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This Rally Is Ridiculous

I realize the market is a discounting machine -- with investors collectively trying to anticipate future events and price shares accordingly -- but let's face it: This rally is ridiculous.

Wall Street is on a bender (yet again), and the shiny, happy future it seems to be looking forward to overlooks the fierce grimness of now. It's a mirage, at least in the near term. Maybe the midterm, too.

You may be right; I may be crazy 
Still, it's worth pondering just how much longer this particular bout of irrational exuberance might last. If the market can make it here, after all, it can make it anywhere.

Unemployment is high and poised to climb higher, GDP remains mired in negative territory, and the much-ballyhooed news that consumer spending rose during the year's first quarter (hurrah!) evaporated on contact with even just casual analysis. January produced virtually all of the quarterly gains, February was flat, and March actually saw consumer spending decline. More recently, personal income has been mired in flattish territory, according to the most recently reported figures.

Yet the market has been on a tear, with the S&P 500 climbing by more than 40% from its March lows. Even the financial sector has joined the fun, by pacing the market over the past three months with double-digit gains.

This particular mirage is a mesmerizing doozy, with the likes of Goldman Sachs and Morgan Stanley rocketing to massive gains on a year-to-date basis, even though the black hole at the center of our financial galaxy -- i.e., those pesky toxic assets -- remain, well, toxic. The fabled TARP-initiative that Treasury has floated to address the problem -- a public/private partnership that essentially subsidizes private-side investors at the public’s expense -- has yet to get off the ground in a serious way.

History repeats? 
With that as a backdrop, it's worth asking whether additional financial-stock moon-shots can be far behind, even from the sector's currently inflated level. I don't believe such a rise would be warranted, at least not based on fundamentals. Indeed, I'm among those who believe that the financial sector should return to its former lack of glory and become a comparatively much smaller slice of the market's pie chart, complete with permanently shrunken market caps for former big boys.

Between now and that smaller, shabbier future, though, there may be money to be made, largely by speculators betting that the financial sector will essentially become a government entitlement program -- albeit one that puts up with little of the pesky regulatory oversight that attends, say, Medicare or Social Security.

Bright like Buffett
For those who prefer to invest rather than speculate, there are far smarter ways to proceed -- and to align your portfolio with what a sustained market recovery will probably look like. As shell-shocked investors return to equities, they'll probably do so judiciously, newly aware of the benefits of bonds, for example.

In this, they’ll be following the lead of Warren Buffett, who has lately pared back his equity stakes. The Oracle of Omaha has trimmed his positions in CarMax (NYSE: KMX  ) and ConocoPhillips (NYSE: COP  ) , and he sold a double-digit chunk of Berkshire Hathaway's stake in ratings agency Moody's (NYSE: MCO  ) , too. These moves, moreover, come amid an increase in Berkshire's slugs of U.S. Treasuries and corporate bonds.

Sounds like a plan
For my money, savvy types should watch Warren with one eye, while eyeing the cash-flow kings with tremendous long-haul track records of success with the other. Buffett dialed up his investment in health-care kingpin Johnson & Johnson (NYSE: JNJ  ) , for example. And for those seeking growthier fare, Apple (Nasdaq: AAPL  ) , Medtronic (NYSE: MDT  ) , and Amgen (Nasdaq: AMGN  ) strike impressive profiles, too. They're financially healthy stalwarts that boast robust earnings-growth estimates.

Cheapskate that I am, though, all the above are on my watch list (rather than in my portfolio) because I think their valuation profiles will become even more attractive when our dead cat finally touches down back here on planet Earth.

The Foolish bottom line 
For those looking to put money to work right now, my colleagues at Motley Fool Inside Value have identified a host of companies that fit the kind of profile I like. And their market-beating recommendations come with "buy-below" prices to help guide you to the right time to buy. That's handy indeed. If you don't have the quality (or quantity!) time to don a green eyeshade and conduct deep-dive fundamental research and valuation work, not to worry: They've done it for you.

Even better, you can check out the service's complete list of recommendations for the low, low price of, well, nothing. Click here for 30 days of complete access to the service that helps you "invest like an adult." Even your inner child -- if not your inner speculator -- will thank you for it.

Already subscribe to Inside Value? Log in at the top of this page.

This article was originally published on May 4, 2009. It has been updated.

