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. 3.19.08: Next for the Economy: The Greatest Bull Run in History? Home Page
(3.19.08 ORIGINAL ARTICLE: Please see UPDATES BELOW)
3.19.2008. Bear Stearns stock plummeted 3.14.08, and had to be bailed out by the FED and rival JP Morgan. One would expect people lined up at their local banks; strained, anxious looks on their faces as they wait impatiently to clear out their accounts. Massive fear and panic in the streets, utter chaos as trillions are withdrawn from the banks... Oh wait, that didn't happen.
It hasn't happened simply because we don't really have a choice. The American banking system is the most trustworthy in the world (for Americans at least), and we have to function in society, go to work, and pay our bills. It's just not practical to keep cash out of a bank, mainly for security reasons, and Americans these days cling to the idea of security.
Have to think the other brokerage houses have their share of troubles too, as they all got caught with their hands in the cookie jar. They created investment equities that didn't have any real equity, so now they are held honest. As the credit crisis weighs in on our very faith in the system, we are forced to stay in it. It may be the ultimate survival mechanism of the financial system: The simple fact that there are no viable alternatives.
Does all this set up the greatest stock market bull run in American history? There are some indications to think that. In the stock market, we are witnessing a high degree of both buying and selling, i.e. volatility. This means the market is looking for stability. However, bearish sentiments have shifted to bullish over the past week. With the fall of Bear Stearns, as the 'sacrificial lamb', and all the FED counter recessionary measures that have occurred, I wouldn't short the stock market below DOW 11,000: In fact, it may be time to start shopping for deals in stocks.
There is simply no place else for all this new money to go. Eventually one can predict that the FED liquidity programs will become an 'over compensation effect'; and there will be too much money in the system. Combine this with lower prices on oil and commodities (which could happen as the stock market bulls upward), and we are looking at some real pent up appreciation in the stock market. Given that there's plenty of volatility, the run up could be fast and hard, we could be at 13,000 in a short time. There is downside risk as well; but this may be the time, with the DOW at around 12,000, to get some positions in. Primarily because this deflationary trend will not last; the FED wants inflation (See Article: No Recession, but Deflation?). And you can be assured that they will get what they want.
With inflation, there will be counter intuitive elements in the economy (See Article: The Counter Intuitive Market Force ). Commodities may dip further as money reenters the stock market. We may see the stock market return to its highs, even though we are skating a recession. The market may show similar resilience as it did after 9/11: In fact, the same economic conditions exist as the post 9/11 bull run. A lot will obviously depend on corporate earnings, but we have seen some mixed results, most taking hits but some beating expectations. The recession in and of itself may already be priced in.
Sadly however, the housing market may not recover completely within the next few years, because prices (at least in California) have not truly corrected. The speculative elements of the housing bull run will not re-enter the market: Simply because they got burned as they realized after all the hype that you buy a home to live in it, not as an investment (See Articles: The Counter Intuitive Market Force: But Housing is the Exception, The 5% Income Rule). This is not to say other markets have not recovered: Beaten down markets where sellers acknowledge the market conditions and are selling homes should be considered the 'recovery markets'.
With FED liquidity actions, there are reasons to believe the banking crisis is over. Additionally, there is reason to believe that the crisis may stop at housing and not spread to commercial, as some have speculated. Commercial property is income producing, for the most part: Commercial buildings won't be effected by this bubble because they financially support themselves (asset class).
Firstly, banks usually have low loan to values on commercial properties, even though they make superior investments to housing. Banks don't have to consider many consumer and political elements in commercial investments, as they do in financing homes for families. Secondly, business is for the most part doing fine, buildings are generally leased, and usually landlords need only lower their rates a bit to lease buildings. No one is going to walk away from a commercial property at 50% loan to value ratio. Without the spread into commercial properties, the bank crisis may have nowhere else to go.
-comment-UPDATES:
UPDATE 5.3.08: It took 2 weeks for my 13,000 DOW prediction on 4.19.08 to come to pass, yet it did (initially predicted 3.19 in the above article). We also saw my other predictions come to fruition, at least in a small 'trend starting' way: commodities down, dollar up. BUT there was an immediate 'reversal' of this very bullish trend on Friday, 5.1.08; with oil and commodities recovering, yet the dollar still strong and stocks up again. Conclusion? short covering in commodities: a bullish sign. I expect us to still see an approach to DOW 13,200, possibly 13,500. at 13,500 or thereabouts, look for a pullback to the new 13,000 base.
