A Bull Market by Any Other Name

Includes: DIA, ERO, SPY
by: Chris Damas

It’s a bull market in North American equities:

  • The S&P 500 is up 11 points to 1,128, now 20 points over the 200 day moving average.
  • US markets are leading many other market bourses higher (in Europe, Canada, Australia, South America).
  • It helped that Shanghai was up 70 odd points in the early morning trade. (P.S. I think Beijing, not New York, is the financial capital of the world, but please don't tell that to Mark Haines.)
  • The DJIA is up 124 points to 10,575 and is 818 points (8.4%) over its intraday low of 9,757 on June 8th.
  • The S&P/TSX Canadian price index is up 130 to 12,057.
  • Gold, the calamity metal, is down a couple of bucks, at $1,255.
  • I'm modestly bullish on gold. It's just another hard asset.
  • The weekend Chinese indication to revalue their yuan upwards, however gradual, will be a welcome shot in the arm for DJIA Asian corporate profits, and US and Canadian exports.
  • The yuan was up 0.44% yesterday, to 6.798 per USD.

I watched self-styled bank bear guru Meredith Whitney on CNBC yesterday talking about the death of the US home owner. She now says we are going to have a double dip because the US homeowner will be evicted soon from their stay and don’t pay home, and will have to pay cash rent rather than living in a defaulted, mortgage-payment-free house.

Bears will go to any lengths to grab media attention and justify their morbidly negative views.

What these permabears say has little to do with US multinational corporate profits.

I would even go farther as to say the Whitney’s and Roubini’s don’t know what is in the DJIA and other major stock market price compilations, and they don’t attend many corporate earnings conference calls. Most likely they rely on bearish stock strategist S&P 500 earnings forecasts and don’t consider the multiples in a historical context.

They just hype their case and let investors tremble in their boots.

In the summer of 1992, we were coming out of a serious recession and credit crisis and the DJIA was valued at 15 times earnings (compared to my May 31 estimated P/E of 13.6 times 2010 earnings for the top ten DJIA movers) and enjoyed a spirited rally for the next year and a half, in spite of Treasury yields almost twice as attractive as currently.

If anything, THIS particular stock market reminds me of that of the latter half of the 70’s, after coming out of the only OTHER post-war bear market that featured a plus 50% decline in the market average. (As I have studied it, I am not THAT old).

Equities and Hard assets (not bonds, not cash), including quality stocks, gold, oil and other commodities, rallied furiously during that period, up until Volcker took away the punch bowl.

Here is what we wrote on June 3/10 on Seeking Alpha (Why I Believe This Panic Is Over):

I will bet the US stock market will be back above 11,000 within the next few weeks, in anticipation of decent Q2 earnings.

It may take a couple of more weeks than my June 24 deadline. My 2010 year end estimate for the S&P 500 is 1,320, a 17% increase from current levels.

The vociferously negative reactions to my well-reasoned article, thrown at me like rotten tomatoes, from a cross-section of SA investors (pros, trolls and retail), made me convinced, even more, that the average investor, and quite a few pros, are totally wrong on this one.

What is the fundamental, back of the napkin reason why I think stock markets will rally, rather than decline in a credit/currency collapse, with us all paying for bread with wheelbarrows filled with failed currencies and defaulted sovereign bonds?

The financial and real economies were out of balance, and they are rebalancing quickly, partly due to the actions of governments, corporate leaders, and the millions of consumers and entrepreneurs, guided by the Invisible Hand of Adam Smith.

Equities and hard assets are substantially worth more in an era where paper is declining in value. Bonds are going bust. Companies that generate sound earnings flows are undervalued. Throw in the “Beggar Thy Neighbor” rush to devalue currencies to accelerate the transition. That is why the euro rally, and now the yuan revaluation, are a welcome relief for US corporate profits.

I don’t know why everyone forgot the lesson of March 2009: rather than believe the consumer must lead us out of the bear market, we are being shown it is the bull market that will lead the consumer out of his/her funk.

The value of cash is declining as I write this. You’d best be buying something of value with it. See our previous articles for buy candidates. If you want bottom-up examples of how company earnings yields far exceed comparable corporate bond yields, let me know.

Gold is going up in price, as any asset with some value will appreciate as cash declines.

To sum up, and as famous early 1900’s market timer and speculator Jesse Livermore wrote:

What makes me money, is being Right, and the actions of men that are Wrong.

Disclosure: Long US, Canadian and Australian Equities and REIT's