LANDY INVESTMENT MANAGEMENT BLOG

A STOCK – BASED INVESTMENT PLAN FOR RETIREES

I. Estimate your annual need for investment income.

A. Add up how much you spent over the past twelve months. Get this from your checkbook or your bank statements.
1. Subtract unusual huge purchases, such as an outlay for a new car. (You should add back an annual amount to save up for the next car if you buy it outright).

2. Subtract monthly items that will disappear due to lifestyle changes, like if you sell your house, stop commuting to work, or if Medicare will reduce your health insurance bills.
3. Add any large future things you want to budget for, like an increased budget for travel.

4. Subtract expected income from non-investment sources, such as pensions and Social Security. After making these adjustments you now have a figure that is your "annual need for investment income."

5. Divide your annual need for investment income by twelve to determine your monthly need, which you will withdraw from your investment account each month. In order to estimate how long your money will last, run simulations, using a financial calculator found on the Internet, assuming various different assumptions for the inflation rate and your investments' rate of return.

II. Set aside enough money in risk-free investments that will provide as much as five years of income during stock market meltdowns.
A. Multiply your "annual need for investment income" (calculated earlier) by five to tell you how much money to set aside in risk-free investments - enough to provide five years of income, if needed, so that you can avoid having to sell stocks for retirement income when stock prices are very low.
B. Invest your risk-free money in either bank CDs (with at least 1/5 of the money accessible each year) or a money market fund. Normally, tax-sheltered money (IRA, 401K, 403B) can also be invested in TIPS (U.S. Treasury Inflation-Protected Securities) or a TIPS mutual fund. Currently (April, 2012), TIPS are priced unattractively for new investors and should be avoided, but that is likely to change as rates on US government bonds recover to more normal levels.

III. Invest the balance of your investment money in a diversified portfolio of stocks (with no one stock initially accounting for more than 3% of the total), or low-expense broad-based stock market index funds.

A. Your monthly income depends on how much you arrange to be sent to you. You can arrange to have a mutual fund liquidate shares, as needed, to send you checks, monthly.

B. Your investment income does NOT depend totally on how much in dividends or interest you receive. It depends on your total return, which includes dividends, interest and capital gains.

C. Total return from stocks has averaged 9 - 10% over the past 50 years and past 100 years, based on growth of the American economy. Even so, there is no telling how stocks will do in any particular year or decade and some years stocks will go down in value. Declines of around 60% from the previous high were experienced in 2007-2008 and 2000-2002. However, future long term growth of the American economy is likely to continue to yield ever higher stock values and dividends, and those with sufficient patience will reap the rewards.

D. Avoid all high-fee mutual funds and closed-end funds. Avoid all leveraged funds. Any and all funds should be low-fee broad-based index mutual funds.

IV. Start monthly withdrawals for retirement income. Withdraw from stocks and stock funds in normal times and when stocks are dear, but not when stocks are cheap - like in 2008. In such times, withdraw from your risk-free reserve fund.

A. Withdraw all monthly retirement income from stocks and stock funds, unless we are in a "bear market" for stocks.

B. Switch to make your monthly retirement income withdrawals from your risk-free reserve funds when stocks enter a bear market. A bear market is generally defined as a 20% or more decline in the S & P 500 below its previous peak. If you don't follow the financial news, you will usually know when we are in a bear market from seeing the news headlines. Once you ascertain that a bear market has started, cease withdrawing your monthly retirement income from your stock market account or stock funds and switch to withdrawing that monthly amount from your risk-free reserve. Keep checking the level of the S & P 500 at least at the beginning of each calendar quarter. When the S & P 500 goes above that 20% decline point from the previous high, which you calculated previously, switch back to making your monthly retirement withdrawals from the stock or stock fund account, again. In this way you avoid selling your stocks when stock prices are cheap and your stock holdings can participate fully in the subsequent recovery.

V. Income tax considerations should be kept in mind both before and during retirement

A. Maximize holdings of stocks in taxable accounts, rather than tax-sheltered accounts to take advantage of the low maximum tax rate on dividends and long-term capital gains.

