Economy Might Suffer, But That Won't Prevent a Stock Rally

In my previous article on Cramer vs. Kass, I sided with Kass, thinking that we are in a sideways/slightly downwards correction. I was wrong, at least for three weeks. We had such a wonderful rally!

Doug wrote a piece yesterday which almost matches my thoughts. Almost.

Now we are talking long term. Which in our brave new world means about 18 months. I'm thinking about positioning and every decision now can bring big gains or losses.

So, who to follow? Cramer, who is all "buy, buy, buy", but lately prudently recommending to sell something into the rally? Or Kass, who doesn't see any long term upside?

Funny enough, I can't take either side now. I think that Dougie is closer to the truth in his analysis of the economy and the way the recovery is going to progress. We are going to have a slow recovery, harmed from time to time by bad decisions, such as tax hikes (already going on and more coming), big stupid government programs, like medical welfare for everyone, biofuels and God only know what else.

But I don't agree with the conclusion. I think that we are going to have a huge bull market the next several years. And there is only one reason for my optimism: the history of the previous Great Depression. That one started in 1929 and ended in 1939 (or, as some would argue, in 1943). You'd think that the stock market was down the drain all those years. Wrong! The Dow Jones fell 89% from 1929 peak to 1932 low. But after that, the Dow rallied. It rallied huge. Anybody who invested in stocks any year between 1932 and 1943 won huge.

Was the 1932 bottom related to any improvement in the economy? Just kidding. The New Deal and other stuff were still ahead. The economy didn't even think to recover and unemployment was at around 25%. The reason for the rally was simple: stocks were dirt cheap and paid huge dividends.

Fast forward to now. Stocks are oversold. Many of them are dirt cheap and pay huge dividends. Lots of REITs, bond ETFs and CEFs pay more than 10%. Not all of them are going to be destroyed. Banks are cheap. Bank preferreds are cheap. Again, most of the banks will survive. Tech is still dirt cheap.

I am bullish long term. We are going to have volatility, which should be used to trade. But I am going to use the current pullback to increase my long position. The economy might suffer in the near future, but it doesn't mean that stocks can't rally.

Comments

[Maxe Paul:]

"I think that we are going to have a huge bull market next several years"

"stocks are oversold"

And if we can finish with one of your openning quotes, " I was wrong"

Aug 12 05:41 AM

[Niner:]

"stocks are oversold" NYMO indicates they are, at least short term. Ok, just crossing into oversold territory.


On Aug 12 05:41 AM Maxe Paul wrote:

> "I think that we are going to have a huge bull market next several
> years"
>
> "stocks are oversold"
>
> And if we can finish with one of your openning quotes, " I was wrong"

Aug 12 05:59 AM

[jamiemcdaniel:]

I could be misunderstanding you, but "big stupid government programs, like medical welfare for everyone" sounds like you are against some real (not just repackaged) health care reform in America. It should be clear that it is not good for the economy to have millions of fellow citizens worrying about being uninsured or underinsured. The greed of insurance companies has created a crisis and needs to be properly addressed via surgery -- not just a band-aid applied.

Aug 12 07:20 AM

[Clive Corcoran:]

Maybe the reason why so many stocks are paying huge dividends is that investors are less sure that the dividend stream is going to continue in more austere times.
Also don't forget that HFT algorithms don't stick around long enough to capture dividends
If the rallies continue on the back of a typical holding period of a few seconds rather than a few years the normal discounted cash flow models seem like quaint curiosities from another era.

Aug 12 07:24 AM

[TonyNasir:]

This is a bunch of non-sense. We expect to have better articles that this one.
Alex: please don't waste our time with your own notions. Next time, pls. come up with some real arguments and facts to write an article.

Aug 12 07:26 AM

[chap08:]

"Now we are talking long term. Which in our brave new world means about 18 months".

Maybe in your world, but not in mine and not in that of the most successful investors that I have worked with. Have a plan for the short term, have a plan for the long term and don't confuse them.

Aug 12 07:38 AM

[enigmaman:]

BS

Aug 12 07:43 AM

[Maxe Paul:]

Stocks are oversold? What, on an intraday chart? The market has just rallied near 50% in 5 months, you think that is oversold? Stocks were oversold in March.

Please point out what your definition of overbought is.


On Aug 12 05:59 AM Niner wrote:

> "stocks are oversold" NYMO indicates they are, at least short term.
> Ok, just crossing into oversold territory.

Aug 12 08:10 AM

[Davewmart:]

It depends on whether we are 1932, or 1930.
The graphs tend to match us with 1930.

Aug 12 08:14 AM

[Prop Tradin...:]

If you are basing your optimism on the history of the great depression, then you should know the history...true the market did decline 89% from 1929 to 1932, but there is the little issue of the ~50% bear market rally from Nov/29 to Apr/30, or over 6 months, not that different than what has happened since March/2009 to present. After that rally, the market fell ~85% from Apr/30 to Jul/32 before starting the rebound you think will be the historical guideline for today. Methinks you may be a couple years and a few hundred points on the SP early.

Aug 12 08:16 AM

[Baboon:]

>>Lots of REITs, bond ETFs and CEFs pay more than 10%.

The average reit's yield is about 4.7% which is not that high by historical standards. The cefs in many cases augment the earned income of their underlying assets with the return of investment capital so their yields are determined by rising or falling market and have no indication of underlying market conditions.

Aug 12 08:17 AM

[socrateazz:]

All of you are correct. Where the stock market goes almost totally has to do with earning and prospects, beliefs on what is changing, what alternatives people have and the amount of money without a home out there. The alternatives do not look good, so why not put the money where it might help. hiostory is on your side. I say earnings prospects are bad until need for any companies goods or services increase (I do not expect that). I can only predict that most companies earnings prospects will change when supply of goods or services offered is less than demand for those goods! Belief in hope is great. I would not be too surprised if I were later informed that the government is behind the latest stock ralley. If you have unlimited funds, any manipulation which causes a change in direction or contnued ralleys is possible. The start of a ralley when everything looks bleak should be carried through by those who see such a move. Likewise, Most drops can be stoped by enough money. But either will only pay off until things are extremely over or under priced. The like the Hunt brothers legacy all will collapse! I will leave things here. For I know nothing and suspect anything from those who can manipulate.

Aug 12 09:09 AM

[Big Bubbette:]

How are we doing with HR 1207?

Aug 12 09:40 AM

[AndrewBaker:]

Someone's holding a lot of stock they want to sell on. I wonder who?

Aug 12 09:42 AM

[Andrew Butter:]

Good article you are correct.

Aug 12 03:21 PM

[E Nuff Sed:]

Take a look at this analysis of S&P returns both in real and nominal terms.
www.scribd.com/doc/183...
The stock market took 240 months to recover from the 1929-32 crash in nominal terms but only ~60 months after inflation and dividend reinvestments (real return).
www.scribd.com/doc/180...

Aug 12 05:57 PM

[Tony Daltorio:]

This article clinches it! Bear market will resume within 60 days..........

Aug 12 07:48 PM