Tuesday, December 1, 2009

Appearances Can Be Deceiving

If there is one thing that the New England Patriots have in common with the stock market it’s that neither is quite all that they are cracked up to be.

Like the Patriots, the stock market has a certain amount of star talent supporting its run for success. The Pats have the skills and talent of Belichick and Brady that enable an otherwise mediocre team from drifting into the domain of the pigskin wannabees. In the case of the stock market, it is largely the skills and talent of the stimulus machine (monetary and fiscal) that enabled (emboldened might be a better word) investors to lift prices to above historical average P/E land.

Investment Strategy Implications

Quarterbacks know that handing off the ball to a solid running back makes their life that much easier. The stock market equivalent rests in the economic handoff from stimulus to sustainability. Thus far, that has not quite occurred. Yet, valuation levels strongly suggest that such an occurrence is not only inevitable but will be highly successful (as in earnings growth rates that a V shaped economic recovery makes possible).

Sorry Bill and Tom, this will likely not be your year of glory. Your skills and talent will likely not be enough to mask the weaknesses that underlie your team. As for equity investors, they are accordingly well advised to be sensitive to the economic weaknesses that are masked by huge sums of liquidity. In sport as in the markets and the economy, appearances can be deceiving.

No comments: