May 7, 2015

The Stock Market Will Continue To Climb.

The Dow at 20,000-21,000 looks easily within reach in 2015.

 Even though the Dow has essentially gone nowhere in 2015, I do believe the remainder of the year will be very bullish for stocks in the USA…In fact, even though the market has basically been sideways for the past 5-6 months, I think this is imminently about to change...and, from right here, view the prospects for a MAJOR RALLY BEGINNING as an “any day now” possibility.

As I have intermittently noted for several decades now, I have long seen the world as being in the midst of gigantic boom (even during the periods when I viewed the stock market as a shorting opportunity) that has been generated by combined effects of two primary forces: The 1990 Death of Communism and the Technology Revolution/Information Age, which cranked up in the 1980’s and is still expanding, exponentially really, all over the planet.

As I wrote some 5 years ago…and still believe to be the same:

August 2010

The USA, China and Russia all have variously different political ideals and structures, but all three (and the rest of the world) are now immensely more interested in making money than in making war. In other words, Capitalism has broken out all over the planet as opposed to what was the case just 20-25 years ago…Think about it. In 1985, you still had several billion consumers suppressed by Communism, living under circumstances, for example, where factories produced according to government mandates (or quotas), not market demand, and making a quality product, or a profit, was rarely a primary consideration…But, how that has changed! Now, China has essentially become the world’s second largest economy, and their government, unhindered by the restraints of congressional gridlock and partisan party politics, is doing everything it can to turn their country into the world’s biggest Capitalistic machine…With China having 20% of the world’s population, this 21^st century version of Capitalism (State Sponsored) has become a  rising global force, and I believe, represents just as much of a dynamic influence for the planet as did  the advent of computers back in the mid-80’s…

But again, China is not alone in their “adoption” of Super Capitalism as a means of elevating the living standards of its citizenry. Though each government’s approach and degree of support may differ, when you get down to it, as I’ve said before, the whole world has become about business. Whether it’s just the old guard, well developed, Western style economies…or Southeast Asia, India, Arabia, Eastern Europe, South America and even parts of Africa, nations everywhere, even the old Communist ones, are now geared, MORE THAN EVER, towards expanding commerce, not ideologies…and in all of those “new” capitalist nations, the most important thing they are really producing is the massive growth of their middle classes. They are producing hoards of new wage earners and CONSUMERS, which in the final economic analysis, is what really keeps everything going.

Beyond that, when you combine these new aggressive attitudes towards capitalism with the still ongoing, still in-its-early-stages Technology Revolution/Computer Age, I firmly believe you have the prescription for a worldwide economic boom…And I’m not just talking about some two or three year thing.

Simply stated, I think the confluence of these two forces, the “introduction” of maybe 1/3 of the world’s population to Capitalism, and the still-just-getting-started Technology Revolution, will result in worldwide growth, maybe on a scale unseen ever before…And as a consequence, this suggests (to me) that the chart above does have nowhere to go but UP, and whether it takes 4 years, or 10, we WILL then see the Dow at 25,000…or, for that matter, even higher.

So where does that put us in 2015?  

Start with these two observations…

Add to all of the above that we also now have the lowest interest rates…at ZERO even…in modern history.

AND

Combine these unprecedented low rates with the ALL IMPORTANT price of Crude Oil being sliced by over 50%...in the space of less than 6 months.

AND...The reality of these four unquestionably dynamic factors suggests to me that…

NOBODY, AND I MEAN NOBODY, ON THE PLANET HAS EVER TRADED THE CIRCUMSTANCES WE NOW HAVE. NOBODY HAS BEEN “HERE” BEFORE…which means, I believe, that you can just take a whole bucket of supposed economic “rules”, buzzwords, and talking head talking points and throw them totally out the window…

Every day, really 24-7, there are thousands of columnists, analysts, economists, newsletter writers, brokers, bankers, pundits, experts and innumerable talking heads all filling the internet and the media with loudly profuse “logic” as to what the economy and stocks are going to do…They cite PE’s, cycles, charts, indicators, signals, sentiment, inflation, exchange rates, interest rates, Fedspeak, job statistics, inventory ratios, political policy, geopolitical events, etc, etc, and etcetera as the basis for their prognostications, but the bottom line is, even in “normal” times , 99% of them are perpetually wrong. 99% of them are yapping away non-stop, looking sharp and sounding intelligent, when the honest-to-god truth is, THEY DON’T KNOW…And today, especially, with these four major, historically UNPRECEDENTED forces at work, they are even less likely to get it right…

