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Secular Changes = My Secular Bull Theme

I have often given my thoughts from a technical perspective of my Secular Bull theme during this year. This article will center around the fundamental secular changes that I perceive are and will continue to take place and take the market higher as we go forward.

There are at least 4 different material changes that are taking place right now that most are not recognizing and of course the naysayers will denounce.

Some of these were highlighted on a recent conference call I attended with Fund managers that are currently involved in the "small" cap " universe. However , they surely apply to overall market conditions as well. We look at the world through the filter of change. Small caps in particular , it is all about change on the margin; and it's about innovation and creativity, and the ability to deliver something the world wants. Every small company is trying to grow. What they need to grow, for any long period of time, is "demand pull." We identify these "demand drivers," and if you look at what's going on in the world today, there are at least 4 major demand drivers in the U.S. They are:

Revitalized Consumer Balance Sheets & the return of U.S. Household formation.

The Federal Reserve released its estimate of households' balance sheet as of the end of June. The report contained some significant upward revisions to past estimates of financial assets and net worth, with the result that household net worth now stands at $74.8 trillion, up some $4.5 trillion from the previous (March '13) estimate, and up $18.4 trillion from the recession low. Virtually every metric of households' financial health has shown significant improvement over the past several years. Net worth and financial assets are up 35% from their March 2009 low; the value of households' real estate holdings is up 17% in just the past two years; owner's equity as a percent of household real estate has jumped to almost 50%, up from its all-time low of 37% four years ago; household debt has declined by almost $1 trillion from its 2008 high, and is now back to the levels of early 2007.

Then there is more evidence of the housing recovery: according to Case-Shiller, home prices rose over 12% in the year ending July, reaching a post-recession high in both real and nominal terms. However, prices are still 23% below their early 2006 peak in nominal terms, and 32% below their peak in real terms. Despite their recent rise, 30-yr fixed mortgage rates are still 25% below their 2006 average, which means that housing is still far more affordable today than it was seven years ago. yet all we hear is the negative side from the naysayers.

The second generation of biotechnology

Anyone that has followed the biotech sector lately can attest to this huge growth opportunity. A sector that Admittedly I have totally missed , yet I believe there is plenty of runway left for the major players in this field, not to mention the upstarts that will revolutionize healthcare and drug delivery as we know it. Companies like Amgen Biogen, Celgene, Gilead and a small cap called Nps Pharma (NASDAQ:NPSP) are just a few names that can grow substantially, even from these levels.

Cloud-based information services, Tech revolution continues.

The American Technical revolution continues with "cloud" technology.

Mobile devices now rule , access to our information from anywhere we sit is expanding rapidly and we are in the very early innings of this play. I can add robotics, in the Industrial and Healthcare sectors and the potential game changer "3D printing" that will demonstrate the tech advances we can look forward to. CSCO, AAPL,QCOM,NVDA FFIV are names that play well here ... I own CSCO, AAPL, QCOM,NVDA, and look to add FFIV on weakness.

The American oil shale play.

As we slowly make our way to increased oil & gas production here in the U.S. it will lessen our demand for imported oil. That will slowly put a damper and possibly end what was the greatest transfer of wealth from here in the U.S to the oil producing nations. That wealth now stays here at home. We are already exporting natural resources because of this development . In the future we can be the world's largest exporter of LNG. LNG needs that will fuel Japan, China , etc as they move away from their Nuclear (Japan) and Coal fired power plants (China) . A huge windfall for this country.. CXO & WLL , recommended earlier are taking advantage of this fact . Their stock prices have now reflected the value that sill exists there. TGP & GMLP are LNG carriers that will benefit..

Another note : The bears failed to either notice or acknowledge the huge injections of cash into the stock market by corporations. From Q1 2009 through Q2 2013, S&P 500 companies repurchased $1.5 trillion of their shares and paid out $1.1 trillion in dividends for a grand total of $2.6 trillion. Something they simply ignore and brush aside.

