Bob Howard, the editor of Positive Patterns (email@example.com) is a smart guy. He’s also experienced enough to know that nobody picks the market direction or amplitude consistently. Those of us who are honest and who have been to two goat ropes and a pig-wrestling contest know that the market will always do its best to confound even the most intelligent and savvy market professional.
You can listen to those touts who claim, “My last pick went up 184% in a month!” if you like. (After all, “a fool and his money are soon parted” is what these charlatans depend upon to keep their business growing and your net worth declining.)
Alternatively, you can try to identify those advisors who use common sense, a lifetime of experience, and discipline to make money more often than they lose it. Bob is one such advisor; a friend and competitor with whom I exchange newsletters and ideas. He’s also one of the few people I know who told his clients to sell everything in September of 2008 and to buy back in March 2009.
Like me, Bob believes this rally that has climbed 56% from 6,600 to 10,300 with hardly a breather is long in the tooth. Like me, he’d rather begin easing his clients nearer the exits even if it means they “miss” part of the continuing irrational exuberance. Unlike me, he believes it may end with a bang rather than a whimper.
I see more and more skeptics joining the party on every 200-point up day and think it pretty likely that, when the last skeptic bites their lower lip and reluctantly throws in the towel – along with their cash – that’s when the market will begin its correction. More buyers than sellers = an up market. Even one seller if there are no buyers left to buy = a down market.
Neither Bob nor I nor anyone else knows for sure what the market is going to do or when it is going to do it.
But Bob has posited one interesting possible scenario: that there are still enough uncommitted investors sitting in cash that if Wall Street manipulates sentiment and trading just right, they can suck in the last of those on the sidelines in one tumultuous day with buy orders that drive the market up 300 or so points, then watch as the public panics in that day and the next.
He figures if we see an 800 or so point up day it will be a clear signal to sell. After all, for every buyer there’s a seller, and you can bet when “everyone” is buying it will be Goldman (NYSE:GS) and Morgan (NYSE:MS) et al who are dumping their inventory onto an unsuspecting public.
How does Bob suggest positioning for such an event? Unlike me, Bob doesn’t play the short side so he wouldn’t buy the “downside insurance” puts on the market as I have done for clients, or buy inverse ETFs as I have done.
Where he and I violently agree, however, is that a correction in precious metals will also take place, but will be shorter-lived, and that gold and silver will be higher at year-end 2010 than at year-end 2009. We also agree that the US dollar will likely rally, but only in the short term. Our government’s piggish devotion to taxing workers (called by government, “the piggy bank”) and spending on giveaway programs ( properly called “breaking the piggy bank”) dooms the dollar in the intermediate and long term, so a dollar short is a good bet.
We also agree that, with a declining dollar, commodities like food, base metals and energy will rise in dollar terms, so high-income energy plays like gas and oil pipelines and other MLPs, as well as the best of the oil producers, make sense, as will quality apartment-rental and health-care REITs.
In his own words, from yesterday’s e-letter:
So where the HECK can we make money here?
Gold stocks should do well.
Energy stocks should do well.
Agriculture stocks should do well.
RR stocks should do well. Uncle Warren says that his BNI trains can haul 1 ton of coal 460 miles on one gallon of diesel. If you can convince yourself that he did NOT buy BNI for the coal angle - then you probably think OJ is innocent, and that the recent 3.5% GDP was real, and that elephant you see in the room of America is just a mirage and you can wish it away.
Bob’s projections at the macro level for where we stand today:
Stock Market Next Few Years? Sideways, back and forth - in a range - downside at most 30% - worst case 35% from here - or 10 to 15% upside from here - absolute tops - hard to get much above that.
Best Performing Index Next 5 Years? I would expect that to be the Nasdaq and... the Russell 2000.
Best Groups To Own For The Next Few Years? DEFENSIVE STOCKS THAT ARE ON OFFENSE!!! Tobacco, Food, Ag, Pipelines, Some Foreign/Big, Canadian Stocks, Gold Stocks, Energy, Apartments, Some Banks, Some selected asset plays, Internet Content Providers/Digital Sellers of VALUABLE Content, Water Plays, and a few special situations.
Finally, regular readers already know my favorite picks in these sectors, and can review past articles at their leisure. But here are a few that Bob Howard recommends that I have not: Balchem Corp. (NASDAQ:BCPC), Barclays Capital Convertible Bond ETF (NYSEARCA:CWB), Central Fund of Canada (NYSEMKT:CEF), Seaboard Corp. (NYSEMKT:SEB), Trustmark (NASDAQ:TRMK), WebMD Health Corp. (NASDAQ:WBMD), John Wiley (JW.A), Chicago Mercantile Exchange Holdings (NASDAQ:CME), Elbit Systems (NASDAQ:ESLT), EOG Resources (NYSE:EOG), SunTrust Banks (NYSE:STI), Teva Pharmaceuticals (NASDAQ:TEVA), Nestle (OTCPK:NSRGY), Philip Morris International (NYSE:PM), Roche (OTCQX:RHHBY), and Syngenta (NYSE:SYT). I’m reviewing them currently and present them for your consideration, as well.
Personally, I hope Bob is right and that there might be / will be a whopper of a blowoff day. It would be a far clearer signal that it’s time to cool our jets for a while than the slow drifting-sideways end I fear may happen. And clarity is something we can all use a little more of in times like these…
Full Disclosure: Author is long inverse ETFs, market index puts, and a whole bunch of energy, agriculture, income, REITs, and MLPs, many of which Bob Howard and I independently concluded were excellent holdings. (See previous articles for specific equities.)
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