Specifically, while there are times when you find all the yakheads jumping on the bullish bandwagon, this usually only occurs AFTER a recent upsurge in prices. The rest of the time their pronouncements are either blandly, mealy-mouthed conservative (“We look for modest gains during the coming year”) or just outright bearish due to “too high PE’s”, or the market being “overbought”, or because “current stocks prices aren’t justified considering the current economic climate”, and all sorts of other supposed wall-of-worry Wall Street gibberish. Again, for sure, some of the time all those guys are jumping up and down and screaming, “Buy it now!”, but MOST of the time they do so exactly when it’s NOT a good time to be buying…and MOST of the time, they are urging caution, predicting “pullbacks”, “corrections”, “dangerous bubbles”, and yes, “the next Bear Market”.

So where are they now? Here’s a sampling of headlines from recent weeks…And while I recognize there ARE bulls out there, from my unbiased and solitary post out here in the boondocks, my opinion is that “real” bulls are currently few and far between…My very distinct read is that the stock is market trading on its highs...but even so, there is a TON of doubt everywhere…And one of my VERY, VERY firm market beliefs is: If you are on the highs in a market, and there is ANY noticeable degree of press suggesting this is where it stops…IT DOESN’T. If there are plenty of people saying, “Sell it now”, IT AIN’T THE TOP.

Here are some recent examples of what I am referring to…And this sort of “Don’t buy it” mentality IS all over the place…

REALLY.REALLY. REALLY...! I have yet to see a top in any market that was accompanied by every Tom, Dick and Wall Street Doofus telling you, “It’s time to sell”. And I assure you, the little sampling I have provided above IS just a wee part of all the doubt that is out there…And I remind you, as ALWAYS, all of the bearish economic “logic” you will hear, however “intelligent” it sounds, is probably quite wrong.

And along those same lines…that the professionals do understand how the market works, take a look at this item…To me, this is quite interesting…but also almost laughable?

Ok. In April, 2005 this poll obviously indicated that Money Managers were extremely cautious (as they are now as well)...and the Dow was up about 39 % sixteen months later? Aside from reinforcing my opinion that 99% of the "pros" DON'T know what the market is going to do, their current "caution", the most in 10 years, argues, I believe, for another blast higher in equities.

So where do I get the idea of 20,000-21,000 being an easy target in 2015…?

Right here, the big picture chart I come back to over and over…

For starters, I think this  115 year graph basically represents the past century’s  growth of the US and world economies...and CAPITALISM...That decade by decade, there are perpetually more businesses, more products, more profits, more economic activity…and MORE CONSUMERS...all over the globe...And while there are occasional bumps in the road, between exponential population growth & the ramped up expansion of Capitalism, I see no reason why this "picture" should do anything but continue to climb...For sure, there will be periods when it goes sideways, or down some, but I seriously doubt that is where we are now. Cheap money. Cheap energy. An explosion in Technology. AND a 2 Billion+ global explosion in New Consumers? The world is buzzing. The Dot Com crash is behind us…as is the Great Recession…Excesses have been squeezed out (several times) and from the Arctic to Antarctica, it’s now all about doing biz, making money and SPENDING IT…And believe me, any ideas that “growth is still too slow (or slowing) here in the US” are absurd, as are worries that the 2000 year old CONTINENT OF EUROPE is in trouble, and ditto that China’s supposedly subpar 7% growth is a bubble starting to burst...WE HAVE BEEN THROUGH THE “BUMPS” AND THE WORLD ECONOMY IS GROWING…AND I THINK THE LAST THING YOU NEED TO BE DOING NOW IS BETTING ON THINGS GETTING WORSE.

 SO BUY THE STOCK MARKET

The problem is, however, there never seems to be any leverage in stock index futures options…unless you are willing to just throw money at way out-of-the-money calls or puts…and this very definitely appears to be the case right now. I do have a very strong bullish opinion (or it wouldn’t be in this newsletter) but frankly, there is no 1 call & 1 put strategy I see that  really makes risk-reward sense. More specifically, I can visualize a move down (going the “wrong” way) as having a high probability of getting your money back, but when I calculate on the upside, the numbers are such that it would take a move up to 21,500 just to achieve a triple, and I therefore have to conclude the potential reward simply does not justify the risk…THEREFORE, FOR THE MOST PART, THIS PIECE IS NOTHING MORE THAN AN EXPRESSION OF OPINION ON MY PART…SO, IN GENERAL I’D SAY USE IT ANY WAY YOU WISH…KEEP THE PERSPECTIVE IN MIND, ACT ON IT IN THE EQUITIES YOU TRADE…OR DISCARD IT…OR WHATEVER.

