Barron’s had its 2011 Outlook on Saturday's cover.
We were discussing the generally bullish in Member Chat and Barfinger said "So, Phil, what is your response to the bullish preview?" That was a great question because it made me think. Does he expect a "rebuttal"? I can understand that as I’ve been fairly bearish but let’s not confuse caution (I called for a cash out when the Dow hit 11,200 in early November, it peaked at 11,444 on the 5th and closed Friday at 11,491) with bearishness – it’s just that my now 45 days of running around saying "the sky is falling" while it stays in place does make me seem like a perma-bear.
The "October Overbought Eight" was my first bearish portfolio since April 28th’s "Hedging for Disaster – 5 Plays that Make 500% if the Market Falls" (and it did, and they did). THAT was a bearish outlook! We are not that bearish here, otherwise it would have been the easiest thing in the World to re-up those plays for the new year. We expect a correction, but hopefully not the kind we had between May 4th and July 2nd, where the Dow dropped 1,600 points in just over 2 months. We are HOPING for a nice 20% pullback off the 15% gain from 9,800 to 11,270 back to the 11,000 line and holding that would make us very bullish going into next year.
That would be 1,180 on the S&P (the declining 200 dma) and just 5% down from Friday’s close – THAT’s how bearish I am! Where we are now is simply where the 5% Rule told us we’d be back on May 5th, where the chart pointed out that 1,240 is 20% off the upper, non-spike consolidation at 1,550 that marked the high for the S&P. 20% is the most powerful level in the 5% Rule and that’s why it’s been safer to wait and see how this line resolves than place long-term bets in either direction into the slow and volatile holidays.
Obviously, I am fairly convinced that Global "leaders" are making all sorts of policy mistakes handling the economy and I do believe it will all end in disaster but that does NOT mean I am market bearish.
Think of it this way: If you come across a fire that is consuming a house from the inside and the firemen show up and spray water on the outside, then I will stand there and tell you that the house will still burn to the ground. However – I will also tell you that the house is going to be soaked in water. The two things are not mutually exclusive – just as a slow-moving economic collapse and a booming stock market are not mutually exclusive – especially if that collapse is the result of a transfer of wealth from the working class to the investing class (see the 1920s).
So the Fed and other Central Banks can print money to paper over a Global Economic melt-down and they can funnel Trillions of Dollars into the Global Banking system that still has a multi-Trillion Dollar hole to fill (see John Mauldin’s comments this weekend) and we can have the ILLUSION of a growing economy through top-down inflation. Money is poured into the top through tax breaks to the wealthy (actually the extension of existing tax breaks that have already destabilized the economy so they now cost money but provide no new benefit), which includes Corporations who are already sitting on $2Tn in cash and not hiring – as well as the Fed injecting it directly into the banks in case the lack of taxation doesn’t leave them with enough money to hide the gaping holes on their books.
This is, I believe, a tragically flawed policy as we are pouring water into a leaking pool without fixing the actual leak. Over time, that rots the foundations until one day, it suddenly collapses catastrophically and everyone stares at the damage all surprised saying no one could have ever predicted that. So I am pissed, I am outraged, I am fearful for our nation’s future and I still believe that it will take the smallest of shoves to knock the entire global economy off the ledge it’s perched on but that doesn't mean I'm bearish on the markets.
I am, at the moment, not sure that enough is being done to fill our global pool but we’re getting there and, like our burning building example, in the short run – enough money is being spent to at least make us wet. We need to invest like we’re in the late 90s but, as I said earlier this year – is it mid 1998 or December 1999?
That’s pretty hard to tell. With the new Republican Congress coming in next month, we need to be careful as any real attempt at austerity in the US may have global repercussions. Right now, we are doing China a huge favor by sending what used to be our middle class running for Wal-Mart (WMT) and the Dollar Store to buy all their goods but what happens when they can’t afford that anymore?