I am still bullish on tech; and really ONLY tech: MSFT said "No YHOO deal": general sentiment is that MSFT will rally and YHOO plummet; will be interesting to watch. Big cap tech currently the only reliable international growth area not effected by gas prices or inflation; but note it has gone up lately. Hard to say how Inflationary pressures will effect tech; probably to lesser degree than other exposure. Also have a neutral sentiment to retail; so will be looking for entries there.
Big cap financials recovery? its being priced in by the street; something of a danger signal. I am putting small etf positions in now, but this is on pure speculation, in case we see another financials rally like 4.30.08. Would still like to see the write downs diminish before committing; there is still no real proof of bank recovery. If financials rally this week, its time to get out for awhile and prepare for the price correction. One may consider some retail, like TGT (target) around 53, which will certainly benefit from the stimulus package: even old SBUX around 16.5 (starbucks) beaten down to lows never seen before, may benefit. Walmart is a bit high now; many things priced in already.
I am still very, very bearish on local regional banks that depend on deposits and real estate loans in the local markets: we may in fact see some threats of bankruptcy coming year end: especially here in California. Depositors are pulling their money out and moving it to larger banks and investment houses. Any and all loans made in the last few years are sitting at 100% ltv's. profits are way down, if any. Big cap financials, like USB and BAC, have shown substantial price recovery in the last week, purely based on speculation that this financial mess is over: I say 'caveat emptor'. We may see a correction back here, even for the big caps.
How will this weeks elections effect the market (5.6.08)? look for a rally if hillary stay in it: some bearish sentiments with obama.
Week of 5.5.08 Stock market predictions. Sentiment: Bullish DOW +300/-200.
(week of 5.5.08): Tech: hi volatility, big caps trending up: only true global growth area not effected by inflation/oil prices. Financials: currently up on recovery speculation: hi volatility, to trend down. Retail (e.g. TGT, BBY) trend up on stim package: low volatility. Commodities: hi volatility-down. Start: 13,058.20. Worst low: 12,850. Best High: 13,350. Last general predictions 4.19.08 were accurate, but one week late. (For past predictions and analysis, See: Next for the Economy: The Greatest Bull Run in History?) or Articles
UPDATE:
UPDATE 4.19.08: So we had a nice rally in the markets to bring the DOW up over 12,800. If you have followed these articles, you would see how stock market sentiment had gradually shifted over the past few months from extremely bearish in early February, to neutral in late march, and now bullish in mid April.
I am now convinced the places to be are companies with large international exposure with little or no dependence on fuel prices, like technology. Also, many financial news guru's are touting global infrastructure stocks. I'm going to predict for the coming week of 4.21.08 a small, cautious, then building upturn as we witness a re-entry into the market, and we will cross 13,000. Commodities should go down, including oil, and the dollar strengthening a bit.
It may be time to load up on big cap tech, and pick up something like GE now while its still at around 32.50 for a long term hold. Being that the recession may be milder than expected, many top name U.S. brands have good entries now, at their lows with bad news priced in. My logic is, if a company makes money and has reasonable growth potential, and is at it's 52 week low, its better than a 2.5% CD.
I continue to be bearish on inflated commodity prices (including oil), financials, and housing. I still don't see a real estate recovery because of the financials mess. Real estate valuations are dependent on flexible financing: with less flexibility in financing, the more questionable real estate values can be. Once the financials recover, then real estate will have hit its bottom...and not until then. Why tie yourself down with a real estate investment in this market: when it will be a liability to you, and not easily liquid? This sentiment may change; predictably when the banks get their act together and financing becomes easy again. Will this happen soon? Who knows.
I would suggest before you make any real estate investment in California, you analyze the most recent Q1 results from the states regional banks. They have come in mixed, dependent on exposure. Some have shown recovery, but others still have major problems. Community banks are earning less than they have in many years. This all means they will increase their risk management, and make loans harder to get locally. There will be less qualified buyers to meet this 'stricter' criteria, and more damaged credit reports. As stated before, the threat of 3 or 4 year old fixed rate 20% mortgages going delinquent is very real: people would rather walk away than continuing paying on a house worth less than the loan.
Thus we have a vicious circle: Tighter lending - less qualified buyers- less speculation- lower prices - more foreclosures - tighter lending. The current sentiment for California real estate is "Hold. Do Not Buy Yet." The chance will come, as the banks are at least showing some recovery - but the "when" is a gamble because of the added risk of 'blue chip' loan defaults.
