Aug 1, 2013

We are Long, and buying, the Stock Indices

I am back on the long side of the Stock Market. Since the almost 1000 point sell off begun in May, the Dow has now recovered totally and is making new highs. Meanwhile, we are back to the point where doubts about the market are in evidence everywhere…and as I have said so many times, tops in the market are NOT made when the overwhelming majority of talking heads are telling you even, “Be careful here”, much less expressing the sort of negative sentiments shown below…all gathered from various major news websites during the past few weeks.

You get the picture…Here the market IS making new highs and there IS plenty of doubt…quite similar to what we’ve seen all year (with the exception of early May, when, almost overnight, all the painted faces turned gleefully positive, right in time for a 1000 point downswing) as the Dow was charging 2200 points higher. In fact, I just looked back at my January 30, 2013 newsletter when I said I thought we had a shot at 17,000 (or more) by year end…and still do…Interestingly, in that letter, with the Dow at 13,900, I listed about 15 late January headlines that exhibit pretty much the same sort of “DON’T buy it!” mentality that you see in all those headlines from the last few weeks…Also, in that same newsletter, I outlined my big picture view of the USA and world economies…and why I think we are in major long term boom that argues for holding stocks “forever”…and figured I could save some time by just copying those comments to this newsletter.

So here is an excerpt from my January 30^th newsletter…

 January 30, 2013

 I am still Long and still Buying the Stock Indices.

Not “when it dips”, Not “when it corrects”.

I say you buy it here, “at the market”,

Call Options or Futures, and put your stops in.

Stocks are making new highs. Yes, there is finally SOME talk that is bullish the market but in general, there is still a mountain of doubt.

Here are a few recent samples taken from well known news websites…

One lesson I learned decades ago: If  a market is making new highs, and you can find any noticeable degree of opinion suggesting “Don’t buy it here”, or “This could be the top”, you’d better ignore all the doubt, get on the horse and ride with it….And I would add, especially if it’s a market that everybody is aware of, not some obscure commodity, like Cocoa for example…And the Stock Market is obviously THE market of which every investor is acutely aware.

As I wrote throughout 2012, the whole thing about Europe collapsing was nonsense...that the idea our economy was growing too slowly was nonsense…that the perception job growth was too slow was irrelevant. Ditto that the election mattered, or that China might slow down, or “there were still too many foreclosures”, or whatever…including all the malarkey about the  fiscal cliff (which has now morphed into the “debt ceiling”)...All of those reasons not to own stocks were just the usual wrong way chatter that accompanies every bull market in equities…

The bottom line is the world is still in the midst of a three decades old economic expansion inspired by the Technology Revolution and The Death of Communism, an expansion that will now be aided by extremely  low interest rates , a perhaps steady decline in energy prices due to advances in fracking, and 3-4 years of pent up demand about to hit the real estate and housing markets…Businesses have wrenched out excesses. Overvalued housing and real estate in general have been revalued and now represent a major asset class that has nothing but upside. Technological products are being absolutely devoured by the WORLD’s masses while also producing jobs faster than there are people to fill them…And to add to all this, two incredibly expensive, decade long wars have ended or are close to being so….As I have written for years, today’s planet is about BUSINESS, not ideology. The death of communism did add about a third of the world ‘s population back to the consumer driven economic cycle (after almost a century without them), and whether it’s here in the USA, or in Africa, South America, Russia or CHINA, Capitalism is King….and after the last 12 years of sideways stock market consolidation and the solving of various crises and the elimination of various excesses, I say the world is on the cusp of, at a minimum, 10-15 years of unmitigated prosperity…To me, where we sit is something like the early 1980’s or early 1990’s. In other words, I think the world economy and the equity markets are going up…a  LOT and for a long time.