Adding more fuel to the Bull argument is the improvement on the "debt issues" we are faced with .

Some facts :

Because of low interest rates, debt service as a percentage of GDP is 1.5%, half of what it was in 1989. And while rates will go higher at some point, I'm suggesting that rise will be modest and produce volatility but be manageable as we just witnessed when the 10 yr rose to 3% and the S & P rallied to a record high of 1725. I'm still waiting to hear the "bear" argument to counter that last incident.

The change in this debt problem is already taking place: We've seen dramatically higher tax receipts over the last several months , because of economic growth and a a rapidly shrinking deficit. The deficit will soon be well below 3.1% of GDP, the 40-year average, and is projected to shrink to 2.1% of GDP by 2015.

Since hitting a high of $1.478 trillion in February 2010, the U.S. federal budget deficit has plunged by 54% to a new, post-recession low of $679 billion in the 12 months ended August 2013. A contributing factor accounting for the bulk of the decline: federal outlays have declined. Virtually NO ONE expected the budget outlook would improve so quickly and so dramatically.

Relative to GDP, Gov't spending has declined by over 15%, from 24.4% of GDP to 20.6%, while revenues have increased by almost 17%, from 14.2% of GDP to 16.5%. The budget deficit is now a mere 4.1% of GDP, down from a high of 10.2%. In less than 3 years, the federal budget outlook has gone from dire to almost normal. Amazing facts that for those that are in "denial" , will continue to dismiss.

Add the European turnaround and the fact that China and Japan didn't implode as the "bears" suggested and we have more evidence for our Secular Bull theory.

Yes, there are still many things wrong out there, but at the same time there has been a whole lot of improvement. That is why the market is up at these levels , while most still moan and fret about a weak recovery. Those who have taken this view, and who have thus avoided taking on risk, have passed up huge gains. Those optimists who saw the facts and the change that is taking place and acted accordingly have been richly rewarded. If things continue to improve, and if we can simply avoid any missteps, (Congress & the DC crowd, are you listening ? ) there are more gains to be had by taking on risk and avoiding cash and Precious metals.

The non-believers have consistently underestimated the ability of the U.S. economy to grow and improve. Even though we remain stuck in the weakest recovery ever, the economy has still managed to exceed the doubter's apparently dismal expectations. The facts presented above lends a lot of strength to the secular Bull argument. There is real, significant, and fundamental improvement that has taken place in the U.S. economy, and the 'bears" have either ignored it or chosen to believe that it is a "blip" and will be short lived. It's not. IMO, We are in the early stages of these secular changes and this bull market run. Net worth at a new high, financial assets at a new high, real estate values recovering, debt declining: what's not to like?

Am I suggesting that investors need to throw caution to the wind and go all in here ?, absolutely NOT . There will be plenty of bumps along this road. and as astute investors remember there can be periods of declines that may take the averages down around 20% , while we still maintain an upward bias.. However, one step at a time,, in the short term , the debt ceiling issue will unfold , and eventually get resolved . More importantly we will need to see continued growth in earnings.

As late as today I get questions as to what is wrong with the market ?, They reason that we just received good news from the fed with a no taper decision , yet we had a one day rally.. Already most have forgotten where we have come from, please do not lose sight of that as we sit today a mere 1.6% from the highs .. What will they be saying if & when we drop 10% ?

So maybe the rocky road starts here , after all we have had quite a run ..

All of these short-term machinations, however, should be taken within the context of a secular bull market. Verily, we got yet another Dow Theory "buy signal" last week

as the majority of the indices I monitor rose to new bull market highs. LT investors need to stay the course until we see a material change in this trend .

If you raised cash along the way as suggested , be ready to put it to work as we move forward..

Best of luck !

Disclosure: I am long AAPL, CSCO, QCOM, CXO, WLL, GMLP.

Additional disclosure: I am long Numerous equity positions ( all can be seen here on this blog) I am short Gold via DZZ