Is Stephen Leeb a Waffler?

Regarding today's "Leeb ETF Trader Update" by Stephen Leeb (see excerpts below), it seems to me that he is waffling. I am not sure what the statement: "the way (the banks) act is not confirming a firm bottom" is supposed to mean. When do big market bottoms appear to be firm, unless it is 6 months later and 1000 points higher. A week ago this column was pretty bullish. Now he says to sit on the sidelines with cash. I don't think most people can get in and out of all their investments in one week.

This paragraph from Leeb is equally confusing: "That said, at this time we'd have to say the near-term outlook is as clear as mud. We suspect the market will have an upward bias and that the financials will continue to recover, thanks to the Federal Reserve's aggressive rating cutting and steps to ease the credit crunch. That outlook is backed up by positive divergences in the stock market, positive earnings trends (ex the financials) and continued strength in commodity prices. Nevertheless, we can easily envision another problem cropping up in the credit market (such as more big write downs) that would cause a setback and a retest of the previous lows."

I think we all understand that the near term (next 3 months?) is confusing. It always is in the vicinity of a market bottom. Economic problems that cause the bottom don't ever get resolved quickly or convincingly.

I agree with Leeb's view of an upward market bias and the reason for it: the "put" the Fed put on the market with the orchestration of the BSC acquisition by JPM and then telling the world the Fed was backstopping the banking industry. Sure, maybe the lows will get retested (for a third time), but I do think "the bottom is in". It would be horrific for it to get taken out. That would mean the Fed wasn't able to guarantee the banking sector, which means the failure of the Fed and really by extension, the failure of the American economy and government.

What situation will occur in banking where the Fed can't guarantee the loans causing all the market problems? None can be seen (or ever could be seen) other than a complete collapse of the US dollar or a run on the money center banks. The only question there ever was, that was answered last week, is if the Fed would be willing to rescue the banking sector. It is willing and able. The Fed's (US Central Bank's) primary mandate is to be "the bank of last resort". It is fulfilling that mandate.

The only question I can see that is not answered, is what the government will do to backstop the housing market. The Fed can't really help with this. It will take legislative action to enact some type of incentive to buy homes or change the term of loans headed towards default. But, I think the housing mess may be starting to wind down on its own. The price drops in the most leveraged markets (Phoenix, LA, Miami) are now significant, which is good. At some point, when the big bubble from '04-'06 has been completely reversed those prices will become attractive and buyers will emerge. I think there is another 20% to go in those markets, so we are over half way there. As long as buyers can find mortgages, home buying will stop the drop at that point. The Feds should be able to assure there are mortgages available for qualified borrowers, through Freddie Mac and Fannie Mae.

I am also hearing concern about auto loans and the securitization of that market. But this is not anywhere near the problem of housing. First, autos are a relatively small market. At $30K average each and 16,000,000 sold per year in America, the total market is $480B. But, second, autos always depreciate. This is the big difference. A car will lose 80% of its value in 5 years. We are already 2 years into the credit crunch. Cars sold in 2004 are probably worth 30% of new. Those sold in 2006 are probably worth 60% of new. So, this problem gets solved just by time. Within 2 or 3 years more years, all the problems will get cleaned up on their own through depreciation of the problem asset. The default loans over that time should be less than $100B, with much if not all that loss already reserved.

So, I think now is the time to be buying the market, even if cautiously or by dollar-cost averaging. By the time the "all clear" is sounded, it will be too late and the market will be 10% higher than today or more. I saw this at the 2003 bottom. The time to buy was prior to April 1, 2003 off the market bottom on March 23. Within two months, the stock market (S&P500) had gone from 788 to 965 for a 18.3% jump. That was about the point where market pundits were declaring that maybe March had seen the bottom.

Brian



Excerpts from Stephen Leeb ETF Trader Update on Friday March 28, 2008

Market Recap:

The eye of the storm in the Western stock markets remains the banking sector. As much as we want to think that last Monday (March 17, 2008) marked an important market bottom, it is the health of the banks that will tell the tale. And right now the way they act is not confirming a firm bottom....

....Today's crisis is much bigger than the Enron blowup and ensuing accounting scandals, and back then Congress was heavily involved the aftermath. It is an easy bet that there will be a lot more regulation to hit the industry in the next couple of years. ... The bottom in the market will come when the XBD components are out of the woods. They don't seem to be there yet....

....at this time we'd have to say the near-term outlook is as clear as mud. We suspect the market will have an upward bias and that the financials will continue to recover, thanks to the Federal Reserve's aggressive rating cutting and steps to ease the credit crunch. That outlook is backed up by positive divergences in the stock market, positive earnings trends (ex the financials) and continued strength in commodity prices. Nevertheless, we can easily envision another problem cropping up in the credit market (such as more big write downs) that would cause a setback and a retest of the previous lows....

.....As we indicated last week, there's no place for heroics in the current investment environment. Until a meaningful trend is established we'll continue to maintain a mere handful of carefully selected open positions. We'd rather sit mostly in cash rather than risk getting whipsawed out of trades due to quick reversals in share prices.