#12707 Jul 27, 2009
Stock market rally will tire quickly
Monday, July 27th 2009, 4:00 AM
Acker/BloombergDavid Eilenberg works on the floor of the New York Stock Exchange.
Themarket acts great technically. Stocks want to go up. The market hasbeen rallying since early March, but the last two weeks have beenespecially strong. The bulls are firmly in control and the bears areback in hibernation.Bad news that would have trashed markets last year is being ignored, like when Microsoft and Amazon.com,two bellwethers, reported weak profits. Both stocks were down Friday,but the market rallied, refusing to give up its winning streak.Thereare reasons to be bullish. The financial system has stabilized and it'sunlikely to get worse. The drop in real estate is slowing, and earningsfor many companies are coming in better than expected. This is not tosay the earnings are good, but rather they are not as bad as manypeople feared. Since the market operates on expectations, upsidesurprises are nothing but bullish.Before you get carried away,look at the composition of the numbers. Consumer demand is still weak.With higher unemployment, people are cutting back on spending.Companieshave been able to show strong profits by taking a chain saw to theircosts: laying off people, cutting back on advertising and reducingnonessential expenditures. But cost cutting is not a sustainable growthstrategy. It's a short-term fix.Bulls argue many companies arenow lean and mean. As demand picks up, they will be able to show hugeprofit gains because of their lower cost structure. Bears argue demandwill not pick up and the prices of these stocks will come down.I'min the middle. Consumer-based industries need further increases indemand or significant reductions in supply to provide the earnings kickthe bulls expect. While Circuit City, Linens `N Thingsand other chains have closed, we have not reduced supply in retailing,restaurants or other consumer industries the way we have in automobiles.Thebailout of the financial system and the economic stimulus package hasstabilized demand, but consumers are still worried. Many are spendingless.Withthe bears in hibernation and technical indicators strong, the stockmarket should keep going up. But without a strong underpinning ofconsumer demand, cost cutting will not be enough to sustain the rally.This means there will be a correction when the technicals run out ofsteam.My U.S.-basedinvestment fund has slightly more than half its money invested. Ournormal exposure is about 70%, so we are less positive than usual. OurChinese fund is 78% invested, meaning we are more bullish on China than on the U.S.Ifyou've got a lot of your investment assets in cash, you can still playa short-term rally. However, if you now have significant exposure, youshould trim some of your winners, especially those that rely onreinvigorated consumers.Your Money columnist Peter Siris is an investment manager at Guerrilla Capital in Manhattan.