After what you’ve just read, the following excerpt from my August 17, 2010 newsletter may be a bit redundant, but I’m going to insert it again here as it may provide a clearer picture of the world’s economic climate as I see it…

 August 17, 2010
The world is in harmony…

Yes, the terrorist threat exists (and will), but I believe the world today is more at peace than any time in my 60 year lifetime. When I was a kid, we truly feared war with Russia and the threat of massive nuclear attack. We DID…China was the giant silent mysterious Communist enemy we knew NOTHING about, and with whom we didn’t even have the slightest of diplomatic relations…Half of Europe had been gobbled up, and held prisoner behind an Iron Curtain from which no one, nor any information, escaped, and the western world lived with the ever foreboding question of, “Where will the Soviet tanks show up next?”. The Cold War was real and it was global.

Today, even though the war in Afghanistan continues, and to a much lesser extent in Iraq as well, these are not world encompassing conflicts and definitely not wars between superpowers. And yes, the situation between Israel and its neighbors will continue to be “prickly”, but the international bottom line is the major “wars” now being fought are purely economic…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.

And so back to the present…August, 2013.

I am certainly biased but I think my observations covered in this economic “mega-picture” are all quite accurate. Obviously, none of the above says stocks can’t go through negative periods, or that some “black swan” catastrophic event can’t pop up, but I do think this perspective supports the idea that stocks, decade by decade, WILL be continue moving substantially higher…especially after having spent 13 years going sideways.

So think about it…When you hear names like IBM, Coke, Microsoft, Exxon, Caterpillar, Home Depot, Walmart, Johnson & Johnson, Boeing, American Express…just to name a FEW of the 30 Dow stocks which DO, I believe, genuinely represent the economic future of the USA…Can you imagine them being anything but a LOT bigger, and making a LOT more money 10 years from now? Or do you think they’ll be spending the next 10 years shrinking, being poorly run…getting smaller instead of expanding? To me, the answer is obvious…and maybe a little bit more so any time I take a look at the following 100+ year chart of the Dow Jones…

I think NONE of the economic models, which are all essentially built on historical premises and historical observations, and all easily flawed under the best of circumstances, cannot possibly account for the birth of the computer age, nor the impact of having a third of the planet suddenly switch from Communism to Capitalism. As stated above, I think these are monstrously dynamic forces that no model can even begin to gage on a statistical basis…

Here is one approach to use…There are various ways to do this…including “units” of 2 calls and 1 put…

My impression is there is a LOT of money hoping/expecting a pullback...and if the market does start cranking on the upside, it could spur a big "Just get me in now!" type of move…the end result being 6-8 consecutive maybe triple digit up days (NOT unrealistic)…and cumulatively it DOES all add up to 1200 points with a few weeks time.

I see the Stock Market as a Buy and I am fully back on this trade…And I do think the odds are strong we ARE about to see 1200-1500 points on the upside.

 Still Long Treasury Bonds, but cautious…

While I am still very much of the opinion there is a considerable move coming on the upside in Treasuries, the recent action in this market (trading back to the lows) has put me on the cautious side. I absolutely believe Treasury Bonds have a shot at the 150 area by the end of 2013, but I recognize the possibility there may be a few points left on the downside…With this in mind, I am now either waiting for maybe a news generated “slam” to the downside…or…to see the market make a 2-3 point reversal to the upside, before initiating any new positions. Charts are NEVER an infallible guide, but at the moment, it simply looks like new lows are the next thing we see…

Make no mistake. This is a market I do want to own…somewhere in here or some time very soon…If, for example, we were to get a very strong employment number tomorrow (implying rates “have to go up”, and Bonds go down), and they therefore hit the bonds hard, I probably would be taking a good look at the buy side…if not tomorrow itself, then maybe Monday or Tuesday. THIS IS, IN MY OPINION, THE MOTHER OF ALL CONTRARY OPINION MARKETS…and when it is time to buy it, the whole trading world will be screaming, “Sell! Rates gotta go higher!”.

And still Shorting Wheat…

Give me a call about any of this…

Thanks,

Bill

866-578-1001
770-425-7241

The author of this piece currently trades for his own account and has financial interests in the following derivative products mentioned within: Mini Dow Jones, Wheat