August 17, 2010
The Economy HAS turned around, for good.
Stocks are going up…
Dow 25,000 is not out of the question.
I believe the bull market in Treasury Bonds is over.
Gold (the fear trade) has nowhere to go but down.
I’m sure that 25,000 number makes me look like some sort of maniac extremist, but aside from my general view that stocks are supposed to be bought now, I base that number (or even higher) on the 110 years of history depicted by the following Dow chart. As you look at it, I’d suggest you start by blocking out any of the conventional media opinion you’ve read or heard as to where the world economy, and stocks, are headed. Then do nothing more than look at the chart and ask yourself if what I’m supposing is a reasonable possibility…or not. Again. Forget all the economic babble that’s out there, and using these 110 years of what has been a LOT of diverse history (like several World Wars, the Depression, the birth and partial death of Communism, etc.), just visualize the possible ways in which this chart might develop…Up, down or sideways…because it will do something…and if it is going to be on the upside, to me, 25,000 just doesn’t look that difficult to imagine.
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 21st 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.
The Economy HAS turned around…
Buy the Stock Market
I swear, 98% of the current herd instinct economic commentary (which remember, IS just about always backwards) is talking “double dip”, or “not enough jobs being created” or “we’ll never overcome the deficit”, etc., and accompanying these almost universally negative prognostications is an even more negative attitude towards the stock market…Everybody seems to hate it and statistics show that the general public wants no part of it. By one reckoning at one brokerage house of which I’m familiar, during the first half of 2010, something like an INCREDIBLE 97+% of mutual fund investing by retail US investors went into Bond funds and fixed income, with less than 3% having gone to stocks…As I have stated over and over, ALL of the paper markets are nothing but a giant financial “game”…No value is fixed. All values are simply a function of mob psychology driving capital (by both professional and non-professional investors) from one location to another, and INEVITABLY, when all of the money ends up in one place, you’d better be looking for something else…Yes, the demographics of the baby boom do dictate that more monies are now seeking the security of bonds and other fixed income instruments, but we must not forget that, essentially, there are still only three real choices when it comes to paper investing: Stocks, Bonds & Cash…And as Equities have NOT just totally disappeared as one of those vehicles, and as the masses, right now, basically want NOTHING to do with stocks, and are, in fact either in cash (money markets paying almost zero percent) or POURING money into bond funds, does suggest that buying stocks IS exactly what everybody should be doing…Furthermore, some day, probably way down the road, and some many 1000’s of Dow points higher, I feel quite certain I’ll be noting that, “Beware! Everybody is now throwing all their money into the stock market”, but that sure as hell is not the case right now.
OK…the Great Recession (as the last few years seem to have been named) was the worst thing since the Great Depression…but it WASN’T another Depression, and it WON’T take decades, or another world war, to recover from it. In fact, I firmly believe we definitively turned the corner last year, and even though the economy is not zooming ahead, virtually every economic indicator I can find says we are headed back up…which, really, is the only thing that is important…The economy is a BIG ship…It does NOT have to take off like a rocket. We don’t have to know that every job lost during the downturn has been recreated before we can say we’re back on the right track (it NEVER happens that way). All the economy really needs to do is begin moving in the right direction… which, again, is exactly what almost every statistical measure I am looking at seems to indicate (charts follow a little later).
The Mortgage Debacle
The truth is, if you think back a few years, the only thing that really went wrong was extremely lax mortgage lending standards led to a bubble in the residential and commercial real estate market. That bubble obviously contributed to above average growth and consumption in many areas, but even so, what we weren’t seeing, outside the financial industry, was all of corporate America (or the world) being stupid about how they run their businesses. The downturn we had post 2000-2001 had already served as a “tighten up your operations” wake up call for businesses in general, and I’m pretty sure if you just run down a list of, for example, blue chip companies, and ask yourself, in 2007 (at the top), “We’re these guys at all the cause of what happened? Or were they just victims of the mortgage debacle like everybody else?”. I believe the answer is clear…They had nothing more to do with the crash than you did…And furthermore, I’m certain this Great Recession has only resulted in all of those still standing businesses having tightened up even more…I mean, ask yourself…Do you think, basic companies, just to name a few…like American Express, Boeing, Coca Cola, Disney, Exxon, GE, Home Depot, IBM, McDonalds, Merck, Microsoft, Proctor & Gamble, Verizon and Walmart…are in ANY danger of going down the tubes? Do you think any of those companies are being run by a bunch of idiots who have been twiddling their thumbs and doing nothing more than, “hoping things get better” for the past few years? Or are they, like every businessperson you know, doing EVERYTHING they can to promote their own growth? To improve their operations? Are ANY of those companies “in bad shape”? And more importantly, and perhaps too simplemindedly, don’t you think that 2,3 or 5 years from now, ALL of those companies will still be here? And that they will ALL probably be bigger and more profitable than they are in 2010? If your answer is “yes”, then I’ll tell you the stock market will ALSO still be here, and right now, what you are supposed to be doing…and nobody really is (believe me, ask any stock broker)…is buying stock in all of those companies, and NOT just as a trade. For the past ten years, “Buy and Hold” has been something of a losing proposition, and quite naturally, of late---AFTER the fact---supposed financial “advisors” everywhere seem to be saying “Buy and Hold is Dead”, exactly when this should now be everyone’s overall perspective as regards stock investing…It has nothing to do with my own ongoing and immediate recommendation to buy the stock index futures (take your pick…Dow, Mini Dow, Mini S&P ,Mini NASDAQ), but now IS the time to be buying quality stocks and holding them for the long term…that I believe the odds are now high that the equities markets are going to be going up, a lot, and for many years to come.
