The Bull Market has returned

On a technical basis at least, the Dow Jones is back in Bull Market territory, rising 21% from the March 9th low. The recession might be still underway (see prior post “Bank lending drops again in February” March 20-09), but that hasn’t stopped investors from paying more for many stocks then they thought made sense two weeks ago. And there’s good reason for the green on your screen (in this order):

– the U.S. Congress has encouraged the Accounting Standards Board to suspend the pain of mark-to-market accounting, possibly relieving U.S. banks from further asset writedowns;
– the U.S. Federal Reserve is engaging in quantitative easing, making 30 year mortgages as cheap as they’ve been since people started to track the data; and
– the U.S. Treasury is going to hold its nose and put US$1 trillion to work by partnering with BlackRock, among others, to buy the very same asset pools that were causing the banks such pain. BlackRock will have o invest just 7% of the purchase price, with the balance being provided on a non-recourse basis.

Point #1 stops the bleeding at the banks, #2 should serve to stimulate housing sales, and #3 frees up capital for banks to, perhaps, increase their loan portfolios…which in turn gets your average business to grow again.

That’s why we’ve just seen the fastest Bull rally since 1938. The fact that the market rallied 48% during the 1929-30 period, only to make new lows thereafter, is important to keep in mind. On a bottom-up basis, research analysts say the S&P 500 (as at March 24th) will generate about $62 of earnings this year, an improvement of 26% over 2008. That generates an implied earnings multiple of 12.9x, which isn’t substantially higher than the 11.85x multiple when we last checked in (see prior post “U.S. Bank stock analysts still too rosy about 2009” February 26-09).

Lots has changed since late February, making many perspectives of that vintage utterly stale. The good news is that the S&P bank earnings figure (12x ’09 EPS) might be right now, assuming that the MTM rules are adjusted so as to prevent further writedowns, and that asset transactions associated with the “Toxic Asset” purchase program will require no further haircuts, either.

The recession isn’t over, but the prospect of a depression seems to have diminished over the past three weeks (starting with the big MTM move); suspending reality has a habit of potentially changing the course of history. While we wait it all out, Canadians can take some comfort that Florida-based retail investment houses are recommending Canada as a safe haven.

Here are some highlights of the photo advert in case you can’t make them out:

– 2nd largest country on earth and 8th largest economy;
– rich in natural resources (oil, timber, diamonds and base metals);
– tar sands have more than 6x the reserves of Saudi Arabia;
– more than 20% of the world’s fresh water supply;
– in stark contrast to the U.S., Canada runs budget surpluses;
– according to our valuation work, Canadian currency is undervalued;
– Canadian banks are in better shape than U.S. banks….

Thank God for General Sir Issac Brock!

MRM