B. Interest earning investments should be directed to tax sheltered IRAs, 403Bs (teachers' annuities), and 401Ks, as much as possible.

1. Interest from fixed income investments is taxed fully, whether in a taxable account or when withdrawn from a sheltered retirement account.

2. Stock gains and dividends also are taxed fully when withdrawn from a sheltered retirement account and you miss out on the reduced maximum tax rate.

V. Confront Inflation

A. Avoid investments in long-term bonds, except for considering tax-sheltered (IRA, 401K, 403B) investments in TIPs or TIPs funds when their valuations are reasonable.

B. Interest - earning investments in money market accounts, bank CDs and TIPs will not be hurt by inflation.

C. Stock investments will not be hurt by inflation, in the long run, as costs, selling prices, dividends, stock prices, and the value of assets owned by the companies you invest in will all rise with inflation.

D. Adjust your monthly investment income need once a year, based upon expected inflation, your past twelve month's spending and your future plans. THE END

INVESTING IN STOCKS IN TIMES OF UNCERTAINTY

Investors today have a heightened awareness of the risks that come with investing in stocks, having lost money, on average, over the last ten years.  This has led many investors to turn cautious, even though stock prices are lower and corporate earnings are much higher than they were ten years ago. Indeed, during 2009, even as the S & P 500 rose by 26%, investors in mutual funds reduced their net holdings in stock funds, while adding to investments in bond funds.

Risk is always with us in stock investing.  But, what has increased during the current period of economic turmoil is not actual risk, but investors’ perception of risk.  The risk was always there, we just didn’t know it. 

 

 In 2007, before the onset of the financial crisis, investors were complacent. Having been shaken by the severe recession and the collapse of Lehman Bros., Fannie Mae, Freddie Mac, AIG, Chrysler and General Motors, many investors remain frozen by the danger of a descent into a double dip recession.

  

We are bombarded with fears that the nascent economic recovery will peter out as soon as government stimulus spending fades away, or when the commercial real estate mortgage market melts down, or when government borrowing crowds out private capital, or when the dollar collapses, or when the house buying credit expires, or when taxes and interest rates have to be raised.  Some of these worries may be valid to some degree, but what is clear is that investors have a sharply heightened awareness of what could go wrong with the economy.  We are like characters in a nightmare walking through Times Square wearing earphones that magnify the volume of sound that we hear by a factor of ten. 

 

When was it more risky to fly on commercial airlines: before 9/11/2001, or after?  Right before 9/11 the risk was the highest ever - we just didn’t know it. 

 

When was it more risky to own a Toyota Camry - in early 2009, before we knew about potential acceleration problems or now as they are fixing them? Obviously, the risk was higher last year, we just didn’t know it.  But, now consumers are leery of buying Toyotas.

 

When was it more risky to buy stocks - in 2007, when investors were complacent, even confident, or in 2009 when, in the midst of economic trauma, both stock prices and the economy turned upward?

 

Nobody knows how stock prices will perform in the near future.  Risks are always there.  But investing in stocks today is no more risky than it was before the financial crisis.  And stock prices are substantially lower.  Indeed, investors’ heightened perception of risk has provided us with a buying opportunity. 

 

If history is any guide, many of those too nervous to buy stocks will wait until the economic recovery has taken hold and growth in employment spreads confidence throughout the land.  Many such cautious investors then will buy stocks because their perception of risk will have declined, even though actual risks may not be lower, at all.   When they finally do come late to the party, they will be paying significantly higher prices for their stocks and we will be closer in time to the next bear market and recession.   Landy Investment Management LLC remains bullish and our clients are nearly fully invested in a diversified portfolio of stocks.

BRIGHT DAYS FOR BERNANKE, BULLS AND BREADWINNERS

With Ben Bernanke's official confirmation as chairman of the Federal Reserve, the bulls on Wall Street can gore and tear to pieces that red flag for stocks waved by recent uncertainty about his reappointment.