What are the facts?
I’m not just sitting here saying, “I have a feeling the economy is improving”. What follows are a number of charts of various economic indicators, in which, as stated above, virtually every one of them HAS turned back towards the positive. Yes, you have all these guys talking about a potential “double dip” recession, meaning all of these now positive leaning indicators will then turn towards the negative, but the truth is, the overwhelming majority of those people who are jawing about the economy going back down never saw the almost 8,000 point crash in the Dow coming (even after it was well under way), none of them saw the stock market as a buy in March, 2009, and all of them were basically screaming, just THREE MONTHS AGO, that Europe was about to go out of existence.
The point is, if you want to buy into all the pessimism, go ahead. Are things great yet? No…But they ARE improving, and moving FORWARD again, which is really all we need to be happening…And virtually every chart you are about to see, covering a diversity of indicators of the US economy going back some 60-90 years, should show you that growth is absolutely back on track again…and that all of the chatter about “double dip” and “jobs not being created fast enough” are just typical economic babble from the talking heads and perpetual band wagon forecasters who generally ARE always on the wrong end, or tail end, of anything that is happening…I’m not just singing a happy song here…What I want you to do is check out these charts and then tell me they are not ALL headed in the right direction…And I’d also add, as you look at them, consider the possibility we have begun the 21st Century with a tremendously different economic climate than was the case for a major percentage of the 20th…that relative peace is a reality, political ideology is secondary, and the world is now more interested in commerce than anything else…And, finally, that it is quite possible, that from here, supposedly still in the depths of potential recession, where we really might be, is at the inception of one of the biggest global expansions in all of modern history.
Start with this…GDP, the broadest, most basic look at whether the economic picture is positive or negative…
And make no mistake, when businesses are making money, they do try to make more money…And to do that, they DO have to add new employees…new jobs…by which I mean, JOB GROWTH WILL COME…MAYBE IN GIANT LEAPS…AND MAYBE NOT THAT FAR OFF IN THE FUTURE.
Those last nine charts do not cover every minute aspect of
the economy but I do think they represent enough of a cross section to be
meaningful…And yes, there are other factors to consider, like…
To that major media worry you see everywhere, “we’re not producing jobs fast enough!”, the next few charts tell me we are right on schedule for typical job growth when coming out of a recession…
As for this whole “double dip’ theory, for the record, there has been only one such occurrence on the charts above. This happened between 1980 and 1982, which is precisely when Paul Volcker’s Fed, in their battle to defeat the inflation generated by the 1970’s, had raised interest rates to the highest levels EVER seen in this country…To put it mildly, this is hardly the same backdrop we are facing today.
Along those same “double dip” lines, here’s something else to consider…Have you EVER seen the economic forecasting crowd predict a recession before it actually happened? Yes, there is always that 1% of analysts who see the bad times coming before everybody else, but my 30 year experience has been that when the economy is rolling along, and about to hit the skids, you NEVER have 9 out of 10 economists/analysts predicting it. EVER. Yet right now, even though everything I see indicates we are definitely moving forward, all I seem to hear, from EVERYBODY, is, “Beware! Bad times a-coming”.
And here is the jobs situation seen from the reverse side…the Unemployment Rate.
