The Facts Indicate We're Not in a Depression or Bubble

As this link shows, there is about $3.5 Trillion sitting in money market funds collecting less than 1% in interest. This is as of a month ago. People are just scared and do the opposite of what they are supposed to do, which is to buy when stocks fall. Instead of loading up in the last few months on equities, which were selling at generational low price ratios, investors instead piled into bonds, CDs and Gold.

According to Warren Buffett, the best time to get greedy is when everyone else gets scared and it is a fact that those who usually show up early to a party always get the best seats. With interest rates close to zero, how much longer do you imagine people will be happy in cash, bonds or CD’s, especially when they see the markets going up everyday?

With Real Estate showing no capital appreciation for as far out as the eye can see and an even scarier scenario showing no capital preservation either, the stock market is the safest place to be, as it has already had its bubble burst and has begun a new Bull Market run. Shorting stocks (since March 2009) is the third rail of investing and if interest rates start to rise, what do you think will happen to the principal on your bond investments? That’s right long term pain!

The S&P 500 maybe up almost 60% since March 2009 but is still down 25% from its high of 2007.

For the S&P 500 to get back to its level of October 5, 2007 it would need to go up another 40%+ from here.

The NASDAQ is currently trading equal to its December 1998 close and needs to go up another 140%+ from today's close to break its record of March 6, 2000.

Another interesting fact is the chart of the U.S. dollar vs. the S&P 500 for the years 2003-2009.

Now as you can see when the dollar goes down, the exact opposite happens to the markets. Why is that? Because when our multi-national companies repatriate their profits back into U.S. dollars, they get a bump up in their earnings. With a strong dollar their earnings suffer, but with a weak dollar they thrive and as a collective group move the Markets upward. The dollar is very weak at the moment and getting weaker as every day goes by, so this is very bullish for our multi-national firms, who make up most of the DJIA. As earnings continue to be repatriated and investors in cash start seeing that the train is leaving the station and they are not on it, they will one by one board the train and bring this market higher. It won't be a panic but because of the current fear will be a slow clean upward run.

The weaker dollar also has the effect of making it cheaper to produce products here at home, so look for more hiring to occur, that will help bring the unemployment rate down. As more and more people get back to work, they will start spending their new paychecks and revive the economy. We hit the bottom point of the recession (March 2009) and the market, being a forward looking indicator, is screaming that things are getting better. Apple’s (AAPL) and Texas Instruments (TXN) earnings reports proved that things are a lot better than most believe. I am predicting 1800 on the S&P 500 by 2013 and I am fully invested and am enjoying the ride.

One final point is that Warren Buffett's favorite indicator is very bullish right now. Gurufocus wrote an amazing piece that everyone should read.

Just some facts to calm everyone’s nerves.

Disclosure : No position AAPL, TXN.

Comments

[logicalthought:]

>>One final point is that Warren Buffett's favorite indicator is very bullish right now.<<

You're referring to the "market cap to GDP" ratio, which I would say is an extremely misleading metric these days due to the now-massive "public debt-to-GDP" ratio. As an aside, I guess Warren must have a lot of "favorite indicators", because the one I recently heard him cite was related to "rail freight", which has been God-awful lately. Of course, both of these latter two "indicators" ("excessive public debt" and "rail freight") have extremely negative connotations for Warren's ABSOLUTELY favorite "indicator"... "Profits".

Oct 20 08:10 AM

[TCK:]

I am sure the "Smart people" said the same thing in 1930 when the market was up 90%.

Another correlation is that Obama is trying his to do his best imitation of FDR.

Happy Halloween. Very scary !

Oct 20 08:42 AM

[The Geoffster:]

Maybe all that cash on the sidelines is just waiting for the other shoe to drop. I'll know this rally is over when that cash gets put to work.

Oct 20 09:51 AM

[Swashbuckler:]

Fine graph on the inverse correlation between stocks and the USD. And a truly spectacular dissertation explaining the unrefuted logic of that correlation. One small question. Is there a remote chance that the graph HAPPENS to begin in 2003 because that is the year the inverse correlation begins, and prior to that the USD and stocks moved in tandem for many years? Which would of course serve to gut your article.

Oct 20 10:31 AM

[Glen L.:]

<<I am predicting 1800 on the S&P 500 by 2013 and I am fully invested and am enjoying the ride.>>

I hope you like downhill runs on the rollercoaster, too. Just remember they happen remarkably fast.

By the way, if the falling dollar is causing the stock market rise, should we not root for the dollar to fall to zero, which implies the S&P rises to infinity? If not, why not? Think things all the way through? Never!

Oct 20 11:34 AM

[Tony Daltorio:]

"The best time to get greedy is when everyone else gets scared" - but that's the problem.

This article is just of thousands of very bullish articles recently. Everyone I know that is an investor or is actually in the investment business is more bullish now than ever - they believe the media and think everything has been solved even though NOTHING has been done to solve the underlying problems.

The return of the "bubble boys" like the author tell me that we are within a few percent of a major top.

Oct 20 03:44 PM

[Denis Gould:]

You neatly explain the recent market action - a revulsion from cash trade. But that doesn't mean anything fundamental is happening to justify the higher prices, and eventually the market reconnects with the fundamentals. The people who own that 3.5 trillion of cash are going to be seen to have been the smart ones. No return maybe, but at least no destruction of their wealth.

Oct 21 03:36 AM

[dustbusterz:]

you claim that the lower dollar makes it cheaper to manufacture here in america(so get ready for companies to begin hiring0??? what a croc that statement is. it completely ignores the fact that people are not ordering what they manufacture,so why would they rehire? it also ignores the fact that the government is passing new taxes(especially against the rich_can we say the very people who you expect to rehire us?)these new.much much higher taxes will cause less investment in expansion of businesses here(chase away many businesses to other countries with lower tax rates) leaving more unemployed .

Nov 08 10:58 PM