  Attention now turns to this week's labor market data.  Thursday morning will yield the weekly report on Initial Claims for Unemployment Insurance, an important Leading Indicator of economic activity, while Friday, February 5 brings us the Employment figures for the month of January.  After two years of dismal reports, the labor market finally is on the verge of showing an increase in jobs - if not this Friday, then a month from now. 

 In recent months, economic data has gotten "less worse."  The stock market will welcome increases in workers on the job as confirmation that Bernanke's "green shoots' of last Spring are morphing into tangible signs of economic growth.  We have seen good news recently on GDP, the ISM survey and corporate earnings.  Even formerly depressed industries, like media/advertising are springing back to life.  But expanding employment will be the key to a sustained economic recovery and news of job creation, likely this month or next, will give a strong boost to stock prices.

Accordingly, Landy Investment Management has moved solidly back into stocks, after a brief hiatus occasioned by the recent uncertainty on Bernanke's confirmation.  We had been heavily invested in stocks nearly the entire time since mid-October, 2008.  We hold important sector positions in (1) large-cap computer industry stocks, including Apple (AAPL), Microsoft (MSFT), and Google (GOOG); and (2)  pharmaceuticals, including AMAG Pharmaceuticals (AMAG), Isis Pharmaceuticals (ISIS), Suremodics (SRDX), and Johnson & Johnson (JNJ); and (3) the oil industry, including Oceaneering (OII) and Occidental Petroleum (OXY). 

Uncertainty on Bernanke Confirmation is a Sell Signal for Stocks

Last week, as the outlook for Federal Reserve Chairman Ben Bernanke's confirmation turned doubtful, I reduced the proportion of stocks in clients' portfolios from over 90% stocks to less than 15% today.   The economic recovery does remain on track, in my opinion, but doubts regarding Bernanke's confirmation by the Senate raise a red flag. 

One might quibble over whether the Fed should have bailed out AIG or supported large investment banking companies, like Goldman Sachs (GS), but I give Bernanke a pass if he made a few mistakes, possibly, while making rapid-fire decisions which averted the Great Depression Round II.  Under his stewardship, Fed innovations stabilized the banking system. 

The Fed's cautiously stimulative  monetary policy will enable the business cycle to continue its natural path, moving  from recession to sustained growth, with little inflation.  If Bernanke is forced to retire as Fed Chairman, uncertainty among investors will rise because his replacement may be regarded as somewhat of a wildcard.  Of course, Christina Romer or Larry Summers would be fine picks, and I would be confident that they would refrain from doing anything dumb, and the economic recovery will continue.

But the stock market is another story. Recent doubts that Bernanke will be reappointed threaten to shatter the confidence of investors and darken the bright light at the end of the economic tunnel that has drawn investors along the track to higher and higher stock prices.  If Bernanke's nomination for reappointment is confirmed by the Senate, I will consider raising stock holdings to near 100% of client portfolios, again.  However, any changing of the guard at the Fed will make for a shaky stock market and I will await signs of stabilization in stock prices or clear improvement in coincident economic indicators before committing more capital to stocks. 

Stock Report on Oceaneering

I wrote an analysis of the stock of Oceaneering international Inc., an oil service industry company, which was published January 14, 2010 as an "Editor's Pick" on the popular financial blogging site SeekingAlpha.com. For those interested, here is the link:  http://seekingalpha.com/article/182456-arnold-landy-s-highest-conviction-pick-a-focused-deepwater-drilling-leader

THE DUMBNESS OF DIVIDENDS

    Dividends are not a positive factor in deciding whether or not to own particular stocks. That’s because dividends reduce the value of the underlying shares by the amount of the dividend. Suppose there exists a corporation that consists of a broken hot dog cart, with no regular place to sell hot dogs, and it has no other assets or liabilities. This company would not be worth much. But, suppose this corporation had $1 million dollars in its corporate bank account. Then, the company would be worth nearly $1 million.  A person could do very well buying the company for less than $1 million, then disposing of the hot dog stand, closing the business, then withdrawing the $1 million from the bank account. But, if the current owner of this business paid out in dividends to herself the $1 million that was in the bank account, the business would be left with roughly zero value. So, the business is worth a great deal before the dividend, but not much afterward. Likewise, publicly traded stocks trade at prices set by investors’ evaluation of what the company is worth. The value of any company depends on its earnings, prospects for the future, assets and liabilities. Cash is part of the assets. And each dividend paid out translates into either more borrowing or less cash on the balance sheet.

