Thank Uncle Sam for the rally

By Bill Fleckenstein

There is nothing like a monumental surge in government stimuli to help boost the markets and, by extension, people's perceptions of the news.

I've been struck by how well the recent stock market rally illustrates an old saw -- the market writes the news -- because as this powerful rally has built over the past six weeks, enthusiasm has increased with it.

A stimulus-is-bliss rally

The primary reason for the rally, in my opinion, is the extraordinary amount of liquidity and fiscal stimuli that has been provided by the Federal Reserve and the federal government.

In a recent issue of Grant's Interest Rate Observer, Jim Grant charted the stimulus money (both monetary policy and government spending) as a percentage of gross domestic product for this downturn, compared with the previous 13 recessions.

In those earlier recessions, if you added all the percentages, the cumulative monetary stimuli constituted about 6 percentage points, while thus far in this recession, the stimuli have clocked in at 18%. Add in the 11.9% (of GDP) supplied by the government and you get 29.9% for the combined stimuli. That's compared with a total of 39.3 percentage points for the prior 13 recessions.

When the current recession is compared with the Great Depression, we find the relative amount of stimuli is almost four times as high today as during the 1930s collapse, even though GDP has dropped only 1.8% versus 27% back then.

Given the massive stimulus efforts, one must be leery about the conclusions one draws concerning what this rally might mean.

This rally could indicate that times are getting better -- or just that massive liquidity is leaking into the stock market and that the real economy is going to see more inflation.

There is a tremendous amount of motion, and there are lots of ways to get fooled. Money printing won't necessarily solve our problems, but expressing a bearish view on that subject is dicey. Who can say what can't happen? Thus I continue to believe there is no big hurry to participate in stocks generically.

Waiting for ideas to take off

That doesn't mean there aren't potentially terrific ideas to be found both on the long side and the short side.

Sybase (SY, news, msgs) is a software maker in which I took a long position in late February and sold a couple of weeks ago. It's been one of the few companies that, despite the environment, has really managed to make progress, both because CEO John Chen is a good businessman and because of Sybase's strength in the mobile-messaging arena.

At some point I would like to repurchase the stock, but for now I am just paying close attention.

Poker as teacher

The patience required in investing is not so much the patience for sitting with a position after you establish it but the willingness to be patient beforehand.

To quote my friend Jack McHugh (using a Texas Hold 'Em analogy): "Waiting for more information allows a patient gambler to better know when to commit his or her chips. . . . There's always another hand to be played, just as there will always be a new set of investment opportunities to consider."

I agree. And I will continue to wait for opportunities where I believe the risk-reward ratio is really in my favor and I am able to muster up some conviction.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.