Setting the Stage for the Next Great Bull Market

by: Bill Cara

There is a saying that your first wealth is good health. This week I got sick enough to stop me from doing the full Week in Review. I’ll spare you the details.

I’m just waiting for some wag to say that it is an improvement over my regular report.. Not really able to laugh, though.

This week, I’d like you to look at the $USD, which has had its run up to the down sloping Moving Average lines. I think the run is soon over, and that natural resources-based currencies (Canada for example) will start to rally. So too will gold. Actually the rally in the gold commodity and the stocks started this week, about which last week I pointed out I could foresee happening this week, and this week had quite a run up in the gold bullion. Early Friday morning, I gave you a good list of 20 PM stocks to keep on your Watch List.

Higher U.S. Treasury yields will try to keep that gold move in check, but that too would worsen the situation in the housing industry. So, I suspect we’ll be told the housing industry problems are over (not!) and that it is ok to have lower bond prices (not!).

As to the new highs in the equities, I haven’t yet seen any analysis of apples to apples comparison. The index components and weightings have changed since the last long-term cycle peak. Also, the share buy-backs and increased dividend payout levels have simply restructured the corporate balance sheets and pumped up share prices and the equity market indexes. So, without seeing the incremental enterprise values to support these higher share price levels, in the majority of cases, I’m not impressed by today’s chatter of records.

In any event, trading is about finding stocks of quality (peer out-performing) companies and buying the dips and selling the peaks each long-term, intermediate-term or short-term cycle, depending on your own approach to trading.

I believe the equity markets have lifted for two basic reasons: (i) falling oil prices, and (ii) hope of falling interest rates.

If you think that global economic recession or depression is close by, then I guess you have a reason to think that oil prices will fall into the 40’s or 30’s. But then you cannot also believe that corporate earnings will continue at a double-digit pace.

If you think that the war against terrorism will soon be over, facilitating smaller budget deficits in the U.S., then I guess you have a reason to think that interest rates will decline. But then you are not listening to the U.S. President saying he is putting more troops into the war, and warning the world about that other “axis of evil” Iran.

You know, being a fiscally conservative person, I was hopeful in the Bush Administration six years ago. But utterances such as “axis of evil” are, to me, a sad reflection of a pretender to high diplomatic position. The world needs diplomacy. Bush’s speech this week to try to explain the new policy of military build-up in Iran resulted in precisely no change in the lowly ratings the President has. Admittedly, he is facing the worst problems in maybe 50 years, but by the polls his own people fail to see the leadership.

I think the axis of Bush string-pullers has gotten the world into the crisis shape it’s in today, and central banks have followed the only course available to them. Excess credit has been poured into housing at first, and then stocks and bonds. The final cyclic move will be into gold, silver, palladium and platinum. And when the precious metals cycle is over, all prices will be in a cycle of decline.

I’d like to think that politics and markets were like church and state, separate, but this President has them all mixed up. As and when the stock and bond markets decline from here, I believe there will be a massive outpouring of emotion against this President, and a denouement that sets the stage for the next great bull market.

Now I can return to bed – thinking of good things ahead.