     Clearly, dividends do NOT provide a cushion under the stock price, as investors have found out painfully in recent years. And their payment has further weakened many companies already suffering from declining profits.

     However, paying dividends does make great sense when a financially strong company earns more than it needs to use for working capital or for its capital budget. Here, the cash would just continue to grow.  An example would be Microsoft (MSFT).   Better to pay out the excess cash in a dividend to shareholders (your maximum tax rate on dividends is only 15%) than to let it pile up in the company treasury while incurring the high corporate income tax rate on the interest that it earns.

     Dividend payments are fine for companies that are strong, financially.  Examples are:  Diamond Offshore (DO),  Intel (INTC), Lockheed-Martin (LMT), Lowe's (LOW), Microsoft (MSFT), Johnson & Johnson (JNJ), 3M Company (MMM), Stryker (SYK), Wal-Mart WMT), and Walgreen (WAG).   But cash is part of a company’s assets. Once paid out in a dividend, that cash is no longer part of what the company is worth. The bottom line: dividends are efficient and appropriate when companies have excess cash, but a dividend payment does not increase shareholder value because it subtracts a like amount from the what the company is worth, which is expressed in its stock price. Therefore, investors should not consider a dividend as a positive factor, in and of itself, in evaluating whether or not to own a particular stock.

     Disclosure: My clients or I own shares in: Intel (INTC), Microsoft (MSFT), Lockheed-Martin (LMT), Lowe's (LOW), Johnson and Johnson (JNJ), Stryker (SYK), 3M Co (MMM), Wal-Mart (WMT), and Walgreen (WAG).

RISK MANAGEMENT IN STOCK MARKET INVESTING

    Investment portfolios should contain a minimum of twenty stocks, with no single industry accounting for more than 15% of the total value at the time that the portfolio is constructed. Even with such diversification, a portfolio of stocks is vulnerable to the risk of at least a 60% loss from peak to trough (there have been several 50 - 60 % stock market declines in my lifetime, but feel free to pick any number between 60% and 99%, depending on how nervous you are about investing in stocks). I hope to avoid major market declines by pulling out when I correctly foresee a recession, but even　 successful economic forecasting does not protect against all bear markets.　 Some investment pros advocate limiting a portfolio's loss to say, 20%, at which point one liquidates and walks away.　 But this method is effective only if one never goes back into stocks.　 For example, a 20%　 trigger point would have produced a 20% loss in 2008.　 But if one re-entered the market in, say, January, 2009, one would have liquidated by March, 2009 with another 20 % loss. Indeed, one potentially could string together a whole series of 20% losses.　 All that does is spread the loss over a longer time period, without limiting the total loss.　 And during the periods between liquidation and re-entry the investor remains on the sidelines with no chance of recovery.
　　 Another problem with liquidating upon some predetermined loss percentage is that it fails to protect against a rapid market meltdown.　 During the 1987 crash, stock prices dropped about 5% one day (a Friday), then another 23% the next day that the market opened.　 The total decline from the peak was about 1/3.　 If one's portfolio is already down by, say, 10%, another 23% decline in one day puts you well below a 20% loss threshold in a flash.　 Indeed in the 2007-2009 bear market, there were several days when the market opened 5% or more below the closing prices from the night before, so there was no chance to liquidate at points in between. In 1987, stocks rose to new highs by the end of the year. So any investors who liquidated after the crash and stayed away from stocks would have missed out on the recovery. Likewise, most who liquidated after the drop in early 2009 likely missed out on the recent 50% rise to new highs for the year. In both cases, liquidating to prevent further loses had the unwanted effect of making impossible the recovery of the investors’ assets.
　　　　 Corporate and government bonds are also subject to considerations regarding risk.　 Corporate bonds are subject to the risk of default (like if one owned Lehman Bros. or Six Flags bonds).　 Both corporate and government bonds are subject to the risk that their value will decline if interest rates rise or bond ratings decline.　 The most serious risk of all, however, is that inflation will erode the purchasing power of the fixed interest payments each year and will decimate the purchasing power of the principal upon maturity.　
　　 The best risk management method is to place some assets into Treasury Inflation-Protected Securities (TIPS). These are U.S. Government bonds that pay a low rate of interest, but the interest payments and the principal are both guaranteed to increase with the rate of inflation.　 Both the interest received and the increased principal value that accrues each year are taxable income.　 In IRA and other tax-deferred accounts, tax is not payable until the money is withdrawn.　 These bonds can be purchased directly from the U.S. Treasury or through a bank or broker.　 Also, there are mutual funds that invest in TIPS and exchange traded funds (ETFs) that invest in TIPS.
　　 Risk management in stock investing cannot be achieved simply by selling as stock prices decline.　 Nor can risk management be enhanced by sticking to stocks of safe companies. (Define “safe”: Citigroup? GE? Fannie Mae? Freddie Mac? AIG? Polaroid? General Motors?)　 The bottom line is that the best risk management program for stock investing is found outside the stock market: in the government securities market through the purchase of TIPS.　 For funds not needed over the next few years, the lowly stock market, after getting beaten up over the past decade, remains a good bet to resume its　 long-term (100 year) pattern of providing a　 9.5 % rate of return.　 And, even after their recent run-up, stocks remain on sale at prices 1/3 below the highs of two years ago.

