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.
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.
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
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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.