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Current State of the Market - Fall 2010

Where have we been the past few months and where are we going?  You may have wondered after my last email blast why my predictions have not yet come to fruition.  This blog is an attempt to fill in the gap and bring you up to speed on where we are today. 
I am now posting as a blog on seekingalpha, and I encourage you to look at other postings here or do research on any of the equities you may think about buying.  The community here is excellent and the insight and variety of opinions are unsurpassed as opposed to the traditional media. 
The past 6 months have been a whirlwind of activity and confusion. Bad news can send the market up, good news sends it down and no news can go either way. So where are we? How come the market didn’t dump this Fall as I had predicted this Spring and Summer? Why have we had this run-up in stocks and assets in spite of the economy?
I am not going to talk much about the state of our economy in this posting, as I think we are all familiar with where it is. As for where it’s going, I think I can sum it up rather quickly by saying ‘nowhere anytime soon’.
So then why is this market so high? Why haven’t we seen defaults? Where did the Euro crisis go? Why is the Euro so high and the dollar first gaining then losing? Let me first say that the market is not a logical place. It is emotional. It is based on fear and greed and at the end of the day, like it or not, the market is always right. I hate saying that and hate it when someone tells me that, but the reality is just that. An asset or bond or piece of real estate is based on what people will pay for it and nothing more. In order to try and make sense of all this, I need to take each sector separately, even though as we well know they are all intertwined. 
First, a bit on the current state of the world.  You must first realize that the West (Europe and the US) are still in big trouble. The East (all of Asia), Australia, New Zealand, and most of South America are in the midst of a huge boom. I mean HUGE.  Younger demographics and the growth of a middle class in some these previous 2nd and 3rd world countries are nothing short of spectacular. This new middle class (comparative to the rest of their countrymen) are all doing the same thing. Buying!   Buying refrigerators, cars, air conditioners and every other thing we take for granted in this country. 
I could talk for hours on the consumption of this new wealth and how it affects everything from commodities to stocks and currency. The Chinese now buy more cars than Americans! Think about that for a moment. What does that mean? For starters, gas, oil, palladium (for catalytic converters), steel, plastic and every other raw material that goes into an automobile. The only reason why our gas prices haven’t gone up is because our demand has held stable and their demand has taken up the slack. Regardless of whether our demand rises or not, their demand will very quickly outpace the worlds ability to pump, mine and produce. That means supplies will become tighter and that means prices will go up. If you read nothing else, go out and buy commodities and enjoy the ride. I would need to devote (and may if your feedback requests it) a whole article on commodities. 
First up are equities. By this I mean mostly stocks. Understand that the bull market of the past 2 months is really based on something tangible, so let’s talk about that for a moment. 
  1. After all the layoffs and reduction of inventories, corporations are sitting on the largest pile of cash in history. Not surprising. We then saw a fairly modest gain in production because we were depleting these inventories. We are now seeing inventories building again and this could be worrisome if consumers don’t start buying again. There are some indications that they have started to but they are much more selective and price conscious. I wouldn’t even call this a solid trend yet. 
  2. Corporations are global. Profits come from all over the world. While the US and Europe may be slow, the emerging markets and the rest of the world is buying like there is no tomorrow. What we like to call ‘American’ corporations are really international companies if they are of any size or wish to remain competitive. Overseas profits are up! 
  3. There is a belief that the QE2 program just announced by the Fed will get our economy going again. I do not believe so, but remember, the market is based on fear and greed as well as expectations. 
  4. Mutual Funds (the largest and most important component of the market) have moved the cash they had previously held on the side and are almost fully invested in the market again. This tremendous inflow of cash has pushed prices higher. 
  5. There had been an expectation of a Republican victory which we saw come to fruition on Tuesday. That gives the market some confidence that there may be some stability in our government or at least no more economically negative legislation like the health care bill was. Putting it bluntly, gridlock is better than what we had. At least the administration will have a harder time wasting money on bailouts and welfare programs. 
There are other reasons as well, but these are the main ones and I think these do a reasonable job explaining why the market has gone up so significantly. Add to that exuberance is the denial of some realities. As I write this today (Thursday November 4th) unemployment stats went up by 20,000 more jobs that were lost last week. Previously there had been a bit of a decrease over the past few weeks, and the market just shot up in spite of it. It’s now up 136 (185 and I’m still writing!) as of right now. Go figure. As I said earlier, good news and the market tanks, bad news it spikes and anything can happen for no reason at all (see my previous blog on bank manipulation of the markets). 
Let’s go to bonds. As I warned months ago in an email to many of you (I wasn’t blogging at the time), bonds are in a bubble. If you own bonds, sell now and get out. The only bonds you may want to hold are Treasury TIPS (Treasury Inflation Protected Securities) or high quality corporate debt (IBM, GE etc). In fact it deserves a mention here that for the first time in history, (Yes, I mean ever!) TIPS sold last week for a NEGATIVE adjusted yield. You heard that right. People bought TIPS for $105, which if no change in inflation occurred over the next few years would yield them $100. That’s right, less than what they paid for them. Do you think these people were foolish, or do you think they know something we don’t? Can you see and say inflation? Yes, that’s right. We are moving from a deflationary situation to the beginnings of an inflationary one and the new QE2 will help us get there. 
Is that good? It depends on how much inflation occurs. Some level is good and necessary just to keep the economy going in a positive direction. Too much and we end up like the 1970’s under Jimmy Carter when home mortgage rates were 18%. The Fed has reassured us they will watch and measure carefully the impact of QE2, but inflation tends to be like the genie out of the bottle. Once it gets out, it’s hard as heck to get it back in! Therefore, if you believe (like I do) that inflation will creep (or jump), then TIPS will pay off handsomely.
As for the rest of the bonds, yields have been pushed so low that any inflation will eat any possible yield and bonds are in a bubble (we all know what happens when bubble’s pop!).   I don’t have time or space to elaborate here, but when Bill Gross the head of PIMCO, the largest bond issuer in the world says the bull market in bonds is over, believe him. 
This doesn’t include the soon to be disaster in state and municipal bonds which are in serious danger of default. If you own them, get out now while you still can. Our local governments are in serious trouble and it hasn’t started snowballing yet but will soon. If you doubt this, look up Harrisburg Pennsylvania, NJ, California and Illinois pension funds and I could go on and on. 
 My predictions?   This market WILL adjust. If you are in it, be ready to take profits. If you have money on the side, you need to invest in something that will pay off. Inflation will make dollars held in money market or cash positions less valuable by the rate of inflation, plain and simple each year. Think commodities. There are great ETF’s which will help you invest without having to take physical receipt of rare earths and metals (GLD, SLV, PALL, REMX and many more). Invest in Emerging markets (DGW, DEM, EEM), China, India, and Brazil. Some good country ETF’s to look at are:


  1. Brazil – EWZ, BRXX, BRAQ
  2. China – CHXX, CHIQ, HAO
  3. India – SCIN
Do your research! Don’t invest blindly and don’t jump in regardless of the price. Watch for pullbacks and take advantage of them. Watch your holdings carefully. The days of buy and hold are over!!! All of these ETF’s can be volatile and the whole world financial situation is volatile. Put in Stop Loss orders after you make your purchases. 

Disclosure: All the ETF’s mentioned are held or on limit buys waiting for any pullbacks. BPRAX(OTC:TIPS). None of the company stock equities mentioned are held at this time