All good things must come to an end. In the case of my ownership of General Growth Properties stock (GGP was its ticker before bankruptcy filing), the end is near. Why? Anyone following GGP will already know this, but just in case you don't, the price per share moved from $4 to $7 in a matter of a couple weeks. This move, and the reasons for it, mean it is now time to part ways with a very good stock pick (originally bought in April at $0.63 / share).

Three good things happened for GGP in the past two weeks:

There is a simple fact that all Goldbugs miss: and that is the American economy, and most all others in the world, have just experienced a massive asset DEFLATION (still underway in some segments like commercial real estate). This deflation in America was about $15T over the past two years according to New York University's Nouriel Roubini (from $40T to $25T). That asset deflation was completely psychological. One day American assets of all types were worth $40T in dollars and just a little bit later, were worth quite a bit less. There was no massive physical destruction of assets as in a war (counter to the weak Weimar hyper-inflation argument), only economic.

The basis for my opinions on monetary reflation are derived from Hyman Minsky's work. PIMCO's Paul McCulley has written on "The Minsky Solution" many times in the past two years. In early January, I featured one of McCulley's articles in a post.

There is really no debate about the point that unemployment levels lag the stock market. The data is clear on this. Even if one wants to challenge the accuracy of the level of unemployment, the trend is the same. This past Friday saw the passing of the level of 10% unemployment in America. This level was thought to have been a severe psychological barrier to market participants and the market had sold off the two weeks previous in anticipation of that result. The number was announced on Friday morning, and....nothing. The market barely reacted. And for good reason.

In each of the past six recessions, regardless of cause or severity, the stock market led the recovery in employment by 4-9 months. Examples of the stock market bottom followed by the peak level of unemployment in each cycle include: June 1949 vs. November 1949 (5 months), September 1960 vs. May 1961 (8 months), September 1974 vs. May 1975 (8 months), June v. December 1982 (6 months), November 1991 vs. June 1992 (7 months) and February vs. June 2003 (4 months). It stands to reason that the more severe the recession, the higher the level of unemployment and the longer it will take for the employment cycle to reverse direction. This can be seen in the data as the longest recovery lags were the severe 1974-75 recession and the 1960-61 recession.

In the Land of the Rising Sun, the financial sun is apparently setting. I have zero investments today in Japan for the reasons outlined in the story linked below. Credit Default Swaps (CDS) are showing the Japanese banks are under great stress. Those bank debt insurance policies are at levels close to where American banks were in September 2008 before the big crash and bank implosion.

I have business associates in Japan, and the economy has been in virtual depression for many years. They have a homeless problem like you would not believe with tent villages on public grounds in the cities, especially around the old castles (but being Japanese, they are very tidy tent villages).

This past week's sell off in the markets is very similar to the Q2 reporting season beginning at the end of June or the Q1 reporting period beginning in March to April. Investors are now buying the rumor of solid corporate earnings and selling the news, no matter how good it is.

This is one of the oldest and most solid rubricks of the stock market. (Why does it work? I think it is because of human psychology: rumors always originate at a time of fear and weakness in a company stock price; the news of higher earnings a period of time later will be met with satisfaction and smugness, which creates the circumstance for a price peak). Take a look at the charts in late June and early July. This is essentially a repeat performance of what we are experiencing now. But this time, the market is 15% higher than then, as it continues up its sawtooth stair pattern.

Bill Gross and his PIMCO shop have started using a term for our economic future, calling it "the New Normal." I hate this term. It is the same thing as saying, "this time it's different". It is never different. The same old story is played over and over. The costumes might change, but the story's the same. It is a bit arrogant for the PIMCO shop to think they are the first to find this new thing.

Mario Gabelli and Gross were on CNBC Wednesday morning at the same time. Mario made the point to Bill that the past 100 years saw a 4-5% annual appreciation in the stock market, so if we average 4-5% per year for the next 100 years, then it really is not so new, but is in fact quite an old average. Bill did not have a good rejoinder to this point. Score one for Gabelli. Gross and Gabelli also agree that a good manager can add a few points of "Alpha" to that average return. So, 7-8% is possible with good portfolio management, in a very low inflation environment.

Many people are very upset that the dollar has been declining the past few months. The call is out for the Fed to raise interest rates (see Barron's headline, October 19, 2009).

But there is a flip side to this argument. Asset valuation (whether real estate, baseball cards or stock equities) is never about fact, but always a matter of opinion. Facts, like the P/E ratio, might support the opinion, but value is an attitude or belief, it is not an absolute truth. Because valuation is an opinion, it is subject to psychology. When people feel good about an object and can support that feeling with some fact, it has higher value. When they feel poorly about the same object it has lower value. But the object itself doesn't physically change. Value is psychic.

