Friday, 20 January 2012

Why I do not buy the rally.

“In the short run, the market is a voting machine but in the long run it is a weighing machine.”

- Benjamin Graham

The recent rally since the start of 2012 has caught many participants unawares. Myself included of course. The trouble is the longer all of last years top underperformers keep outperforming the more people get sucked into the massive squeeze. I do not have a strong directional view (see my portfolio) and am neither feeling too bullish or bearish. But....

How quickly things change from the doom and gloom of Q4 2011. Or maybe they do not. The fundamentals are still in place. Europe is heading for a decade long debt depression due to a misdiagnosis of a balance of payments issue (excepting Greece and perhaps Portugal). The US seems to be doing ok and China still has a US sized housing bubble to cover up.

Suddenly though the great market lagging indicator known as the brokerage houses have had to go on the offensive with a slew of upgrades and positive spin. They might even stop the layoffs if it continues!

In 2011 a slowing China meant difficulties for the world economy. Now it means stimulus will come and we are all saved. Before no news on the Eurozone meant bad news. Now it means good news. It seems all it takes is a run up in the market to shift the rhetoric. This to my mind is the crux of the issue. The market moves themselves are colouring investor perceptions.

I'd just like to point to one more Graham idea courtesy of Morningstar;

"The lesson behind Graham's Mr. Market parable is obvious. Every day the stock market offers investors quotes on thousands of businesses, and you are free either to ignore or take advantage of those prices. You must always remember that it is not Mr. Market's guidance you are interested in, but rather his wallet."

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