After Erasing 'Lehman Loss,' Bulls May Extend Rally

Wednesday, 22 Dec 2010 08:09 AM

 

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The advance that lifted the Standard & Poor’s 500 Index above its level before the collapse of Lehman Brothers Holdings Inc. in September 2008 is an encouraging sign for bulls, technical analysts said.

The benchmark gauge for American stocks rose 0.6 percent to 1,254.6 yesterday, surpassing its closing level of 1,251.70 on Sept. 12, 2008, the last trading session before Lehman Brothers filed the world’s biggest bankruptcy. After closing within 1 percent of the milestone on five of the six previous days, the index may now have room to rise, according to analysts who base forecasts on price charts.

“It’s a psychological and technical victory for the market,” said Christopher Verrone, lead technical analyst at New York-based Strategas Research Partners. “It strengthens the case that 2011 might be better than a lot of people expect.”

U.S. government and Federal Reserve spending to stimulate the economy and 70 percent of S&P 500 companies beating profit estimates for a record six straight quarters pushed the S&P 500 up 85 percent since March 2009. The index will end 2011 at 1,374, according to the average projection of 11 strategists at Wall Street’s biggest banks, producing the biggest three-year rally since 1997-1999.

Losses for the S&P 500 totaled 46 percent between Lehman’s failure and March 9, 2009, as the worst recession since the 1930s intensified. The index started to rebound three months before the contraction ended in June 2009, according to the National Bureau of Economic Research. It has to climb 25 percent to surpass its October 2007 record high of 1,565.15.

‘Starting Gun’

In the week of Lehman’s bankruptcy, Bank of America Corp. took over Merrill Lynch & Co. as it teetered on collapse and the government seized American International Group Inc. The S&P 500 surged in the final two days of that week after the government announced a plan to purge banks of bad assets and crack down on short sellers.

“Lehman Brothers was really the starting gun for creating this sense of fear, and we still haven’t fully overcome that fear but we’re in a healing process,” said Jeffrey Coons, president of Manning & Napier Advisors Inc. in Fairport, New York, which manages $35 billion. “The aggressive moves of the Fed right after Lehman and ongoing today have been an important driver for the stabilization of stock prices.”

The S&P 500, up 13 percent in 2010, has advanced 6.3 percent in December after losing 0.2 percent in November and posting a combined gain of 13 percent in September and October, the biggest increases during those months since 1998. The measure has rallied 20 percent since Fed Chairman Ben S. Bernanke suggested on Aug. 27 that he was prepared to purchase bonds to spur economic growth.

Tax Cuts, GE

The MSCI World Index, a gauge of 1,660 shares in 24 developed nations from the U.S. to Hong Kong, is within 1 percent of wiping out its 46 percent drop since Lehman’s collapse. The index has gained 85 percent since March 2009 as central banks worldwide maintained record-low interest rates and governments spent trillions of dollars to spur growth.

Should the MSCI World erase its loss, “it would be a positive and bullish development,” said Christian Bendixen, director of technical research at New York-based Bay Crest Partners LLC. “It has psychological and anecdotal significance.”

The S&P 500 has risen 13 of the past 16 weeks. The last time that happened was in 2004, according to Howard Silverblatt, S&P’s New York-based senior index analyst. The December advance was buoyed by an agreement between President Barack Obama and Republican lawmakers to extend tax breaks, and by reports showing consumer confidence, retail sales and manufacturing beat economists’ forecasts.

Priceline, Ford

Consumer stocks in the S&P 500 such as online travel agency Priceline.com Inc. and Dearborn, Michigan-based Ford Motor Co., had recovered all their losses from New York-based Lehman Brothers by March 4. The S&P 500 Consumer Discretionary Index has surged 21 percent since then.

Priceline, based in Norwalk, Connecticut, has surged almost five-fold since September 2008 to $407, bolstered by a rebound in hotel stays and international travel. Ford, the world’s most profitable automaker and the only major U.S. car company to avoid bankruptcy last year, more than tripled to $16.99 as demand for pickups and sport-utility vehicles revived.

Analysts forecast that S&P 500 earnings will total $85.33 a share in 2010, up 38 percent from $61.77 a share in 2009, according to the average projection in a Bloomberg survey. That’s the biggest increase since 1988, Bloomberg data show.

“The market is responding to earnings,” said Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management Inc., which oversees about $50.6 billion. “It’s a commentary on corporate flexibility, the ability of companies to cut costs and increase productivity. This looks like it can last through 2011.”

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