Our last bullish portfolio was October 23rd’s fairly conservative "Defending Your Portfolio With Dividends" and that’s a good one to read as we talk about the benefits of a long-term, conservative investing strategy. I’m sorry it’s not "sexy" but this is a dangerous environment to be placing directional bets in, as we can see from the very mixed performance in our very aggressive $10,000 to $50,000 Portfolio over the past 3 weeks. The premise there is that we stand a far better chance of making big gains to the downside than the upside but we’re getting pummeled in our bearish bets as the market grinds up against upside resistance. If we do punch through, then great and we can start playing more bullish but not until. Dow 11,500 should not be too much ask for as a show of good faith from a true bull market, right?
Clearly the Barron’s article is very bullish, CNBC and Cramer are very bullish and even the blogoshphere, as polled by Bespoke, is very bullish (see chart). Everyone thinks rates will rise but not so much gold yet the dollar will be stronger while oil goes up anyway and home prices recover and China goes to the moon. Sounds like fun to me – is it any wonder I refuse to participate in these silly things?
I shouldn’t say that because our new newsletter is going to be mass-marketed and they are going to want me to do this sort of thing for "exposure". Anyway, the bullish premise I feel most comfortable with is the inflationary one. There is simply more money floating around and that leads to a weaker dollar with higher rates (so bonds go down) but gold goes up and it’s oil that flat-lines (other than compensating for the weak dollar) because people simply can’t afford it and buy as little as they can. Higher rates depress home prices in the US, keeping pressure on banks to hoard cash and China is forced to go on a global buying spree to keep the Yuan in check – something they’ve already been doing with commodities. By the end of the year, China will begin to run out of cash as they spend another $1Tn to keep things going (just $769 per citizen).
I’d be gung-ho bullish now if I wasn’t worried the Euro will collapse as that is the fly in the ointment. If the Euro falls apart then the dollar rises quickly and China may lose control of the Yuan peg (they don’t want it going up vs. Euros or Yen) and, of course, commodities will drop fast and trigger a market sell-off, which will hold housing prices down despite what should be lower rates. We already know it is all about the dollar and, as you can see from this chart – we’re pretty low at the moment with the S&P, Gold and Oil up about 10% on a 3.5% down dollar (UUP is a 2x ETF) – so my bearish caution flag lasts until Europe stabilizes, once again making the US Dollar clearly the worst currency to invest in:
I know it is very tedious waiting for a solid investing signal but, as we learned from our very small commitment in the $1050P, it’s just as tedious to put your money on the wrong side of a bet. If you read the notes from other bloggers about their best and worst calls of 2010 – they are individual stocks. My best calls for the year are calling the entire market at a top in April and at a bottom in July, if you get that right, the individual picks sort of take care of themselves! At the moment, my worst call may be calling a top too early in early November. As you know however, we pick dozens of individual plays in both directions every week so this isn’t about that – We have our "5 Trades to Make 5,000%" on a breakout from last weekend and, while we made a lot of short-term bearish bets this week, we also had long ideas (mostly hedged) on HMY, XLF, CAKE (Monday), TNA, IWM (Tuesday), CCJ, CHK, EXC, TNA, XLF (Wednesday), UNG, GLD, AAPL (Thursday), GLW, TOT and AXP on Friday.
Actually, the bullish picks outnumbered the bearish picks 2:1 last week BECAUSE we were testing our breakout levels and needed to beef up the bull side. It’s OK to take a walk over to the edge of the cliff with our positions as long as we KNOW there’s a cliff and we are comfortable in our ability to pull back from it before getting dragged off the side. That’s where we are now, at that point of "maximum uncertainty," when things could move in either direction.
Clearly from the S&P chart above, we are either in the bottom of a huge breakout channel or the top of a rollover and, as you can see from the chart on the right – fools rush in where professionals tread lightly. Overall, it’s more fun to be a fool, Motley or otherwise, but this is a site that’s about investing, not gambling and we are waiting for a confirming signal before making any serious commitment. We’re already in the right place – we just have to wait PATIENTLY for the right time.
We are able to take bullish positions as we already have downside hedges (our failed attempts at making bearish profits) and, we don’t really expect a massive sell-off (but it is still a concern). If we don’t fail by Tuesday, I expect us to drift into the New Year and, over the next two weeks, we’ll get a little more deeply into the big picture stuff that is likely to move us in 2011 but, sadly, politics may have something to do with what happens to the stock market so cover your eyes and ears if that sort of thing worries you!