Building Your Portfolio for the Next Bull Market

There are signs, here and there, that the declining macro-economic data is entering a broad cycle bottom and that the actual bottom may occur in 2H2009—even if the banking and housing industries take until 2010 to work through their problems. If true (and I agree that this is debatable), the stock market cycle will likely reach a bottom some time before the end of this year, whereupon, as with the stagflation-oriented 1970’s, it will probably muddle through a period of several years of side-tracking, within a narrow range.

But that should not alter your strategies as a trader. You must retain a clear-headed perspective. And, you cannot get shaken out near or at the stock market bottom.

So, my thinking is still that there will be a final market blow-off (that process started recently with the commodity prices -- including the oil and precious metals beneficiary stocks-- that are the last ones to leave the dance floor), which will surely frighten the majority of traders. That final process, however, will also provide the traders who are best prepared an excellent opportunity to move from the abundance of cash they now hold, to the equities they need to buy for the next long-term Bull phase of the market.

In doing so, you will just need to avoid those industry groups that still have serious issues, like banks and real estate.

You will need to focus on the Energy, Basic Materials, Industrials, Utilities, Technology and Telecom, primarily. There will also be many high quality companies in the consumer segment of the market that will perform well, particularly if financially strong and paying out large and growing dividends.

Moreover, if you depend on capital markets for income, you will need to replace your US treasuries and bonds with solid dividend paying equities because interest rates will have to rise for the foreseeable future to counter inflation, which will be with us for many years. In this regard, you can consider convertible debentures as well, especially in the Energy, Basic Materials and Industrials segment, where the Total Return aspect of trading will be of primary importance to those seeking income. Otherwise, you will have to look at high yield fixed income securities from financially sound companies headquartered in countries like Australia and Brazil, where interest rates are high (and will be on the rise but also where the bullish commodity price cycle will compensate).

Negative cash flow companies, like the juniors in oil & gas and mining exploration, will have a tough time in a financial environment where banks will have tight credit policies for the years until their own problems are resolved. But, stock promotion will not die. The junior companies with the best finances, the most aggressive yet prudent management, solid in-situ basic resources, and so forth, will do well. Look to some of these to soon start offering convertible debs, warrants and share rights offerings to overcome their bankers’ tight credit conditions. We saw a lot of that in the late 70’s.

In the macro-economic world today, the emerging economies will continue to develop, much faster than the US, Western Europe, and Japan, and so you should be thinking of over-weighting the shares of companies that have heavier assets and revenues in those markets as you build your portfolio for the next Bull market in equities. Just be careful of country risk.

Looking at the various international equity market indexes Year-over-Year, you will see that most are down 1.5 times to almost three times the major equity indexes in the US:
Australia: -21.6%
Jan’s Nikkei: -12.9%
Hong Kong: -18.2%
China: -45.5%
India: -29.6%
UK: -17.1%
France: -22.0%
Germany: -20.2%

DJIA and S&P 500: -14.3%
NASDAQ: -12.9%

The winner, far and away is (drum roll please), Canada: -3.3%. But that has more to do with the direct international (i.e., neighbor) trade implications of a falling $USD in recent years. The future will not be so kind to Canada, generally, particularly in manufacturing.

Yes, in capital markets, price means everything. If you look at the decline of share prices around the world since the 2007 highest levels, it is obvious that this Bear market has already been massively destructive. There is more game to come, but, I also believe that we are in the home stretch—the seventh inning, if you will.

By late August, I hope to release a report on the Cara Global 20 that I believe will provide, by and large, a quite satisfactory Total Return performance over the next two and three years. Cara Trading Advisor clients will see these same stocks in their portfolios. My global group of trading assistants will be working 24X5 to drive satisfactory portfolio performance results.

 

Comments

[ILL PA.:]

THIS IS ONLY MY OPINION;
BUT I THINK == T / IPI / CHK / CSCO / MON / FCX / YUM / V /
EMC / HAL / MRVL / V /.
WILL BE RIGHT IN THE MIDDLE OF THE NEXT BULL MARKET.
I SUGGEST TO BUY , NOW.
THEN WHEN THE =BULL MARKET= ARRIVES.
YOU MY FRIEND WILL BE A BIG WINNER.
I'M COUNTING ON THESE STOCKS AS WINNERS.
AGAIN, THIS IS ONLY MY OPINION.
MR. GENSLER , GA.

