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America Is Back To Even: Time To Fold, Call, Or Bluff?

|Includes:, Inc. (AMZN), CRM, FB, IWM, MSFT, PCL

The booming U.S. stock market is hitting five year highs despite a sluggish economy and the S&P 500 is finally back to pre-crisis levels. So what does S&P $1500 mean psychologically to long term buy and hold investors who held on through thick and thin since March 2009? S&P $1500 means buy and holders of large caps and index funds are just 4% away from the 2007 highs. It also means that after the horrific crash of 2008, most "buy and hold" investors have gotten most, if not all, of their money back. Like any gambler who claws his way back to even against impossible odds, American stock market investors may be thinking about taking some money off of the poker table.

Some of the most value oriented long term investors are actually up from their highs in 2007, and hedge fund managers are out in their Phantoms and Bugattis once again now that many have clawed back to their high water marks (in other words, they are earning performance fees again and buying up art they don't understand, cars that are completely impractical, and houses with more bathrooms than a typical Marriott!).

What's most impressive to me, is that value investors who stuck to their guns are reaping big rewards despite a lackluster economy and an increasingly stratified society. Just look at the results for some of the great mutual fund managers out there who have trounced the market over this period of time like Donald Yacktman. The Yacktman Focused Fund (MUTF:YAFFX) is focused like a hawk on making money following a high quality value investing discipline. As you can see, an investment with this "Don" of value investing has turned $10,000 into $30,000 since 2003. Pretty impressive stuff for a concentrated value manager, and hard to refute (sorry, efficient markets people).

Two of the most widely followed measures of the economy, as far as investors are concerned, are the US Dollar (and its status as the World's reserve currency) and the U.S. stock market which is making new 5 year highs. Meanwhile, the Dollar keeps hitting multi-year lows against gasoline, foodstuffs, and raw materials prices.

To the outside observer, the stock market seems to defy gravity and valuation concerns. Profit margins are at peak levels but central banks keep flooding the global economy with cheap money which the banks have used to help "melt up" the stock market -- sure some companies are finding out how to thrive in today's world, but for the average "man on the street" life has not been the same since the economy tanked. Unemployment for recent college graduates, for example, tells us a lot about what the bottom rung is like right now in America.

So what gives with the stock market? If it feels like things are worse today than ever before, that technologically savvy hustlers are in charge, and that the system is broken you are not alone. So what are investors supposed to do given the crummy economic backdrop and little to no alternatives for parking investment capital? Starting a business is a good idea for younger people, and I highly suggest this route versus trying to make a living from your stock account. I think stock market participants right now are living in a greed bubble that SHOULD pop sometime soon. What should happen, however, and what will happen could be very different outcomes thanks to global central bank currency devaluation. So, if you want to fight the tape, you might want to wait until all of the proverbial bullets are finally exhausted.

If you trade equities on the long side for a living, think about short selling in addition to your "long only" investment strategies. Stocks are a good hedge against inflation compared to holding bonds but Inflation expectations are everything and markets appear to be in a bubble for some stocks and sectors just as they were in 2007. For Bernanke, the stimulus measures and the increasing financial leverage of the Federal Reserve may be hard to unwind without an ensuing ugly mess. Central banks may have no viable exit strategy to stop QE and reverse course "down the road." In fact, many people believe central bankers will never stop printing/QE at all -- poker pro and famous bluffer Phil Collins said as much in a recent tweet: "no practical way to end QE, U.S. Bond Market would collapse." So, we know the smart money is betting Quantitative Easing ending any time soon. In my opinion, central bankers have overplayed the QE bluff. Hopefully, the "market vigilantes" don't come a call-in.

QE will likely mean higher asset prices for commodities and stocks, so valuation is a trickier game for short selling -- we think the Russell 2000 €€(NYSEARCA:IWM) is overvalued again and that the IWM is a good short so long as you are prepared for further short term Fed driven pumps. As you can seem IWM investors are back to even and then some. The Russell is extremely overbought on both the MACD and Slow Stochastics.

Gaming the stock market means beating 80% of computer algorithms and all of the big hedge funds -- for past 12 years, the overall stock market has been pretty much a zero sum game unless you stuck with the Berkshire Hathaways and Coca Colas of the world. For every winner in this QE racket, however, there is more than one loser so make sure to practice proper risk management techniques like investing with top rated value managers or by setting hard stop loss orders on all of your equity positions.

For the long book, we would look for sectors tied to farming and agriculture, solid blue chips at good prices, or equities with abnormally low valuations -- hard assets are probably less risky than paper assets even if the economy recovers to full strength because of currency devaluation. We will be posting a list of cheap asset plays soon.

We urge investors to avoid pricey technology and "new media" stocks because they are speculative and currently overvalued in our humble opinion. It looks like (NYSE:CRM), (NASDAQ:AMZN), Facebook (NASDAQ:FB), and LinkedIn (LNKD) are all extremely expensive and speculative at current valuations. Maybe the best way to play these is to short them intra-day or at least set tight stop loss orders if you choose to short these names. Eventually value wins out, but in the short run the voting machine appears to be either rigged or badly malfunctioning!

Right now seems to be a decent time to take some profits on our Plum Creek Timber (NYSE:PCL) buy recommendation, made here: the reason being that lumber prices are down some 15% from their highs while PCL is still trading at the highs of the recent move, up 20% from where we suggested buying shares last summer. Even though Plum Creek's timber properties are valued at only $1,100 per acre 0or so, we think taking profits when stocks gain 20% or more in a short period of time is almost always a good idea. PCL is still undervalued as an asset play, and if you are looking for a basket of longs to use to hedge a basket of short positions, this is certainly a good candidate to watch.

In conclusion, we think it's time to lighten up on stocks or at least hold 40% in uncorrelated assets like real estate, hedge funds, gold, silver, timberland, etc... Gold and silver are down significantly from the highs and are investable here versus Dollars. Investors should consider raw timber land, farming, mining, oil and gas, and fishing businesses as a productive way to hedge against inflation and QE infinity. Stagflation may end up getting the better of the Russell 2000 over time and we are certainly skeptical of the parabolic move higher. If you are going to buy stocks, consider letting a pro at Yacktman, Tweedy Browne, or Sequoia (MUTF:SEQUX) do it for you. We don't think you should abandon the stock market altogether, but you should consider hedging market risk and these three mutual funds as a lower risk/higher returning investment than a blind bet on the Russell 2000.

Disclosure: I am short IWM, CRM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.