Quote of the Day

“Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle less black than the day before.”

– Jeremy Grantham Co-Founder of money management firm GMO

Grantham’s had some other interesting thoughts on the current state of the markets and the economy in general. The complete May 21^st interview published in SmartMoney Magazine can be found here.

The fair price of the S&P 500 is around 900 but due to the rapidity of which it rebounded from the March 6^th low of 666 it is “likely” that we make a new low. He puts the odds at 50-50 that we re-test this low.

He really likes alternative energy investments.

“Alternative energies and combating climate change are the single most important economic initiatives over the next 10 years—really over the next 50 years. It will be a very exciting next 50 years.”

Mr. Grantham is not optimistic about the long-term benefits of the current stimulus package and other measures taken by our government to assist in spurring economic recovery.

“The stimulus is so great in the United States, China and the United Kingdom, it will kick the economy up. GDP will go back positive for two to three quarters. They’ll assume everything is settled, that throwing money at it has worked. But the long-term imbalance between over-producers [like China] and over-spenders [like the U.S.] will continue. It’ll be a multi-year drag on growth.”

“If the problem is that we consume too much and borrow too much, does it make sense to borrow more and spend more? It doesn’t make sense to solve alcoholism by giving an alcoholic a quart of whiskey, but everyone believes that we must stimulate. So that’s why we feel this is a temporary cure.”

“We’re not rich, and we’re undersaved and underpensioned. Those will be a real brake on economic growth. This will be a pretty long recovery period, longer than we’re used to, but hopefully not as long as Japan took. It will not be as long as the Depression, but it will be several years, and not just two. Lord knows we have had several fat years.”

I believe Grantham would suggest and I would agree that actions to make a positive and permanent change in our economy require a long-term focus and courage to move against the crowd in the short-term. This reminds me of one of my favorite quotes from Albert Einstein, “Problems cannot be solved by the same level of thinking that created them.”

Not out of the woods yet (Part II of II)

Continued from part I. At the time of writing the S&P is now up 33% from its March 9^th lows and essentially even year to date, up 0.56%.

Housing

We are nowhere near the end of housing foreclosures. Mortgage rate resets, which are tied closely to foreclosure rates, are set up to spike mid-way through 2010 and peak in July 2011 at a higher point than we saw in 2008. Notice from the chart how we are currently in a valley or in the ‘eye of the storm’ as some people have said in term of rate resets. Not much is being done to address this problem of coming foreclosures. Residential real estate should continue to be a drag on bank earnings. See chart below.

Trading Volume

While I am no expert in technical analysis trading volume seems to point toward this not being the start of a bull market. William Hester, at Hussman Funds, shows that historically trading volume during the first five weeks of a new bull   is significantly higher than the preceding 5 weeks. Trading volume during the current 5 week rally is actually down about 10% from the preceding 5 week level. See charts here.