Remaining Cautiously Optimistic On the Market

We’ve been talking in my office about getting a bit more defensive with our investment portfolios. The S&P 500 is up over 9% since January 1st and the year is half over. If you check my post from a few months back, fund manager Curtis Teberg offered a projection of the Dow Jones reaching 16,000 by year end. His reasoning? The 15-month period preceding a presidential election tends to boast big moves in the market. His testing goes back as far as 1926 and hold up fairly well. Yesterday the market closed up over 280 points, shining light on the magical 14,000 level. Are we going to get there by year end? How about within a week? (Note: Past Performance is not a prediction of future results).

The Bulls and Bears each make a solid case for where the market is going any why. On the bearish side, the housing market has undoubtedly slowed down. This usually creeps its way into consumer spending and overall confidence levels about household wealth. How would you feel if your house was worth $100,000 less this year than it was last? Would you hold off on that Caribbean cruise? Perhaps.

The Bears also point to oil prices. How can the stock market rally if filling up a gas tank costs the better part of $100? The average person doesn’t earn that much money that gas can cost a family $3,000/year and not be a concern. More importantly, when publicly traded companies report earnings, will high oil prices not factor into lower sales?

How about the falling value of the dollar? Behind the problems of the dollar lies the huge and growing US trade deficit, and the large Federal budget deficit. A falling dollar also means more expensive imports, which ultimately leads to inflation. Will US consumers start buying more US goods if imports become more expensive? Unlikely. What’s more realistic is that the Fed will raise rates to counter the inflation, which could lead to a sell-off in the equity markets.

Some think a weak housing market could counter the effects of inflation and lead the Fed to keeping rates unchanged, or perhaps even lowering them.

What are the Bulls saying with all of these ominous signs above? Well, if you ask me, I’ll offer a somewhat obscure answer: It’s a lot easier painting a negative picture of the economy by pondering our domestic output and talking about all the inherent risks which will slow it down. The intangibles, however, tell us a different story. Innovations such as the iPhone, satellite radio, online classrooms, and G-mail demonstrate the unique talent and potential present here in the United States. Statistics regarding innovations on the Web are staggering, helping to create a global landscape, anchored by the United States. A lot of this stuff goes under the radar and perhaps it shouldn’t.

More traditional bullish factors include the recent sustained period of low interest rates, and incredible amounts of merger and acquisition activity. We’re in a private equity “boom” which gives the market lots to be confident about.

Where do I stand in all this? I’m cautiously optimistic, as I have been for years now. I think plenty of opportunities exist in the market if you understand risk and how to create a smart portfolio. I don’t know that I’ll ever be a perpetual “Bear.” It’s just not in my personality. The US stock market has been doing great lately, and I’m not one to argue with a rally.

Comments

[c1ue]

Your arguments might be stronger if you picked some examples not subject to hype.

Satellite radio - nice technology, very poor financial performance
Gmail - wasn't free email popularized by Microsoft? Started in 1998 vs. Gmail's 2004?
Online classrooms - Get YOUR degree in 6 weeks! 'nuff said
iPhone - I'd believe the technology more if I were not literally surrounded by Aapl billboard ads. Aapl's ad spending numbers are not easy to find, but I have a hard time calling Apple a technology company when their R & D spending is 4% of their overall sales (2006). Their general expenses, including marketing, is 17%. To compare: Intel's R & D is 16.6% of sales with general being 17.2%. But Intel has capital equipment and has many more employees, furthermore is in a down revenue phase due to the price war with AMD.

[RussellBailyn]

Point taken--what I'm really getting at here isn't even the individual products. It's more the intellectual property and tremendous investment in education in the United States. Stocks love to price in momentum... but GDP stats don't.