Bearishness in nominal terms - meaning expectations that broad indices like the S&P 500 (SPY) will decline - continues to be rampant: David Tice is calling for an S&P target of 1,000; John Hussman warns that the market is overbought; David Rosenberg says it's looking like the bear of 2011 all over again.
I tend to disagree. I already shared my technical view, in which I expect SPY to reach 182 by 2014, but here's a recap of the four fundamental reasons I think the bull market in equities that has kicked off 2012 is far from over:
1. Like Blackrock's Larry Fink, I think the weakness of the bond market is a major driving factor. It is not so much that equities are such a great opportunity as it is that money has to go somewhere -- and bonds do not look like the right answer. This may be a question bears should spend more time considering: if not stocks, then where? Granted, the "problem" of where to put all their money is not really an issue individual investors/traders like myself face, but for the super-rich and the mega-funds, it's a very real issue. Some will go to gold, some will go to fine art, some will be in cash...but when all the options are considered, I believe more is due to be allocated to stocks, simply because the size of the bond market and its current weakness are driving factors.
2. Money supply continues to reach all-time highs, with the most recent numbers (from March 5 at the time of this writing) putting MZM past 10.8 trillion. This point doesn't get much airplay, but as my background is in forex trading, it's not a point I can easily ignore. The Fed and private banks are still collectively expanding the money supply, and all this money has to go somewhere.
3. Although 2012 has gotten off to a strong start in Q1, let us not forget that last year was not a bull year. As a result, we're not seeing many stocks post new highs; John Gray of Investors Intelligence notes that less than 200 stocks are at a 52 week highs, and that the number will more likely be at least 500 or more when a real market top has arrived. I tend to agree with this conclusion and think it is a very important point.
4. Last but certainly not least is China: fears of a slowdown in China are rampant, but China did recently announce its intention to bolster credit growth -- a move that sent Chinese stocks listed in the US higher. This does reinforce the other points in this article, in that credit growth will result in an expansion of China's money supply and will also make investments in risk easier to finance.
I believe part of the confusion is that the US economy is still sluggish and in the midst of a depression. From this perspective, equities should not be growing. But the real issue is that the credit and currency markets are dysfunctional, and so equities will receive capital simply because they are, in an odd sort of way, safer than most other options. Or at the very least, their safety is underestimated.
For the reasons outlined in this post, I think equities are headed much higher. My areas of focus, as my previous articles on Seeking Alpha can attest, are uranium miners, (URA) gold mining producers (GDX), and explorers (GDXJ). I do believe the dysfunctional nature of global credit markets will contribute to bubbles in a multitude of sectors -- namely these six.