Wednesday, March 30, 2005

Bill Cara: The End-of-1Q05 Equities Big Picture

Bill Cara: The End-of-1Q05 Equities Big Picture

Bill Cara does a great job of making his case. He is bearish. He and many others. This market has been a tough one. However, the economic cycle is in place to have four or five very strong years.

Keep in mind that there is an element of truth in the efficient market hypothesis. In other words, the market is currently fairly priced if one takes in to account all factors. The tricky part is that the factors include a psychological or perception factor. This sentiment factor can keep the market over or under-priced for a considerable period of time. The bubble of the late 90's is an oft mentioned example where the market went high on fundamentals but then went very high on misplaced sentiment. We have been in an upside down bubble for a few years. Stocks have an earnings yield equal or greater than bonds with growth potential as a bonus. The market has been discounting the growth potential heavily.

Again, the good news is that the short-term traders will jump on board and help push prices up quickly once the big move starts. Today the market is having an excellent day but it is hard to get excited when the market is simply bouncing off the lower end of a trading range. I am a bit excited about the gap up in AMR. A growth rate of 3 or 4% in seat miles will at some point cause a significant jump in revenues as rates will rise quickly when more seats are filled. The operating leverage of this business is huge. Profits will be very large in the next high utilization cycle.