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 middle term, 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, the Dubai debt debacle may be just the tip of another Iceland-style iceberg, and while a weak dollar functions as a kind of shadow stimulus right now, making our goods and services cheaper abroad, the Fed appears concerned about the potential for permanent currency erosion. Black Friday retail sales, meanwhile, disappointed, notching a mere 0.5% rise relative to a year ago when, you know, the end of the world as we knew it was nigh.

Yet the market has been on a tear, with the S&P 500 climbing by more than 60% from its March lows. Even the financial sector has joined the fun, chipping in a double-digit gain for the year to date.

This particular mirage is a mesmerizing doozy, with the likes of Goldman Sachs and Morgan Stanley rocketing to massive 2009 gains, 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.

Get smart
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 likely do so judiciously, newly aware of the benefits of bonds, for example. And for the equity sleeves of their portfolios, a focus on cash-flow kings with tremendous track records of success -- and beaten-down share prices -- will be in order.

IBM (NYSE: IBM  ) , Google (Nasdaq: GOOG  ) , and Oracle (Nasdaq: ORCL  ) , for example, have those first two attributes in spades. But they're on my watch list (rather than in my portfolio) because I think their valuation profiles will become more attractive when our dead cat finally touches down back here on planet Earth.

Microsoft (Nasdaq: MSFT  ) and Wal-Mart (NYSE: WMT  ) strike seemingly attractive profiles just now, trading with price-to-earnings ratios that fall below their respective five-year averages. But I don't own those companies, either.

Why? Growth prospects for each appear dim and the competition is stiff. Amazon.com (Nasdaq: AMZN  ) recently faced off with Wal-Mart in a book-price war, for example, and the online retailer was among Black Friday's few bright spots. And woe is Microsoft: Between Apple (Nasdaq: AAPL  ) and the open-source (i.e., free) software movement, Mr. Softy's once-wide moat is getting narrower by the nanosecond.

The upshot? Given my cheapskate tendencies, it's a good thing I'm a patient investor.

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.

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

Google is a Motley Fool Rule Breakers choice. Microsoft and Wal-Mart are Inside Value picks. Amazon.com and Apple are Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call on Microsoft. The Motley Fool owns shares of Oracle.

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-and-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. You can check out the Fool's strict disclosure policy right here.


Read/Post Comments (4) | Recommend This Article (8)

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 December 01, 2009, at 7:16 AM, bucheron wrote:

    Buy undervalued companies, forget what the market looks like, p/e over 10 years past is at 19.87 for the S&P 500, just over the average of the past 110 years or so,which is not an irrational exuberance (those two words have been used too many times at wrong already please). A p/e of 44 like in 1999 would be though but this nothing like it. All the companies you describe here are overvalued or in line with expected growth, so no I wouldn't buy them unless their price goes really down, and if the price does go down I would be asking myself if theres a valuable reason for it since those companies are ones of the most analysed in the world of finance.

  • Report this Comment On December 01, 2009, at 8:51 AM, ldbfjndljbvn wrote:

    "Between Apple (Nasdaq: AAPL) and the open-source (i.e., free) software movement, Mr. Softy's once-wide moat is getting narrower by the nanosecond."

    Uh-huh! So the recent finding that Windows 7 has outsold the entire market share of Apple OS is something you haven't read? DSGi in the UK reports earning are up based solely on W7 sales.

  • Report this Comment On December 01, 2009, at 11:10 AM, madmilker wrote:

    invest in America!

    RETAIL makes NOTHING!

  • Report this Comment On December 01, 2009, at 11:25 AM, pondee619 wrote:

    What is the record of Motley Fool Inside Value against the S&P over the past 6 month, 1,3 &5 year periods? This information used to be published on the fools home page. Now I can't seem to find it.

    Also, if "This Rally Is Ridiculous" should I be investing in anything right now? Shouldn't I be holding cash or another liquid safe investment waiting for less ridiculous prices? Oh. I get it:

    "This article was originally published May 4, 2009. It has been updated."... Nothing new here, Buy a subscription.

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