Dow 10,000! Sellout or Dig in? Is the Market poised for a fall?

Shawn Baldwin from CMG discusses the market opportunities at Dow 10,000 and Goldman Sachs


The Dow reached the conspicuous 10,000 milestone strongly based on the performance of large financial companies. As I listened to the various market pundits during the climb, I cast a sidelong glance  at the Dow 10,000 cap I received from the Chairman in the late 1990’s resting in its place of honor on my mantle–it was relevant once again.


What a difference a year makes. 

Now that we are in full gear of earnings season we find the  performance of the TARP sustained banks leading the market. The performances of JP Morgan, Morgan Stanley and Goldman Sachs will be fundamental drivers of market value  in the immediate future. I guess saving them was a good idea afterall.

A big winner of course is the venerable, omni-present Goldman Sachs. I participated in a discussion with the head of Investment Banking, David Solomon, at an invite only forum this year for global 500 companies called the Global 50 which is comprised of presidents and CEO’s of multinational companies. During our panel, David carefully outlined his thoughts on financing and future prospects. He was both focused and clear on the areas in which he saw opportunity and the path for companies going forward. I bet on both him and Goldman to succeed after that meeting. You can expect them to continue on that winning streak as fixed income continues to perform strongly in this environment.

Goldman is well positioned in this arena and they will continue to dominate in the future (some conspiracy theorists would surmise that GS helped to create the scenario but that is another discussion altogether) which is why Goldman’s CEO Lloyd Blankfein presciently returned all the TARP funds back to the Federal Reserve bank so that they could pay their bonuses sans Neil B. the TARP cop or any other “Pay Czars” thoughts or comments on the subject. These bonuses will clearly be a large part of the ongoing discussion and commentary as people who aren’t receiving these bonuses openly debate their value or necessity. I won’t be one of those people. 

With the Dow at 10,000 the lingering more relevant question is are we at the precipice of another market correction? In the past 6 months the market has increased over 58% and there hasn’t been a comparable period to this in modern times since 1932-1933. During this period corporate bonds have produced equity like returns with substantially less risk.These returns have come through a mostly jobless recovery domestically and globally–look for that to continue. In the Uncertainty article posted on March 30, 2009 I stated that unemployment would most likely hit 10% in 2010, that prediction has regrettably come to fruition sooner than I expected.


Further support of this thesis would be that oil has rallied substantially and has hit a $75 a barrel highs while both stocks and bonds continue defying gravity. The two instances are diametrically opposed and serve to outline the schizophrenic market in direct juxtaposition to traditional market knowledge.

Something has got to give.

The bull market rally has unfortunately sidelined some investors who weren’t courageous enough to buy in early. They now fear that they may have missed their opportunity and that fear is overwhelming those professional managers. This fear will work in tandem with the professional managers who did take equity positions early and who are eager to take profits. This will undoubtedly lead to a rapid sell off since the world has discovered that the sky is no longer falling and market highs are still possible therefore allowing the cautious investors to return into the market and ride the repeat/rebuild cycle again. The street is very democratic in that sense and works on the theory of expansive buy in of new investors. Prepare for volatility. 

The evidence for the basis of this case can be read on the tape, if we simply looked at cash flows we would find that money was flowing into bonds over stocks at a rate of 6 to 1. As a trader, earnings season always represents a special time that we focus on individual stocks and not the macroeconomic position of the market which means that the individual performance of a company isn’t predicated on the general market conditions and allows for short term dynamic trading opportunities.

 A closer look at the numbers reveals that the S+P 500 is approximately 35-38% overvalued and while $2.5billion has went into stocks over $245 billion went into bonds. This signals market preparation for a sell off in equities. The Federal Reserve Bank effectively created $800bn of buying power when the easing began–one very large question mark is how will the markets react when that stimulus package is no longer in place? The exit by the Fed will be of high importance– if the stimulus is ended to suddenly the results will be disastrous. In order to prevent that debacle the Fed will most likely have a reverse repo strategy. This is street terminology for a reverse repurchase agreements, in which the Fed sells the paper with an agreement to buy them back at a slighlty higher price. This will allow rates to stay low. There is also the distinct possibility of the Fed striking these agreements with money market mutual funds which will make them more profitable in the upcoming year–making them viable, profitable investments over the short term.


Further evidence of a market sell off is the reduction in manufacturing and sluggish economy of the United States. A notable fact is that over 70% of the compositon of the GDP is comprised of consumer spending. This will not be robust as can be deduced from reviewing consumer credit data which has declined for the 7th consecutive quarter. Families represent over 40% of borrowing, so the dearth of credit to them stymies the recovery in combination with insufficient earnings and continued deleveraging pressure on the consumer who unfortunately had no TARP assistance.

 Performance of the financial companies will be split: the entities with fixed income, underwriting and sophisticated trading desks will be strong performers..the new BHC’s (Bank Holding Companies) with roots as an investment bank (i.e Goldman Sachs) will favor much better buoyed by their capital market activity. The entities with consumer focus and mortgage exposure will not fare nearly as well since the financial solutions have not made their way to main street yet for the reasons outlined in the previous paragraph. The banks performance can be outlined and surmised will be constrained by 1)consumer credit, 2) Commercial credit 3) loan loss reserves and 4) shrinking revenues in mortgage origination fees. Bank of America and Citigroup will not fare as well in the short term due to these circumstances.

My suggestion is to take profits in the market now before the imminent market sell off and return again afterwards to turbocharge your returns. There will be other areas to invest in the immediate future that will generate high returns and growth. They are the following:

1)Emerging Markets-high growth (with risk) will be available through these markets and the international companies that serve these areas.

2)Alternatives Investments-Private Equity and Hedge Funds (the ones that survived) are poised to take advantage of the low valuations and market volatility respectively.


3) Commodities-due to coordination and inflation risk Foreign Exchange is on the verge of becoming its own asset class and this will continue given the volatility that will be present as a dollar alternative is sought and individual governments seek to independently change policies from the colletively coordinated easing to move the world out of the financial crisis. Watching the continued strength in gold and oil and the substantially weakened dollar creates currencies that are stronger that buy equities because they are cheap on a currency strength basis. This will also assist  in repowering the equities market after the sell off. During this cycle commodities with Foreign Exchange in particular, will be on a tear as the rest of the world is built out.

We will examine and outline these areas to successfully exploit them for profit.



Shawn Baldwin at the Global 50 meeting with the moderator, Larry Bossidy the Fmr CEO of Allied Signal, Honeywell and David Solomon Global Head of Investment Banking for Goldman Sachs

About the author

Shawn D. Baldwin is Chairman of the AIA Group (AIA), an alternative investment and advisory firm based in Chicago