I was pleasantly surprised to have read an article recently on Seeking Alpha which has been able to help quantify my thoughts and thesis on why this market could go higher, not lower, from here. It helps form the fundamental paradigm shift occuring in the global economy and its effect on the US economy. Here is the article:
I know. I write stuff like this and I get accused of (yes, rampant) drug use. Ironically, I am one of the few people I know who can honestly say that I’ve never indulged.
So right after I pen some craziness, I always say the same thing: Hear me out.
A recent Merrill Lynch (MER) report is calling for a 15% drop in housing prices in the coming year. The Fed cut twice in the last several weeks. What does all this mean? Simply, that real estate, bonds, and interest bearing accounts will be lousy investments this coming year.
There is a theory (one I subscribe to) that the stock market would have been much higher over the last few years except that housing and commodities were too hot of an investment… so housing and commodities was where the money flows went.
With cooling (not freezing, cooling) housing, cooling jobs, both housing and commodities are beginning to move downward. Certainly, there will not be big returns to be had in either in 2008. So money will be moving to where money can be made: stocks.
Stock valuations are still historically low. We could easily move to 15,000 and still have reasonable market P/E, and stock-price-to-corporate cash valuations that are well within historical ranges. Further, valuations combined with lower interest rates will continue to drive M&A.
So the Dow will easily get to 15,000 by year’s end.
“But what about the economy?” What about it? The stock market and the economy are not the same thing, sometimes they move in lock step, and sometimes they don’t. Remember in 03 and 04 when we had our ‘jobless recovery’? Markets did great and the economy did only pretty good. Look for that again this year.
So what to buy? Right now: Money Center Banks and Brokerages. For two reasons: First, they have been crushed, and the worst is over. These stocks will move up in anticipation of improving valuations, and once valuations improve (think 3Q) the stocks will go up some more. Second, it’s volatile times like these that drive scared, stressed, confused investors into the waiting arms of their broker. Expect record earnings from that part of the business.
Speaking of housing, one pet peeve: Falling housing prices are the headline of the day, and every person I talk to is concerned about it. And I always say the same thing: Are you selling your house this year? No? Then what the hell do you care? This doesn’t affect you.” Stay diversified, even if it’s just a 401k. There will be money to be made in stocks this year and money will be made in housing another year. Over time, everything goes up in value, so relax… and unless you just want to be depressed, turn off the 24 hour depression machine known as cable news.
I’ve been laughed at too. For a long time I wondered if I chose the wrong profession as a trader if you can even call it that. A lot of my friends were either, mortgage brokers, developers, flippers, or real estate brokers and making some serious money. I can’t complain about how I did but it just seemed so easy. The Fed rate cuts flowed into housing and that was the hot game of wealth. Now that the Fed is cutting once more where can this money go now? It can’t go into housing like it did before can it? The financing vehicles are just not there nor the appetite.
Don’t get me wrong, the housing industry won’t disappear but the level of speculation will not be there as it used to. But this new money flow has to find a new home and a reasonable higher rate of return and the only logical place would be to the GLOBAL equity markets or commodities. I am not saying that people will start daytrading this new money but they will allocate it to the smartest finance people at institutions, mutual funds and hedge funds. Those money managers will then seek to invest those funds globally and/or within the US. They will seek the highest alpha within their risk parameters and look to U.S. companies with global exposure, run by the most intellegent executive management teams.
With this new found liquidity to the global markets, investors and traders alike will find homes in stable growing economies. We will be selective and those that perform during tumultuous times such as these, which are less common, will have their premiums increased as this global soup is concentrated within fewer groups. Back in 2000, the US stock market was the only game in town thus larger amounts of liquidity during those Fed cuts were chasing the same names higher with leverage making it more accentuated.
That is not the case now. Think Globally. But don’t count Americans out. We are a hybrid of survivors coming across in different boats but now in the same boat [MLK]. We are the most developed intellectually in business due in part to our diversity. We have the best executive management teams in the world based on meritocracy and helped create this new global PARADIGM and if it is one thing we have always outsourced it would be our intelletual business acumen.
If you don’t believe me look at our universities and colleges, where the chosen ones from around the world are sent here to learn about capitalism. Hopefully they bring back with them not only our books but our sense of equal justice and business ethics to their people and to the Earth at large.
If this economy is so bad why are there companies still making new 52 week highs or near their highs? What makes those US and global companies so special? Our top US global companies now cater to 6 billion people (growing to 9) of consumers that has only scratched the surface of penetration. Consumption is a learned behavior and will take time. Now will the markets recover? Yes. When will it recover, no one really knows but rest assured it will always arrive (maybe this year or next?). Just keep a look out for the whales. Follow the whales as they invest, play with them not against them.
There will be no decoupling. Ken Fisher believes as I, that the larger always pulls the smaller and our economy now only comprises 1/3 of the world economy and getting smaller as China, India and other new economies grow larger through industrialization and consumption. Ken Fisher of Fisher Investments also helps support this thesis. He says,
Whether you’re thinking bonds or stocks, you’ll always see a truer picture of what’s going on if you think globally before you think nationally. To see the U.S. or any other country correctly today, you must start from a global perspective. Thinking American first is defeatist. If you envision the world in its totality first, you can see clear trends and then fit the U.S. and other variant countries into them. This will aid you greatly even if you never invest outside the U.S.
It would be too egotistical to think that we control the world economy and that we are the only catalyst for the world economy.
Maybe this kick in the butt is just what the doctor ordered in order to help kick start more proactive measures by governments in the larger and faster growing economies to stimulate their own economies to help this new global unionization prosper.
Again Bernard Baruch once said,
Whatever men attempt, they seem driven to try to overdo. When hopes are soaring I always repeat to myself, 'Two and two still make four and no one has ever invented a way of getting something for nothing'. When the outlook is steeped in pessimism I remind myself, “Two and two still make four and you can’t keep mankind down for long.”And you certainly can’t keep America down for long. Our own ingenuity created this problem and our own ingenuity will help get us out.
Disclosure: Author is long DIA, QQQ, SPY and FXI