Fluor Engineering (FLR) has many positive attributes, FLR has a current P/E of 12 and an almost guaranteed profit for the next 12 months due to the contractual backlog that is inherent to engineering construction companies. Its Revenue / backlog is $23B (all numbers as of October 2, 2009) while its Market Cap is only $8.6B for a very low P/S ratio of 0.37. This while the ROE is 26.71%. Engineering construction is a high margin business with excellent forward visibility.

The long term outlook for engineering construction is very good globally with infrastructure and natural resource processing required in Emerging Markets and as a form of stimulus in developed markets. FLR was at 100 in June 2008 and trends very close to energy and materials stocks as those are the industries where it does most of its projects. The 5 year low was 28.60 on Nov 20 during the panic. I can't imagine prices getting back to that level again.

Successful investing is all about a contrarian perspective. It is my personal challenge to stay contrary at all times. I am naturally that way, so it is somewhat easy for me. Still, there are times, like June or October 2007, when my contrary warning bells were going off, but I did not listen and I stayed long, much too long.

But just as too much positive talk should trigger a contrary response leading to the action of "Sell", so too the same is true when there is too much negative sentiment, like right now. I actually allowed myself to be talked into this negativity in late July, much to my personal detriment. I went short the market in some of my accounts, and sold stock and funds in others, with the market at SP500 = 950. I was worried about all the things I should have ignored: approach of 1000 on the SP index, approach of traditional scary September-October time period, talk of a double dip recession, talk of healthcare and all that it would do to the economy, etc.

I am a long term fan of Natural Gas (nat gas) and have posted pro-nat gas articles on this website in the past. The price of nat gas is weak now due to its "junk energy" status during an economic downturn. It is highly leveraged to the economy and does very well in a strong economy and very poorly in a weak economy. This is due to its current primary use as an industrial energy source, its seasonal use for building heating in North America and its status as an "off-peak" electricity source.

If (when) nat gas becomes a primary transportation fuel source alongside gasoline and diesel, its utility and value will soar. I think that time is coming soon. The easiest way to achieve a significant global reduction in green-house gas is by a conversion of transportation systems from gasoline to nat gas and electric power from coal and oil to nat gas. This hasn't happened in the past for two reasons: (1) lack of distribution infrastructure (i.e. nat gas fuel stations on every corner); and (2) perception of uneven nat gas distribution across the geography (nat gas is expensive to transport other than through a pipeline due to its low density as a gas). A third issue is the conversion of vehicles from gasoline to nat gas powered, but this is a manageable economic issue that can be addressed with tax policy, and is not a technology issue.

I am selling UNG puts (Oct $18 - UNEVR) for $6.5 Friday morning (September 18, 2009). While I don't like UNG longer term because I am concerned about the premium in the stock price (over NAV) coming out with a ruling from the CFTC, still it is for now the only pure play on nat gas prices. And I see those prices recovering to at least $5 just on the idea of an economic recovery and even before the excess inventory runs down and new production is shown to be behind the demand curve.

Another, more conservative Nat Gas play is PennWest (PWE), a major Canadian energy producer based in Calgary with more than 50% of its production in gas. Friday, I sold the December puts in PWE $15 for $1.60 (PWEXC). This gives me some upside opportunity from the $14.40 price and downside protection to $13.40, which has been the recent base level for PWE. PWE, which I have owned since 2002, was above $30 for two years up until July 2008, and as high as the low $40s earlier. A return to the $30 level will occur with a firming of Nat Gas prices around $8 / mmcf.

Once again, Doug Kass pens a Bearish take on the economy and markets. Once again, I must take exception to Kass’s assessment of the future. Where Kass and his brethren -- such as Bill Gross, Mohamed El-Erian and David Rosenberg -- fail in their analysis is in the idea that “this time it is different”. Every time I hear those five words, I know the opposite is true: “this time is the same as it ever was.”

Kass and the others contend that we will face “non-traditional headwinds” to the economy. This implies that most often the economy must deal with traditional headwinds, I guess. That premise is a fallacious idea from the beginning. No two economic crises are the same. Every event in my 50-plus-year experience is different, and, always, the economy recovers. Any so-called statistical “outliers”, or what are called by the Bears “black swans," always mean-revert.

As much as I like the way the economy and market have behaved the past six months, there is an ominous signal on the horizon that has a very good track record, the Baltic Dry Index, and for good reasons. The BDI is a daily survey of demand for shipping of dry goods, which is everything not a liquid (crude oil primarily), shipped in bulk. All container traffic are measured by an alternate index called HARP. But building materials such as timber or scrap steel, are considered "dry goods" and are a good indicator of economic activity. So, when demand is high for a given supply of ships, the price soars.

This has proven a very good leading indicator for the economy which will show the effect of those material inputs a few months hence. But when demand turns soft and there is less need for shipping to move bulk products around the world, the price drops. Price is very inelastic in respect to demand and the supply of ships takes time to alter. So, for a given short range of time, less than one year, it is hard to find a better indicator of near future economic activity and resultant equity market prices.