The fact is, in January, 2009, the unemployment rate was
10.1% and today it is 9.5%...Can it turn back up? Sure…But I’d still say it
definitely HAS TURNED and we have probably seen the worst we will see…Think
about circumstances back in March, 2009…Many people really did think the
economic world was coming to an end. The Dow was at 6500…Is today’s mood even
remotely close to what it was back then? I repeat: We saw the worst last
year. The world is headed in the opposite direction now…and how fast it is doing
so, today, or next month, is just NOT that important…All the matters is the
direction in which we are moving…
Why real estate activity might explode on the upside in 2011…
If there is one area of the markets where the worries are the most specific, it is in Residential Real Estate (obviously there are problems on the commercial front as well), and everyone is well aware of the negative aspects of the situation. Lots of foreclosures, lots of people underwater on their mortgages, lots of difficulty in getting loans done no matter how qualified the buyer or refinancer, short sales and foreclosure sales dragging down all appraisal values…and so on…BUT, all those things are known by the markets and there IS another way to view the current situation.
Start with this…Residential Real Estate prices HAVE bottomed…Yes there will still be foreclosures and short sales which can put downward pressure on prices, but the following chart indicates the worst of the hit has been taken (I mean, really, wasn’t 2009 the freak out year?) and prices have done the first thing they need to do…which is stabilize…AND THEY HAVE.
The Case-Shiller Home Price Index tracks the values of single family homes. By this measure, which is based on recent sales, prices found a low in April, 2009, and have been firm ever since…and I believe will continue to be so for the foreseeable future. Yes, there are still plenty of problem areas around the country, and plenty of supply, but since nobody has been able to move for two or three years now, I also figure we have built up an incredible quantity of future demand, that WILL, at some point, be cut loose and we will see an explosion of activity that can only, in my mind, mean higher prices…maybe sharply so. Let’s face it…people DO change houses…and again, sooner or later, the impediments to real estate transactions ARE going to fall away, and with the EXTREMELY low interest rates available now, and with the bulk of distress selling already having been presented to the markets, the return of the long restrained, Honey-let’s-move-crowd, will only, in my mind, represent an overall DYNAMICALLY upward influence on prices…And the truth is, I think that moment in time is waiting just around the corner.
Aside from all that pent up demand waiting to be unleashed, by next spring I think we’ll already be looking at a very much higher stock market, and more importantly, I would guess lending standards, which have been the biggest market depressant, will have eased significantly. No, you won’t be able to just go grab a mortgage, or refinance your home in ten minutes, but mortgage lending is an ages old, usually quite stable and lucrative business, and the fact it seems to have practically stopped for the last few years does not mean it will never resume again…In fact, I found it notable that UBS, one of the larger international brokerage firms, is now ramping up programs to have their financial consultants become licensed as mortgage brokers (with other houses apparently following suit) which I can’t help but see as an indication SOME people in the financial investing world see a major opportunity in the residential lending business…and furthermore, my guess is they wouldn’t be licensing those brokers with the intention of being so anally restrictive that they end up just doing no business at all while possibly also irritating their existing clients…My point is, they will be looking to DO those refi’s and DO those mortgages…NOT have people jumping through 50 hoops and then tell them “No deal”. Beyond that, traditional mortgage lenders are in business to make loans, and just as the pendulum three years ago was way over the “too loose line”, today it is way over “too tight”…and this WILL change. With values residential values ALREADY having contracted so sharply…AND maybe having begun to rise, I firmly, firmly believe, by next spring, lending practices will have leaned decidedly toward more normal (but practical) standards, and the cumulative result will be nothing but a major positive for real estate.
Meanwhile, the supply of new homes has contracted…
I’d also add that, yes, we WERE overbuilt, but after several years of bare minimum construction, you DO reach a point where the excess has been absorbed…If you combine that by lending finally returning to “normal”, thereby unleashing 2-3 years of pent up demand, this former absence of building may even result in a “tight” market (I’ve seen exactly this occur over and over in the commodity markets), and surprise (!)…solidly higher prices (which I’ve also seen over and over ).
And finally, there is this…I assure you, at some point, the lowest mortgage rates in over 50 years WILL affect the world in variety of extremely positive ways…
Be assured…Making mortgages has NOT disappeared as an enterprise…"NORMAL" LENDING PRACTICES WILL RESUME AND THE OVERALL EFFECT ON HOUSING, CONSUMERS AND THE ECONOMY COULD BE ASTRONOMICAL. THERE ARE MILLIONS OF BUYERS JUST WAITING TO MAKE A MOVE.
OK…So that is certainly enough of the big picture…Apologies for how long this thing has already become but I don’t think there is a wasted chart here and I do believe all of these glimpses of the economy are necessary to overcome the GLOOMY attitude I see exhibited everywhere in the media…which, guys, is the way it always has been and always will be…With the Dow at 14,000 back in 2007, basically everybody in the equities world thought the good times would go on forever… and at 6500 in March, 2009, they all thought stocks were headed to zero…and now, even though the stock market is actually dead in the middle of a range going back over 9 months (after an 85% rally in a little more than a year!), to listen to everybody, you’d think the DOW was back at 7000 or something…AND IT’S NOT…I THINK STOCKS ARE A MONSTER BUY. I THINK NOW IS THE TIME TO BE ADOPTING A BUY AND HOLD APPROACH…AND I THINK THE USA AND WORLD ECONOMIES NOW HAVE NO WHERE TO GO BUT UP…NOW IS NOT THE TIME TO BUY INTO ALL THE TALKING HEADS/MARKET SHEEP PESSIMISM.
