Toxic Assets, Expectations and an Anecdote

If you have read my prior posts, you know that I am bullish on stocks and consider this a good time to be allocating into equities. There are four things I want to highlight today to bolster that argument. Namely, the Treasuries Toxic Asset Plan announced this morning, Tiffany reported better than expected results, and a conversation I had last week that startled me.

First the Toxic Asset Plan. Treasury Secretary Geithner announced a plan to partner with private investors to to create investment entities that will bid on pools of toxic assets with financing assistance from the government. There is a factsheet on the Treasury's website so I won't rehash it here. In a prior post I mentioned that I was optimistic because I thought the government was finally trying to address all five of the key issues needed to return to a more normal financial and economic footing. They were to: recapitalize the banks, remove toxic asset overhang, find a bottom in housing prices, slow consumer deleveraging, and try to create jobs. Whether this toxic asset plan will work is still debatable, but we have a concrete plan of action from the government and I think that is a positive step. There is real movement on all five areas now.

Second, Tiffany & Co reported bad Q4 results, but they were better than analyst estimates and the stock was up about 5% at the open. I don't cover consumer stocks very closely, but I feel like I am seeing more headlines where things were not as bad as projected. Before things get better, they get less bad, and I think that is what we are starting to see.

Third, and I think most interesting, I talked to a friend of mine last week who told be that they were still being swamped with requests from wealthy households to sell stocks and buy bonds. I found it shocking that investors that have lost so much in equities would now decide to lock in low interest rates and effectively give up the opportunity for capital gains from here. I asked my friend if he was serious. He said that investors were not thinking about how to regain some of the money they lost, they were just trying to prevent further loss. I knew this reallocation had been happening, but I guess I thought it had mostly run its course. There continues to be selling pressure on equities from this type of activity, yet the market has bounced about 18% off its March 9th low. The fear remains, but I think we are running out of sellers.