Doug Kass recently predicted the S&P500 stock index will finish the year at 920. It is currently right at 1000 (on September 2, 2009). I agree with the prediction of 920 sometime in the next couple of months. I think 900 may be possible and even lower to 875 based on the bottom set in July. But unlike Kass, I think the market will rebound by year end. I will wait for signs of a possible rebound once this current drop (begun last week) is further along. The signs of the bottom to this dip will be a stall in the decline just as the recent market top was shown by a stall or resistance around 1040. The rebound will happen when the market goes up on bad news. I think that may happen during the Q3 earnings season the middle of October into early November. I am still thinking that 1200 is a possibility by year end. This would completely retrace the panic selloff starting from the Lehman collapse on September 15, 2008. So if we wait until 900 to redeploy our cash raised the past few weeks that could provide a nice 33% finish to the year.

Where Kass is probably wrong, along with many others on Wall Street, is that there are just too many people with a bearish market view. There is virtually no one on the financial networks (CNBC, Fox Biz, etc) today saying that the selling should be ignored and the market will go much higher. There are just no Bulls as far as I can tell. The market always confounds the consensus position. It has to in order to work. If there are a majority of bears, then by definition, there is hardly anyone left to sell. Once all of us who had our finger on the trigger pull the trigger there isn't anyone left to sell. So I think the decline will be shallow and the market will rebound in 6-8 weeks. This can't be like the panic last year because all the retail investors that bailed out in the fall and winter are still on the sidelines. People who sold everything in January and February never got back in.

It is time for another update on General Growth Properties (GGWPQ.PK). What a great day / week GGP has had in the stock market. Wednesday, GGP (GGWPQ.PK on OTC) was as high as $3.35 and closed at $3.12. The reason for the run is the accumulating market knowledge that:

(A) the bankruptcy court (Gropper) is going to allow time and market forces to work out the debt refinancing issues of GGP;

Many Bears continue to contend that this current market is much overvalued and a return to the March lows of 2009 is inevitable. Even the more moderate of the Bears think 800 is a good possibility in conjunction with a double dip recession, or "W" economy.

I challenge these bears to make their case in a non-emotional and statistical fashion. What I hear from these strategists is a "gut feel" response with no statistical backing. They contend that, of course, the current fiscal and monetary stimulus will wear off and the economy will relapse. The extrapolate the past year of weak consumer demand infinitely into the future (the worst mistake any investor can make is extrapolating the past to the future).

A Mid-Year Checkup on some of Doug Kass' 2009 Predictions (made on December 31, 2008). If he would review his own work from 8 months ago, he would not be so negative today:

2. Housing stabilizes sooner than expected. President Obama, under the aegis of Larry Summers, initiates a massive and unprecedented Marshall Plan to turn the housing market around. His plan includes several unconventional measures: Among other items is a $25,000 tax credit on all home purchases as well as a large tax credit and other subsidies to the financial intermediaries that provide the mortgage loans and commitments. This, combined with a lowering in mortgage rates (and a boom in refinancing), the bankruptcy/financial restructuring of three public homebuilders (which serves to lessen new home supply) and a flip-flop in the benefits of ownership vs. the merits of renting trigger a second-quarter 2009 improvement in national housing activity, but the rebound is uneven. While the middle market rebounds, the high-end coastal housing markets remain moribund, impacted adversely by the Wall Street layoffs and the carnage in the hedge fund industry.

I see many of the bearish market commentators proclaiming that market participants are now wildly bullish, or in the words of Kass: "there is a bull market in complacency".

Who is still bearish among strategists you might ask? Only all of those that ever were, including: Doug Kass, David Rosenberg, Mort Zuckerman, Joe Battapaglia, David Tice, Peter Schiff, Alan Abelson, et al. So, this bandied about notion that there has been a big move in sentiment from bear to bull is absolutely false.

One thing about Doug Kass is that he is willing to stick his neck out. But it sure seems he will get it cut off this time.

I don't know why he says that the advance is narrowing; instead, I see that it is rotating and broadening which is very bullish as sectors left behind are now beginning to catch up. If the break above 1000 on the SPY holds, as it did yesterday, for another couple days (William O'Neil of IBD says 4 days are needed to confirm a breakout), it will probably head up to 1100 on its way to 1300

Financial markets are driven by forward looking data and the anticipation of what is to come. This is true in both directions: down and up. Markets are now suggesting that there is much good news to come, as they drive higher and higher.

We are at the door in two of the major world markets: the S&P 500 and the NASDAQ Composite. The S&P500 finished the day Friday at 986 and is trading right at a key barrier at 1002.63 at the close on Monday, August 03. The NASDAQ Composite last traded at 1975 on Friday and is now at 2008.61 at the close, Monday.