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:
Jan’s Nikkei: -12.9%
Hong Kong: -18.2%
DJIA and S&P 500: -14.3%
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.