FORD FACES FIGHT FOR ITS FUTURE

In the old days, Ford Motor Co. (F) faced  relatively minor threats to its profitability :  the UAW, legacy medical and pension costs, a crushing debt load, retooling costs to meet safety and environmental standards, rising gasoline prices and high quality foreign competition from titans Toyota and Honda.   But now, things are going to get REALLY tough.  After seeing its two American competitors go down the financial drain,  Ford now must compete with streamlined versions of GM and Chrysler, which are having many of their contractual burdens (previous labor contract provisions, inefficient dealer networks, huge debt repayment obligations, etc.) swept away by the bankruptcy process.  This is all reminiscent of the challenges facing the airline industry over the years.  As airline after airline declared bankruptcy (some more than once), rather than liquidating, most continued to function under Chapter 11, then emerged leaner and meaner to compete with and weaken the survivors.  The result has been that airline stocks and bonds  have remained a wasteland for investors over the decades. 
A similar scenario is now facing the auto industry, but with one crucial factor that makes their situation potentially worse than that of the airline industry: the bankrupt auto companies have financial backing from the U.S. Treasury.  This is a problem going forward, not only for Ford, but also for Honda (HMC), Toyota (T M) and Nissan (NSANY), which sell widely in the U.S.   Indeed, the competitive problem is made worse by the fact that the U.S. Treasury is providing $12.5 billion of TARP funds plus additional TALF funds to GMAC, which is now offering relatively easy low-cost  financing to buyers of GM and Chrysler vehicles. 
If I owned a hardware store (as I used to), I would not want to have even the most incompetent government-owned competitor nearby if it had an unlimited source of funding.  We have no way to know whether our government will be able to successfully pull out of its financial involvement in the auto industry, as it intends.  But, until Treasury starts to dial back its involvement in GM, Chrysler and GMAC, investors would do well to turn their attention to other industries for investment opportunities