If there IS anything to be done in the futures arena…through me…I would recommend using straight up futures contracts…WHICH I HATE AS A VEHICLE, but for anyone (no one most likely) who interested, I would be doing something along the following lines…

You could also simply buy a call if the market makes new highs…and risk some percentage of what you paid…but that would be a decision to be made if and when new highs do occur…If you agree with me, and would like to do something with this, give me a call if/when the Dow DOES make new highs and we can look at possibilities.

Here’s a bit more on “How the Dow moves”…

Since this is has turned into pretty much an academic exercise…kind of a mid 2015 economic world view from an old hack newsletter writer…I’ll add a little more and then be done with idea of having anybody actually trade any of this through me…

As is my norm with this newsletter, I have a number of possibly relevant points I’d like to make but simply don’t have the energy/concentration necessary to coherently express them…and I also know there is a limit to how much anybody wants to listen to me drone on and on…So here are some one line thoughts I’ve had while writing all of the above, that I could expand on…but won’t…Maybe some of them will be food for your own thoughts.

MORE POSSIBLE “NOBODY HAS BEEN HERE BEFORE” FACTORS….

None of “analytic” crowd have ever participated in this giant mob psychology guessing game with the circumstances we have today…and I would offer that ALL of their traditional measures and standards of valuing the market could very well be essentially lacking in usefulness…

Especially when you start with this: There is NO formula that specifies what the price of any stock, or the market, should be…or has to be…at any moment in time. Even though stock analysts will tell you that such and such a PE means this or that stock is undervalued, or overvalued, how many times, for example, do you need to see a stock with a supposedly overvalued PE of 30 double in value?…Or conversely, a company with a PE of 7 (supposedly a buy) get slashed by 50% in value? Like I said, analysts can fixate all they want on those sort of stats and numbers, but when their success rate of actually predicting future strength or weakness in a stock is maybe 10% of the time (my guess), I can’t do anything but classify all their “analysis” as brokerage industry “gobbledygook”.

Who has ever seen, or can truly understand, or gage the impact  of something like 4-5 million stock accounts being opened weekly in China? What do numbers like that imply about the growth…potentially massive numbers… of the Chinese middle class? And maybe the same sort of consumer growth is happening in India?

The fact that information IS instantaneous today also falls into this “nobody has been here” equation, and with this in mind, how do you quantify the effect all this split-second -news has today…as opposed to how fast investors could react to (or even be aware of) news 30-40 years ago? Does the fact that 100 million people can know about something 60 seconds after it occurs affect the way events and markets develop?

I don’t care who it is, or how well known they are, ignore the skeptics regarding the stock market. They have never been here before either. The really smart ones will tell you, “I don’t know”, anyway.

It’s not knowing what will happen (nobody does), it’s knowing what CAN or MIGHT happen, and being in position to profit from it.

Part if this game is just waiting…Staying in a trade and trying not to lose until what you are expecting to happen, does happen…and then when it DOES start moving, you again have to just wait…and let the market go for you…which, more often than not, can take months to develop and thereby make the money you envisioned in the trade.

Computers, and the capacities they are creating for the world, are still a new phenomenon. New products and services are appearing every day, many of them never before even imagined before…In reality, this is the fastest the planet has ever operated. Consumption is  expanding at a “warp” speed. The planet is like a giant beehive.

Literally, billions of dollars can change hands, or continents, in 1 second…As regards equities, this is NOT the way it was 30 years ago…And I can’t see how this new aspect of the financial arena (thanks again to technology) can do anything but amplify volatility and the size of price changes in all these pieces of paper we trade…They ARE pieces of paper, and their values ARE a function of the usual mob psychology perceptions.

Nobody investing today has experienced what it is to come out of the an economic contraction like we’ve had with the Great Recession. Nobody knows what the actual dynamics or forward leaning effects are of having 7-8 years of pent up demand in the housing industry…or the lack of housing construction…and then have it all get going again…

I think that’s enough on this subject…

I am still long the Euro, Cotton, Corn, Wheat, and Soybeans…And SHORT THE CATTLE.

Give me a call if you want to…I always enjoy hearing from all of you…whether it’s about market chatter or what it is you are doing in your real world.

Thanks,

Bill

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 Bill Rhyne does not currently maintain positions in the commodities mentioned within in this report...but intends to if the Dow makes new highs.