Now for the bull side. For those of you who did not read the Wells Fargo analysis from last month, here it is: PDF file
It basically states that bears have been fighting an excessive amount of liquidity in no small part brought about by an almost hysterical reaction to a recession and terrorism. When Greenspan engineered the rate drop to 1%, he must have know what was going to happen in a very short period of time, especially since he kept it under 2% for close to three years. The bull market is not rolling over quite yet and shows no sign of letting up because we have never been awash with so much cash, despite a steady rise in rates over the past two years. It has not been a truly aggressive tightening cycle (although steady) and the bond market has refused to get spooked as long term yields still remain at multi-decade lows. The constant worry over a housing meltdown (probably justified) has actually kept a bid on bonds and equity bears short the market. But until the cash dries up, or the perception that it will, it will be hard for a correction to gain any meaningful momentum. Runaway inflation and a lower dollar would be the only catalysts that would trigger a liquidity meltdown. The Feds would resume their tightening cycle and markets would feel the pain. We could have a 1987 scenario this year, but the markets could be much higher from where they are now.
It basically states that bears have been fighting an excessive amount of liquidity in no small part brought about by an almost hysterical reaction to a recession and terrorism. When Greenspan engineered the rate drop to 1%, he must have know what was going to happen in a very short period of time, especially since he kept it under 2% for close to three years. The bull market is not rolling over quite yet and shows no sign of letting up because we have never been awash with so much cash, despite a steady rise in rates over the past two years. It has not been a truly aggressive tightening cycle (although steady) and the bond market has refused to get spooked as long term yields still remain at multi-decade lows. The constant worry over a housing meltdown (probably justified) has actually kept a bid on bonds and equity bears short the market. But until the cash dries up, or the perception that it will, it will be hard for a correction to gain any meaningful momentum. Runaway inflation and a lower dollar would be the only catalysts that would trigger a liquidity meltdown. The Feds would resume their tightening cycle and markets would feel the pain. We could have a 1987 scenario this year, but the markets could be much higher from where they are now.
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on Sunday, February 18, 2007 at 2/18/2007 10:54:00 AM.
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