GENERAL ELECTRIC IS A RISKY INVESTMENT

     I liked General Electric stock at $6.92 on March 6 (see two previous blogs on GE); I do not like it at all @12.39 (closing price April 17) , after analyzing their financial results announced on April 17.  It is not their declining earnings that worries me: that was within expectations.  The problem lies on their balance sheet.  GE shareholders' equity (book value) has declined from $104.7 billion to $101.0 billion.  That doesn't sound like much of a decline, but the trend is in a bad direction and it has catapulted one financial ratio (Assets to Tangible Common Equity) into the danger zone.  GE is primarily a financial company.  It does make appliances, aircraft engines and wind power turbines, but its lending company, GE Capital has accounted for the bulk of its earnings for several years.  GE capital loans money to businesses and consumers all over the world.  The company has borrowed most of the money that it lends out.  Although GE's loan portfolio is well diversified, it does contain some potential clunkers, including Walmart credit cards, mortgages in the U.K., and consumer loans in eastern Europe.  GE also invests in commercial real estate and holds mortgages on commercial properties in this country, both areas of financial stress.  As an AA-rated company (they were rated AAA until about a month ago), they borrow at a low rate and lend at a higher rate to less creditworthy borrowers.  This business model works well as long as investors and lenders have confidence in General Electric. 

     But, worries about GE and other finance companies have arisen as debtors around the world are finding it harder to make their loan payments.  Investors and lenders are wise to keep a close eye on GE's balance sheet, for that is where we can see financial resources available to keep the company going in case many of its loans turn bad.  At first glance, book value of $101 billion seems sufficient to back up GE Capital's loan portfolio of $348 billion.....except for one fact:  $95.4 billion of GE's equity consists of intangible assets like good will and deferred tax credits.  Goodwill is an accounting entry that represents how much GE paid above book value when it acquired other companies.  Deferred tax credits are useful in saving taxes on future income, but are not good for any other purpose.  Analysts subtract goodwill, deferred tax credits and other fluff from book value to arrive at a more realistic figure that is called tangible common equity (TCE).  To see how much TCE underlies GE's common shares we take current book value of $101 billion and subtract the $3 billion in preferred stock that Warren Buffett pumped into the company last fall.  That leaves $98 billion.  Then we subtract the $95.4 billion intangibles (primarily goodwill, but also deferred tax credits, etc.) and arrive at a grand total tangible common equity value of $2.6 billion.  That isn't very much - less than 1% of the $348 billion it has loaned out to its customers.

     The company is not in imminent danger of insolvency.  First, they hold $89 billion in cash (don't get too excited: that's all borrowed money).  Second, the federal government is backing up this company.  The FDIC has agreed that it will guarantee up to $139 billion in future borrowings, which GE will have to undertake (no pun intended) as their existing debt matures and becomes due to be paid off.  Also, the Fed's commercial credit facility (thank you,  Ben Bernanke) has provided short term financing to GE and will continue to be available should the need arise.  So, I don't foresee any liquidity problems for GE; if its loan portfolio deteriorates, it will be able to borrow money to pay its own creditors and to fund operations. 

    But, here is the danger for common shareholders.  Tangible common equity is gaining notice as an important metric among analysts.  As pointed out in a blog by Rolfe Winkler, CFA: optionarmageddon.ml-implode.com/2009/02/23/tangible-common-equity/  ,the Fed is starting to pay attention to the TCE of banks (looking at the ratio of loans to TCE) as an indicator that a bank may be in danger of failing.  The Fed is expected to announce the results of the banks' financial stress tests soon.  Winkler notes that  TCE is likely to be discussed as part of the stress test results.  Unfortunately, GE's ratio of loans to tangible common equity is several times worse than that of the banks, even the most shaky banks.  There is a risk that GE will make headlines in the newspapers regarding this comparison and that will drive the stock price lower.

