The Recent Rally Isn't Much of a Gift

Set aside the hype of the day and the planned fiscal stimulus for a moment and focus on the real news of the day. Yet another over-levered American icon has filed for bankruptcy. The real bad news in the filing by the Tribune Co. is that it was a deal put together and run by a smart businessman, Sam Zell. The bailout of the Big Three is going to end up with a car czar running the show from Washington. Auto company management has been bad enough. Do they really think oversight from a politician is going to make things better? Automakers will be forced to focus on fuel-efficient cars that no one wants to buy. This plan will work about as well as the energy czar did in the 1970s.

Most of Monday's news on the corporate front consisted of layoffs and earnings downgrades. It was just Friday that we announced the largest one-month job loss in 34 years. There does not appear to be an end in sight for layoffs, and unemployment is likely to continue climbing in the months ahead. It is almost a certainty that we will see large layoffs in the auto and financial industries after the first of the year.

Goldman Sachs analysts have made two interesting predictions in recent weeks. One is that we are only halfway though the credit crisis and that normalcy won't return to the banking markets for another 18 months. The other is that Goldman expects the S&P 500 companies to earn $53 next year. Buying stocks right now implies that you are willing to pay 17 times earnings for a zero-growth company with declining asset values and financing problems. I have done a lot of work with distressed companies over the years, and the multiples I would pay for a company facing the problems of U.S. industry are much, much lower than 17.

This has been a neat little rally off the lows. It has been driven entire by stimulus announcements and bailout news. If I were trading it from the long side, I would be quick to take profits in here. Santa may hang around a bit, but the last person at the party could find himself with not only a bad hangover but having to clean up the mess. The time to be a big buyer of stocks was during the October selloff. I am keeping what I own but not adding to any positions until I see the market go lower. With real estate falling and unemployment rising, I am pretty confident that it will.

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At the time of publication, Melvin was long Cleveland Cliffs and L.B. Foster, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.