It's Spriiing Agaiiin.......

....kind of.

I know that it's not technically Spring yet, but as I write this morning from stupendous, lovely, headed to 70 degrees, Wilmington, North Carolina, it sure as heck feels like it! Global warming be damned! Get me to the golf course! In this day and age of telecommuting, I've half a mind to pull up the stakes and set up shop down here. We'll have to run that by the wife first, though.

Anyway, there is a point here. The equity markets have, as I figured they might, broken to new lows, with the S&P 500 standing at about 670 as I'm writing. As I mentioned last week, I thought we'd be looking at a "6-handle" before too long, and sure enough, it certainly didn't take too long to get there. This, I feel is both a blessing and a curse. It's a curse due to the obvious.....stocks have been solidly and relentlessly in the tank. The blessing is that I think that we are starting to get to levels off of which a Spring rally (which I've mentioned before) may well commence.

While I still very much believe that any true bottoming process might take a very long time to play out and that the economy has future air brakes waiting to be applied, this process is likely going to include nice-sized pops as well as drops. So I'm going to go out on a limb, staring at the carcases of others around me who have done this too early, and say that I believe that we're within 5% from marking at least a near term low, which is close enough. This said, I sold my position in SDS (short S&P ETF) on it's strength early this afternoon. Sooooo, let's take a look at a couple of things that are leading me in this direction (or along the path to oblivion).

Employment Report
Wait! Don't stop reading!!! I swear I'm not (too) crazy. I realize full well that the February jobs report released this morning was horrendous. Hear me out though.

The ~650K jobs lost was the worst monthly number since 1949 and the 3rd worst on record. The unemployment rate broke through 8% to 8.1%, marking the fastest 3 month rise in the rate since '74. While I do believe that unemployment will head through 9%, if we're not currently at the nadir in the pace of monthly job losses, I figure we're darn close. As I've said before, a spark to get the market going a bit may well be the pace of economic decline becoming less dramatic, and in terms of monthly job losses, we might be seeing the worst right now (at least I hope so. Daddy needs a JOB!).

I'm not arguing for the numbers to look anywhere close to good anytime soon. All I'm looking for is for them to look "less bad". One thing that gives me hope here is the fact that businesses are really taking the hatchet to inventories, even at a faster pace than sales are declining, and this is absolutely necessary for us to move back into supply/demand balance. This is not to say that sales won't continue to decline in here. The savings rate (now at 5%) is likely to head towards the 60's-80's average of 8% (and remember that spikes higher in times of stress are the rule, not the exception). But with companies ratcheting down production quickly now, they will catch up to the demand decline eventually, and if the gap between the production decline and sales decline remains as big as it has been of late, "eventually" may be pretty soon. At that point, we're going to hit more of an equilibrium of output and demand, necessitating fewer job cuts.

Obama Budget
If you haven't logged off already, WAIT!!!! Indulge me. You all well know where I stand on what's happening in the backwater that is Washington DC. The stimulus plan is not close to what it's made out to be. The budget is even worse. It's a disaster. It makes very little sense, and the assumptions that it makes in terms of revenue coming in are laughable (3.4% GDP growth next year???? Are you serious????). It raises taxes on the most productive, innovative, investment-prone part of U.S. society smack dab in the middle of the worst economic downturn since the Great Depression. Ask Japan about how that worked out for them. HOWEVER, THIS IS THE POINT. The equity market seems to be assuming that the budget will go through as is, and I'm saying that it's so bad, there's no way this happens. When investors see evidence of this, I think it's possible fodder for near-term upside.

Now, I'm not saying that the final compromise will be good. It won't be. But investing in the stock market is a game of expectations, and, much like the jobs report, what we're looking for here is a version that's "less bad" than the original - i.e. better than very low expectations. I think - no, pray - that the final version of the budget, as bad as it might be, will not be as socialistic as what's on the table now. With sentiment low and the market in a free fall, this may be enough to help spark something.