     Now a new and more ominous headline risk has entered the picture.  "Grant's Interest Rate Observer" in its April 17 issue (I am a subscriber) quotes a portfolio manager, Steve Eisman, of FrontPoint Financial Services) who cites TCE as a measure of corporate financial health.  Eisman points out that General Electric's ratio of assets to TCE is so bad that GE's financial rating should not be AA, as it is currently, that it should be rated as junk.  Eisman wrote this without the benefit of having seen Friday's earnings announcement by General Electric.  A quick calculation of figures on GE's hot-off-the-press balance sheet shows that GE's tangible common equity has been roughly cut in half, which means that the ratio of assets (loans, primarily), to TCE has roughly doubled.  "Grant's" is a highly respected publication.  Its "outing" of GE's very high assets to TCE ratio is likely to make the rounds of analysts and financial journalists.  Others can make the same calculation as I did that Friday's announcement shows GE's TCE deteriorated further and that only a sliver of tangible common equity is supporting a large portfolio of loans.  Such publicity will likely drive down the stock price in the near term and could easily lead to GE selling more shares of common stock in order to bolster its common equity and regain the confidence of the market.  If that occurs, the dilution of shareholders' ownership by the issuance of new shares will drive the share price lower, still.

The bottom line:  I liked GE @ the bargain price of $6.92 on March 6, I do not like it now @ $12.29, given the recent deterioration in tangible common equity on its balance sheet.   I do think that the company will survive, thanks to support from the federal government, and the share price five years from now will be higher than what it is today, perhaps substantially so.  But the recent emphasis on tangible common equity by the Fed and financial analysts is likely to spread to additional analysts and business journalists and they are likely to make the public aware that there is a gaping hole in GE's balance sheet.  GE shares are not suitable for risk-averse investors at least until General Electric raises its tangible common equity and the current financial panic comes to an end.

Disclosure: None of my clients' accounts hold GE shares.  I hold shares of GE in a family account currently and plan to sell them this Monday morning.

WHY STOCK PRICES ARE RISING NOW

Bull (stock market optimist):  The S & P 500 Index has risen 28% in the past six weeks !  This substantial rise is a sign that the economy is about to pull out of recession.  Stock prices are one of the Leading Economic Indicators and tend to foreshadow turning points in the economy.   So, stocks will continue to rise and the economy will soon follow it upward.

Bear (stock market pessimist):  The rise in stock prices is just a temporary rally.  The economy shows no signs of reviving - it is just collapsing more slowly than before.  Stocks rose sharply, but briefly, last October and again in November, but then fell back to a new low in early March.  The same thing will happen again because we are nowhere near the end of this recession; it may drag on for years.

Bull:  It won't drag on for years.  This recession is already much longer than the average recession.  We don't have to worry about it morphing into a depression as long as the Fed continues to expand the money supply, and it is doing an excellent job in that department.  Recessions all end.  Economic booms seem like they will go on forever, but one day we wake up and find ourselves in recession.  Most observers knew that the last economic and housing boom would eventually end badly -  we just didn't know when.  The same is true in reverse during a  recession - we know it will end, we just don't know when.  This recession is already long in the tooth.  One positive sign: so many auto factories have been shut down that production is now much lower than auto sales, so inventories of cars on dealers' lots is declining.  Soon, factories will have to recall workers just to keep up with the present level of sales and scrapping of old cars.  The same thing is happening in housing: new housing starts are well below demolitions plus the growth in numbers of households.  These are seeds for the upcoming economic recovery.  We don't know exactly when the recession will end, but if we are only half way through it, I will be very surprised. 

Notice how the overriding pessimism in the media has begun to abate? Government officials had been scaring us with warnings of gloom and doom in order to get approval for their economic stimulus and corporate welfare proposals. Now that those programs (TAF,TARP,TALF, Stimulus Package, etc.) are all in place, we have been hearing those same government officials speak optimistically of potentially good signs in the economy.  They have gone from being overly pessimistic to overly optimistic.  All that has really happened is that the economy is worsening at a slower rate and much of the data is not as bad as was expected.  The rise in the stock market is so far our only early sign of a better economy.  It typically rises 3 - 9 months before the economy pulls out of recession.  In the coming weeks we can expect declines in the four-week moving average of initial claims for unemployment insurance (announced every Thursday morning).  This is another powerful Leading Economic Indicator, one that tends to turn downward just before the economy starts to improve. As this indicator continues to show improvement in the job market, it will confirm the stock market's rise as a precursor of a better economy.  Investors who minimize risk by waiting for further economic improvement before investing in stocks will likely find themselves buying shares at much higher prices in the future.