I know that I had done the request of the bull or bear… but I like the rabbit more! Before starting I will state a brief conclusion: regarding the market, I stick to the bull-rabbit. In letter number 3 of June 5th I was expecting a market adjustment. In letter number 4 of June 17th I questioned my “bearish” vision and I proposed some investments with risks, and ever since letter number 5 of July 19th I am a 100 percent invested in the stock market (this was before the S&P 500 increased by a 14 percent and the Dow by a 12 percent). I am going over this because I want you to know when I am right and when I am not; of the so many aspects of this job, I appreciate honesty, which I consider a privileged value. That is why from this letter onwards I will incorporate an asset selection chart which includes the active investments put forward by Intuition Investment (this way we can all appreciate how the letters are working in terms of investments, besides their analytic and informative nature). I would like to thank Diana Mondino for this and so many other great ideas, and for helping me intellectually and practically in the writing of Intuition Investment letters.
Since the last letter, the market has slightly adjusted and then continued this upward tendency. As it was expected, it’s not paying attention to contrarian analysis. I like the current purchase volume and more and more players are daring to enter the market again. Many shares are still at sale prices (Citigroup?) and the future promises recovery and growth. There is a growing whisper telling us, “The worst has passed”.
These days I’ve been reading a lot about the market and, as usual, I ended up completely dizzy. In this letter we will go over what is going on and my view on the major markets and financial assets. Many issues will be discussed and then we will go into the core of this letter: the dollar. I’ve been receiving numerous inquiries about the currency and its prospect, considering the recent dollar depreciation and its current role in the world; I believe it deserves a thorough analysis. Well then, let us begin!
The Dow is now at 9.820 points and the S&P’s 500 index is at 1.068. The gold finally surpassed the $1,000 per ounce resistance and is going up (it is now $1,010 per ounce). The dollar is devaluating (as I expected, though now I did more research and there’s interesting information to assess, but we will go over this in a different chapter, in the meantime, the euro-dollar is at 1.47). The crude oil continues to go up and down (it’s now at $71.85 per barrel). My beloved Citigroup is at $4.26 per share; Bank of America, $7.63 per share and FAS, $86.99 per share. The U.S. treasury bonds’ yield is: 1-year 0.36 percent, 5-year 2.45 percent, 10-year 3.46 percent, 30-year 4.22 percent. TIPS are 0.94 percent 5-year, 1.63 percent 10-year, 2.16 percent 30-year. The unemployment rate is at 9.7 percent and the average U.S. mortgage rate is 5.16 percent 30-year and 4.65 percent 15-year.
“Our forecast is for moderate but positive growth going into next year. We think that by the spring, early next year, that as these credit problems resolve and, as we hope, the housing market begins to find a bottom, that the broader resiliency of the economy, which we are seeing in other areas outside of housing, will take control and will help the economy recover to a more reasonable growth pace.” Ben Shalom Bernanke, Federal Reserve Chairman
U.S. economy data are improving and exceeding the expected results (moreover, most global economy leading indicators are improving) and G3 policy makers made it clear that, for the time being, there will be no normalization of the monetary boost conditions. Warren Buffet announced that it is buying shares –we welcome the man who can help us to limit the bottom price of shares. Bill Gross (PIMCO) is buying treasury bonds… many bonds (last month it bought more bonds than any other month in the last five years). Over 80 percent of economists consider that recession is over (according to Investor’s Business Daily).
I will refer to a text written by Bill Gross (PIMCO) in his last published letter. He tells us what the future for world economies is:
· Global policy rates will remain low for extended periods of time.
· The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
· Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
· Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
· The dollar is vulnerable on a long-term basis.
It seems that the real estate floor is fragile and house prices may go down some more. Today, U.S. houses average price is $178,000 while the average mortgage loan (with interests) is $324,000. This scenario is kind of scary. During the next 12 months, $71 billion in mortgage loans will expire.
And now I’m reading an article from last week by Bloomberg who states that betting against the dollar has become one of the favorite investment ideas for investors who day-trade! (People from the stock market like to play with fire).
Meanwhile, many economists that I admire are speaking so badly about the market that I wonder if they really do what they say or they say something and do otherwise (because if they do what they say they missed the whole way to recovery that stock markets have accomplished so far). David Rosenberg (former Merrill Lynch, nowadays Chief Economist for the Canadian Gluskin-Sheff & Associates) states that fundamentals are resting and this market is guided by too much available liquidity. His models show him that S&P 500 should go get the 850 again- what would represent a 20 percent fall from the current level (he comes to this conclusion assuming an annual growth of 4 percent in the U.S. GDP. He also says that if the GDP growth rate was 0 percent by 2010, S&P 500 would spike to 670 points. He considers that problems are not over, that short rates of 0 percent show that the conflict of deflation continues- these rates show it, but it doesn’t mean that the conflict will exist forever; the market evidently expects prices to become better.
Another analyst that I admire, Richard Rusell, dares to put the bull market for technical reasons, though with a bitter taste in his mouth, not sure that this is a bull market (he says that the primary tendency is bearish, but the secondary one is bullish). Over the last 3 weeks I saw him putting in and taking out the bull of the rising market twice.
Finally, I read that Bob Pretcher from Elliot Wave expects the world to go into an economic crisis and the Dow looks for the 400 points… I’m open to all kinds of analysis and viewpoints, but saying that sounds obscene to me.
However, everyone can say what they want. Freedom of speech is important. But I believe in talking, doing and thinking in line, because when I align this three elements each word I pronounce carries the power of my actions and thoughts (I doubt that the ones who write about investments do what they say). If I say one thing, but I do the opposite, or I think differently, then my words don’t carry that power, moreover, those are weak words that I don’t even believe myself.