TRADES I’D RECOMMEND
BUY THE STOCK INDICES
The bull move in Treasury Bonds is over…
Long term rates are probably going no lower.
January 15, 2010
As it worked out, my calculation as to where the 30 Year Yield would be was a little off, but on the futures (what we trade) I was pretty close…It is interesting that the same crowd who back then HATED Treasuries, are now the same people who are currently in love with buying the “security” they offer. I am not entering it as a short trade but I do believe the Treasury Bond market has probably seen its highs for quite some time to come and have recently exited the last of my long positions…I DON’T think rates are going sharply higher, and don’t think Treasuries are beginning a lengthy bear market…I would look more for a trading range sort of environment, with lows around maybe 120 and highs around the current low 130’s. The 30 year yield, now about 3.75% will probably have a cap in the 5% range.
There has been a strong correlation between
Stocks, Crude Oil…and Soybean Oil
While the following three charts are not identical, it’s hard not to notice there has been a fairly high degree of correlation between Stocks, Crude Oil, and Soybean Oil. The easiest conclusion is that Crude has been following the hopes and fears of the Stock Market, and Soybean Oil, due to its growing use as a biodiesel fuel, has been responding to the Crude…It therefore seems logical (which I know doesn’t always matter in futures) that if Stocks and the economy are on the upswing…and as sharply so as I believe to be the case…then I would expect both Crude and Soybean Oil to benefit on the upside…
So I am still buying Soybean Oil (since reversing course)
And am now adding Crude to the mix…
And everybody must know the potential bullish story for Crude Oil…so I’ll just stick the chart out there on this one as well…
One other market I want to buy…
and to some people, this will just seem as dumb as is gets…
Believe me, I’m running out of gas on this thing so this will be brief…
The housing and construction industries have not been wiped off the map and WILL be building again…Meanwhile, the number of lumber producing mills that have shut down in this country is almost beyond belief…I don’t have the specific numbers, but I do know from dear old Ed (Croker of Croker-Rhyne), who probably has the best Cypress Log Home product on Earth, something like 9 out of 10 of his sources for wood have gone out of business. The killer has been several years of zero demand combined with relatively high operating costs (energy is a big one), and the result is there are times when, as dead as it has been, it is almost impossible to get specific cuts of wood…and when you do find them, you maybe have to pay up to buy them…
The point is, there truly has been massive supply side destruction in the lumber business, and as those closed mills are not able to just flip a switch to crank up production again, ANY surge in demand (expected or unexpected) can result in sharp price rises similar to the doubling in Random Length values we saw last year (see chart following)…and as I am firmly convinced that a full blown “reboot” of the entire Real Estate Market is dead in front of us, I therefore believe there could be big upside potential in Lumber…
Here’s the trade…My guess is nobody will want this but this probably is a great, great idea…
AND SHORT GOLD
This market is where it is on nothing more than hype and the ludicrous fear the world economic system is going to fall apart…I could not disagree more…As stated above, I think the world has been through some tough times but they ARE behind us. The system is intact and a century of now expanding worldwide capitalistic economic inertia will carry us dynamically forward…And I believe Gold, the FEAR trade, is absolutely the most overvalued commodity on the planet.
This trade can also be taken using the 100 ounce, or 33 ounce, futures contracts in which a $100 move equals either $10,000 or $3,300 respectively. To sell the futures here, and risk new highs would be about a $50 stop, meaning about $5000 on the 100 ounce contract or $1650 on the 33 ounce mini.
And that’s it. This is another one of those “too long to read” newsletters that I personally hate to see…But let’s face it, the opinions here are NOT what you are hearing elsewhere and I can’t just sit here and say, “Hey, I’m bullish. Come buy some Dow futures”....I do think most of the charts here speak for themselves and I DO believe we have reached one of those classic, but ever occurring, market moments when the overwhelming majority is dialed in on “Down”, exactly when the next thing that comes is “UP”, and in a big way.
Give me a call if anything here interests you…
Please pass it along if you know anyone who might find this
malarkey worthwhile…This newsletter IS my primary means of selling my ideas, and
after two long years of dead in the water Soybean Oil, I need all of the help I