2008 Jul 28 03:03 AM

[whidbey:]

thinking ahead is always good, but it seems early to get into stocks just yet, a major decline awaits us in the fall. Then who knows? Sideways or even more down as the banks drop like ripe apples in a dying orchard. We are going to see a fundamental change in American politics no matter who wins, or the issues.

2008 Jul 28 09:39 AM

[cartecay1:]

Folks, NOW is the time to make a list and check it twice. Then check to see how your picks hold up in a strong sell-off. If they do better than the averages, you can bet that they will outperform when the market wind is at their backs. But remember, too soon is as bad as too late...sometimes worse !

2008 Jul 28 12:52 PM

[cynic69:]

Bill – I like your commentary. You are not one of the Polyanna dopes that jump into the market and then blog frantically to try to convince the rest of the world to jump in and save their ass. This being said I think that the US economy and the US stock market are in some long term trouble. In Europe for example the governments have planned for the dislocations that are the result of “peak oil”. In the US the oil companies and their stodges in congress have made sure that there has been no energy strategy. The Republicans have kept saying that the “market” will solve these energy problems. I think they are correct but the road to success is going to be littered by some extreme hardship for Americans. It’s going to take decades to conserve our way out of the “peak oil” mess. Think about this: The auto industry (manufacturing, marketing and repairing) forms a huge component of our GDP. The auto industry may be cut by 60%, maybe more. This dislocation will not be rectified anytime in 2009. The same can be said for the airline industry, in. spades. I’m sure that money can be made in the stock market in 2009 but not by going long any of the usual suspects (like technology, telecom or consumer stocks). I have read that fully 50% of the income of technology companies comes directly from consumers (not B to B).
I personally have made a small fortune by being long oil and owning a truck load of puts. I intend to accelerate my put buying because I think that the curtain is about to fall on the Ben and Hank show. All that’s left is to sweep up the body parts and turn out the lights.

2008 Jul 28 01:08 PM

[Bill W.:]

Thanks galewhitaker for sharing your thoughts, I believe you do indeed, have it right. I'm a retired Project Planning Engineer, in fact I was one, of many, planners on the Alaskan Pipeline. I helped develop the plan and the schedule for the gathering units ( this is the equipment that goes from the wellheads to the separation units. I also helped develop the plan and schedule for the separation units. The separation units separate out the natural gas, which is injected back into the ground for future retrival, water is separated and then piped into Prudhoe Bay, and the oil is sent to pump station 1 to wind it's way through the pipeline and ends up in Valdez in tank farms waiting for shipment off shore.

You are absolutely right about how is priced and how most, if not all of the oil on the TAPS is sent to Japan.

A point most folks don't take into consideration is the lead time it takes to bring major projects on line, the Alaska Pipeline was years in planning and if memory serves took about 8 years for the design,
manufacture and construction.

Respectfully,

Bill W.

2008 Jul 28 06:42 PM

[cynic69:]

Bill W. – I vaguely remember reading an article about the current status of the pipeline. Is it true that it is in a serious state of disrepair and must be shut off for repairs more frequently as time goes by? Is it true that as global warming melts the permafrost the pipeline is in danger of calamitous failures? If these things are true it makes the drill, drill, drill philosophy advocated by permabull Larry Kudlow even more ridiculous then it sounds at first brush. I love the way Larry listens carefully when his guest is saying stuff that he believes but if the guest is a bear he talks over him so that the TV audience can’t hear what is being said.

2008 Jul 29 01:14 AM

[Bill W.:]

I'm sorry I can't answer your question regarding the state of repair of the pipeline simply because I have not been paying much attention to lately.

I believe that our economy is in a lot worse shape than the media has led us to believe. I live in the historal section of Jacksonville Florida, a section of town that is in transition from being run down to being upscale. Anyway there are half way houses that provide room and board for $97 a week......a year ago there was a waiting list to get into these places. They now have a vacancy rate of 33%! The folks tell me that even a lot of the day labor pools have gone out of business. It makes me wonder where these folks are living.

2008 Jul 30 09:50 AM