cannot live on revenge alone. They need the shelter of a strong economy, the warmth of growing earnings, and of course safety from a system of checks and balances that work.

So that takes us to question number two, is the worst over? I’d say the worst isn’t over, if consumers stop spending, if there are more high profile scandals (I can’t believe how many of Wall Streets top pros are saying that companies like Citibank are buys on weakness because they’re too big for the government to topple or expose) or if corporate profits don’t return (deflation is still a greater probability than a double dip recession).

Yes the rains cleared for a few days but the clouds of doubt still hover above. I'd say either stay in the Ark or near the gangplank. The lava has cooled, but it is still too hot to relax or drop one's guard. Yes, this market is like an animal that doesn't know if it is fowl or fish. So far this year, those that have felt that the worst was over have suffered cruelty from the stock market. It would be absurd not to still show vigilance to such possibilities again.

That brings me to even more sinister thoughts and questions. Was last week’s gift a Trojan horse? The shorts are always going to short. It becomes a lot more difficult for them to spread their message and manipulate the market if the forward PE for the S&P is below 20, as opposed to above 30.

Sometimes they pick certain points to cover and lure in anxious watchers that have had cash burning a hole in their pockets. The ensuing rally provides them with another chance to re-short the market and spread their message of doom with better conviction. I think the shorts last week had little choice on Wednesday except to get out of the way. But, they’ll be back.

The best gift that investors could receive now a day is the gift of confidence. They need confidence that the system is working for, not against them. A flash in the pan isn't going to make that confidence a reality. It's great to see that the market still has the ability to post a solid week, but it isn't enough.

Obviously the Bush administration realizes this as members parachuted over the airwaves this weekend working like Santa's elves on the eve of Christmas. It is unlikely that their talkfest did much to soothe nerves, but it does plant seeds. So perhaps the real gift of the week in general is something akin to the works of John Chapman - also known as Johnny Appleseed.

The gift of last week could wind up being a seedling, a small piece of life that could germinate and grow, if watered and protected properly. It wasn't an ark, but instead could grow into a lifeboat for investors. I brought up the question of whether last week was just a natural occurrence. If so its continuation isn't preordained or certain. Most seeds in nature don't grow to be giant trees. They have many natural enemies and impediments. The least of which is a bear sharpening its claws or searching for fulfillment.

I enjoyed last week's action and saw it as a gift because it helped to establish parameters that will allow us to analyze and plot the week ahead. Ironically, the best gift investors could receive in the days ahead is for the market to test last week's lows and rebound. As it stands now I'd say that the majority of investors shunned last week's gift.

Return to sender was the rubberstamp most employed as the market was rallying. But everyone likes to be wooed, so if the gifts keep coming then sentiment could improve. The risky part for the market is that sentiment improves too fast. That is because with improving sentiment comes higher expectations. It is too early for investors to expect anything except the worst. When they look at that Shetland pony, they have to see a Trojan horse.

This doesn't have to go on and on forever, but just a little while longer. The majority of talking heads on television these days are telling investors "we are at or close to the bottom". I've felt that way for a few months, but feel stupid saying it. "Close" to the bottom could be days or months from here (I'm still calling for a substantial fourth quarter rally) and I wish I could be more precise. I don't want to be on the tube a year from now bragging like the bears that got it wrong for a decade, and are now acting like superior market players.

Folks, the best gift you can give yourself now is to view the market with open eyes, know that it will shift, and stay upbeat about future possibilities and is hedged for current risk.

FINAL THOUGHTS AND OBSERVATIONS
I think the time to really consider the market as a long-term investment may come after a few more public arrests occur and the Dow doesn't rally for 500 points.

We're close folks.

The two biggest dates on the calendar will be August 14th when the largest of public companies will began the new procedure of CEO's personally signing off on financials. And the biggest day of the year in terms of anticipation may be September 11th, the one- year anniversary.

I feel a little like Laocoon, warning the citizens of Troy not to bring that horse into city. Telling them not to lower their guards and not to rip down the walls that have protected them.

The market has to be tested before the worst is over, and that test wasn't last week.