Housing
Now, I'm sure I've lost you. I'm entering blogger hell. I'm writing to myself and only myself. But I'll plug along anyway. The most recent pending home sales number was atrocious (down 6.4% Y/Y and down 7.7% in January alone). What in the world would make me cite housing as a potential positive then? It's in the mantra "you have to start somewhere", and I think that I'm seeing signs that the admittedly very long and bumpy healing process in the housing market is beginning to start.

Where, you might rightfully ask? Well, amid the terrible data, one geographic region showed an increase in sales. Where was it? The West - right where the meltdown started. In particular California and Nevada, ground-zero for the bubble, both showed an uptick in home sales. The naysayers may well say, "Sure, but the vast majority of sales were in the form of bank-led sales of foreclosed homes" and that's true. But you have to start somewhere, and the bargain hunters are finally showing some signs of life in the worst-hit part of the country. With builders not building homes, I think that we are looking at peak inventory (if not now, we're pretty darn close), and once again, what we need is "less bad" data going forward. Will we have a full-flegded national housing recovery before '10? I doubt it. Will it be a slow recovery? You betcha. But you have to start the recovery somewhere, and I think we're close.  Remember also that housing sales naturally pick up as we head out of winter, so bargain hunting should pick up in the months ahead.  

Sentiment and Market Internals
Money market fund assets are more than U.S. stock market fund assets for the first time in 11 years. Liquid assets (cash) in stock funds now represent over 6% of total assets, which is the highest level since '01. The AAII investor sentiment index showed the highest percentage of bears since '87 (70.3%) and the lowest percentage of bulls since '93 (18.9%) (FYI sentiment is considered to be a contrary indicator: in other words, when there are a lot of bulls, look out below!). I will admit that sentiment has been lousy for some time and this hasn't put a stop to the carnage in the equity markets, but we're now hitting levels that are historically pretty interesting.

Finally, and I'm kicking myself as I'm writing this, valuations have seem to have gotten to levels that look interesting as well. Now, the valuation argument has been thrown around since the S&P was breaking below 1000, so on the surface and by itself, the argument is pretty lame. The super bears are going to tell you that massive bear markets have generally ended with Price to Earnings ratios (P/E's) in the single digits. This is true, and depending on who you talk to we could be looking at a low in the 500's (or, GULP, even lower) on the S&P if this were to be the case. However, I don't think we get there as many past bear markets have been marked by super-high inflation - which tends to drive P/E multiples down. This is not an issue now (although this may well be a story for another day - stay tuned), and the majority of recessions have ended up driving the market to somewhere around 11-12X.

This said, if you smooth out earnings over the past cycle, you're at around 11-12X, which to me seems like a reasonable, if not cheap, price to pay for the market, warts and all. The U.S. economy is not going the way of the DoDo (although the current administration seems to be trying its best). The credit market will eventually thaw (BAA spreads are at least somewhat encouraging and the high yield market seems to be open at the moment). Corporate balance sheets are in pretty good shape considering. I think that for long term investors, one should be dipping the toe, ever gingerly, into admittedly murky waters here.

How, you might ask? One of the places that's beginning to look interesting to me is oil. Obviously, the price of crude has been decimated, falling over $100/bbl in the past year. However, with China increasing its stimulus package (and if past experience is a guide, their stimulus package might actually include stimulative projects! Heck, they might even finish them in the next couple of years!), and with the potential of the U.S. soon seeing the worst of the downturn, oil demand might be nearing its low point. At the same time, OPEC seems to have found some discipline and is actually, really, curtailing production (will wonders never cease!). So the supply side looks decent here as well.

With this in mind, I bought DXO this morning, which is a double long crude play. This has been absolutely crushed, falling from the high $20's to about $2.30 since last summer. Oil is a depleting asset, I believe that we're in the depths of the economic morass, and it seems to me a pretty good place to look for potential upside.

That's it for this week. Sorry for the delay (had to go out and play some golf in the wonderful Carolina sunshine. Don't ask about how I did). Have a super weekend, and pass along the blog to anyone you feel might be interested!

TRB