Shannon Zimmerman runs point on the Fool's Duke Street and Ready Made Millionaire services, and he runs off at the mouth each week on Motley Fool Money, the Fool's fast 'n' furious podcast. A fresh edition of MFM hits iTunes each Friday, and you can listen at iTunes. Shannon doesn’t own any of the companies mentioned. Apple, Moody's, and Berkshire Hathaway are Motley Fool Stock Advisor choices. Moody's, Berkshire Hathaway, and CarMax are Inside Value recommendations. Johnson & Johnson is an Income Investor pick. The Motley Fool owns shares of Berkshire Hathaway. You can check out the Fool's strict disclosure policy right here.

Read/Post Comments (6) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2009, at 1:32 PM, prose976 wrote:

    It's only ridiculous if you're in the wrong (overvalued) equitites. Otherwise, the rally continues to move within very reasonable valuations.

    Most investors who are proclaiming how ridiculous this rally is are just fretting because their short positions are killing them, their options are expiring, etc.

    I'm doing wonderfully, and continue to invest into this rally, and I'm documenting the whole thing (real money, real transactions) on my Fool blog.

    No matter where the general market is, it always leave us a profitable way in and a profitable way out.


  • Report this Comment On September 11, 2009, at 2:09 PM, fortify7 wrote:

    I see a black Monday coming soon. While the market had gotten too low, this rally jumped too high too fast. A serious correction is due and if not done soon, I suspect we will see a single day crash when the legs fall out of this rally.

  • Report this Comment On September 11, 2009, at 4:25 PM, tgauchat wrote:

    Sadly, I agree with fortify7.

    Why or why can't people be less greedy and, as a result, have a less tumultuous market?

    Oh -- Wait ... It's not the retail investors causing the volatility. It is MANIPULATION and exploitation by Wall Street. Retail investors only exist as a pool of rubes to fund the rich in power.

  • Report this Comment On September 11, 2009, at 5:52 PM, bigpeach wrote:

    This is the 5th time you've posted this article, nearly a word for word copy of the previous 4. You were clearly wrong the first time you posted back on May 4th, when you were for some reason flabbergasted that companies that had lost 90% of their value could regain a small fraction of that former value. You've been wrong ever since.

    There's a very obvious fault to your thinking. You rely entirely on relative value to make your case, and pick the lowest point. Why not pick the highest point? Then your article would read:

    This rally is ridiculous! Wall Street is on a bender (yet again). American Express has plunged 48% from it's high two years ago. Capital One is down 54%. Sounds a little different doesn't it? I'm continually amazed that people are able to make this "too far too fast" argument, completely ignoring just how much value had been lost before the rally.

  • Report this Comment On September 12, 2009, at 4:40 AM, DDRealist wrote:

    Currently, countless posts and articles are concerned the market is going too high... this is a bear market rally... we are bound to hit a correction... this trend is unsustainable... the rally is defying fundamental logic.

    At the same time, those who oppose argue this market still has legs... we are still playing catch up... we still have room to move higher...

    I believe independent, prudent, intelligent, calm, cold-shrewd, non-emotional, rational, disciplined readers should know by now it's anyone's guess.

    I see further absurd predictions such as we could easily see the Dow hit 12,000 by year end while others argue we could very well easily see the Dow crash to 5,500

    I see both sides of the story. I also witnessed both sides - the longs and the shorts - get burned in this market within the last year or so.

    What has kept me sane was the simple questions I asked myself of my own personal business I fortunately continue to own:

    Business has historically for years given me back excellent returns... now, because we're in this funky recession, shall I sell off my stock at a ridicules price? Of course not, that is because I personally know the ins and out of the business I am involved, and, most importantly, it's only a matter of time before business will go back to norm (I am proud to say the Company survived '82; I actually grant credit to companies who accomplished this)

    The opposite occurred during the early 2008 when I was given an offer for my company. I declined it. It was simple: Why sell a perfectly good business that I enjoy running and making a decent living?

    Put your intelligent cap on; don't time the market; stop getting caught up in emotional roller coaster rides from fortune tellers (even the best were not completely accurate); and don't invest money you cannot afford to lose.

  • Report this Comment On September 14, 2009, at 10:04 AM, Tacomatight wrote:

    I second Bidpeach!!!!!!!!!!!!!

    "This is the 5th time you've posted this article, nearly a word for word copy of the previous 4. You were clearly wrong the first time you posted back on May 4th, when you were for some reason flabbergasted that companies that had lost 90% of their value could regain a small fraction of that former value. You've been wrong ever since."

    My God...this and that damned Cramer article need to die for God's sake. I really love this site but stop the amateur hour with these dogmatic diatribes.

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