I'm bullish on stocks still; I think it's clear sailing up to the low 13,000's at least. I will do a re-analysis when we hit just under 13,200, and again at just under 13,500. Don't see much news coming that could stop the GOOG et. al. induced bull run 4.17.08. Will need to watch closely, and read between the lines (See Article: True Market Analysis, or Self Interest? ). Stocks are readily liquid, flexible, easy to borrow against (margin), and the 'dummy fees' like commissions can be minimal if you do your own trading online. I expect YHOO to beat estimates next week: although this stock is a gamble, but MSFT wants it bad enough to pay retail for it.
Stay far, far away from investing in anything financials related: too many unknowns and trying to chase a banks bottom stock price is a recipe for disaster. That being said, have to think we are closer to the banking bottoms than ever. Good news is that financials (as discussed before in these articles and predicted in the UCLA report) may be the brunt of the recession; while other economic areas remain very healthy. Even though the market runs up or down in breadth, it is unwise to generalize, as many people do. Don't use a butter knife when you need a scalpel.
If a democrat gets elected to the white house, I will be expecting a dramatic reduction in oil prices. Could be wrong, but have to think the oil prices today are "government supported" and a democrat will look at things 100% differently. As a result, in November post election (democrat elected) I will look at companies like UPS, fed ex, and other oil sensitive stocks. Not until then, as we can expect oil prices to remain propped up.
McCain will be a continuation of the current economic trend, which is not all bad, but we have to get those oil prices down significantly for the consumer economy to recover. That is what the government should be focusing on.
It is ridiculous that we gained administrative control of Iraq, and we are paying record gas prices. What the hell are we doing? Or, in shorthand, WTF!1? Frankly, 'bringing democracy to Iraq' is not a justification for war; not by a long shot. Ideological wars are losers. If we are there to build our own oil reserves and defend our country, it makes sense... at least in an economic viewpoint.
Part of the original sell on the war was that Iraq would pay for it. I expect that in stealth this is what is happening, and our government is wisely propping up the oil prices, so that our government benefits. If this is NOT the case, and our government is not benefiting from these prices by selling the Iraqi oil we acquire, then I weep for our pathetically incompetent management of this war, and the resources we've wasted on it.
Comment on 4.13.08 Update Predictions: Well, those corporate earning have been mixed, but many have been beating expectations, not coming in below as predicted. Big global companies like Coke, GOOG, IBM Nike, Wall Mart coming in above projected earnings. Tech for the most part doing much better than expected. I was right about stocks, the market rallied since the predictions. But I am looking wrong on the 11,500 downturn prediction, this entry may not come, but the over 13,000 prediction is looking on target. You could probably get in the market now and be sitting on green arrows for the next couple weeks: after that, who really knows? But the leaning is currently bullish, up to 13,200 to 13,500. How deep will the rally go? good question.
UPDATE:
UPDATE 4.13.08. Have to think there is a huge commodities bubble now. The herd of money went from tech in the early 00's, then to real estate, and now has overloaded commodities. We have inflation and deflation running simultaneously. This is an unsustainable trend, one of these has to give. The inflation is occurring in raw goods, oil, grain, and precious metals; and a significant percentage of this must be speculation. The fed with its actions are stimulating growth, and they want inflationary pressures. They have lowered rates aggressively to achieve this.
Conclusion has to be that the deflationary trend in assets is temporary; except for housing, which is in most cases a liability. Inflation is here to stay. Be on the lookout for the commodities bubble to burst as inflation becomes more apparent (See Article: The Counter Intuitive Market Force). Also best we can expect in housing is a flat recovery over a long period of time. Real estate, specifically housing, has not bottomed, and won't for at least a year.
Stocks remain the best place to be, although bearish ultra short term. CD rates have filtered out, and now are getting below 3%. Bank CD's are not attractive. Best to keep cash readily available for stock market entries as the market corrects with corporate earnings coming in below expectations. I am predicting we may see the DOW as low as 11,500 just before a summer run to the low 13,000's...a real opportunity in stocks when it hits the low.
ii
**ARTICLES**
. Q1-Feb 10 '08: - The Perfect Storm of American Economic Downfall . Q1-Feb 21 '08:- The Counter Intuitive Market Force: But Housing is the Exception . Q1-Feb 21 '08:- The 5% Income Rule . Q1-Feb 21 '08:- A Compelling Argument for Alternative Investments Q1-Feb 26 '08: True Market Analysis, or Self Interest? . Q1- '08: No Recession, but Deflation? . 3.17.08: Next for the Economy: The Greatest Bull Run in History?
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