TGIF

The market filled in Wednesday's closing crater yesterday. I suppose one could say that "real buyers" snapped up bargains. Or that "real buyers" saw good earnings on companies such as MMM and put more money to work. Or perhaps shorts put on Wednesday were covered. Or that Galleon liquidation selling pressure eased, allowing stocks to rise from light buying. Or underperforming beefers are trying frantically to catch up. Or perhaps all of these together.

My thinking on the cause of this long, grinding run is the combination of (A) the kindling - a slow recognition by more and more investors that the economy is recovering and will return to a reasonable level of activity in 2010, plus (B) the heavy fuel - insurance companies who sold variable annuities with floor guarantees distributed around S&P 1000 to 1300 are slowly being forced to re-buy stocks. I had written once not too long ago that the stunning selling panic of September and October 2008 was likely partly caused by the selling of such holdings as annuity floor guarantees were being hit. This is quite like the "portfolio insurance" debacle on the Crash of 1987. In 2008, the selling was spread over a much longer time than one day as the distribution of guaranteed minimums was broader in "price space". The reversal re-buying will necessarily be spread over more prices, too. Such is what we have seen in this long, grinding run.

From the monthly S&P chart and assuming a seven year maturity, the bulk the guarantees must have been written in the S&P 1100 to 1300 range, with somewhat less in the range of 1000 to 1100.

What does this mean for the future ?

This annuity re-buying pressure can continue but will peak around S&P 1200 - maybe 1150 to 1250 - a range in price space. After that, the economy must have recovered to normal conditions to provide not only earnings but also good prospects for earnings growth in 2011.

Also, it means that unless the economy DOES improve sufficiently to attract other buying support (beefers, mutual funds, etc), that a wave of selling could re-emerge if prices start going lower again.

For now, I'll ride the bull elephant to the next water hole.

As for new money, it's going into my cash account. I don't see any "screaming buys" now. And I don't have strong new ideas ... yet. I'm, beginning to noodle over where to look for that new water hole.

PS: I mentioned something to Mrs. B yesterday about her stocks in Sky Fund. Many of the big companies whose shares she owns are within easy striking distance of all time highs. One example is MMM. To me, many indices are deceptively negative, as their heavy weights to financials misses strength in big industrial and consumer products names.

PPS: I suppose you can guess that I think such guaranteed floors on stock investments should be prohibited, whether in variable annuities or in any other derivative contract, except via true stock options.

Word of the Day

"Ethotic" - adjective [$10]
Ethotic means of, relating to of characterized by ethos (from Greek - nature, disposition). An ethotic argument is one that attacks the character of the opponent. It's a specific form of argumentum ad hominem.
Sentence: Why does so much American political speech descend instantly to ethotic arguments ? Perhaps there is little ability in the ruling classes to generate true solutions. Or few of the noble virtues in them . Or both.