Should You Be Bullish or Bearish Right Now?
Tuesday, February 6, 2007 | Dylan JovineRating:
Editor's Note: Dylan will be back with us next week. Until then, I wanted to share with you one of his more recent articles on the market offered to members of Fallen Angel Stocks. As members of Fallen Angel Stocks know, when Dylan speaks, it pays to listen. Currently, every stock in his model portfolio is profitable! (For those who are interested in discovering the stocks he thinks are poised for even greater returns, we invite you to take a 30-day Risk-Free trial membership to Fallen Angel Stocks right here: http://www.fallenangelstocks.com/fas.asp)
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“I heard the talk of a soft landing, and I remember joking with people and saying, ‘Well, that will be one in a row.’” -- Treasury Secretary & former Goldman Sachs Chairman Hank Paulson, November 2006
Charles Dickens’ classic novel, “A Tale of Two Cities”, commences with the famous words, “It was the best of times, it was the worst of times,” prose which not only aptly describes 19th century France, but also the current stock market as we enter 2007.
On the bullish side, money is still cheap by historical standards; global growth is still relatively strong; and P/E ratios have not become absurd. Since we’ve heard the bull argument non-stop for the past four years, I won’t bore you with details; however, these are all good reasons to stay fairly optimistic.
On the bearish side of the debate, however, the collapse of the housing market cannot be understated. Historically, 88% of the time housing started to drop by 20% or more, which it has, a recession has followed.
And the global growth that has lifted all boats in the water during the past four years has begun to produce credible signs of inflation in producer prices (the prices companies pay to buy the supplies they need to create and sell products to us.)
Usually, if producers/companies are paying more, that means that consumers like us end up paying more, as well.
Perhaps even more disturbing has been the tightness of the labor market. Labor costs represent 66% of the price it takes for a company to make the products they sell to us. For example, if you purchase a new IPOD, 2/3 of the price you will pay represents labor costs.
As much as we all love having jobs and seeing our friends get jobs, it’s not good if the prices we have to pay for these products keep increasing because of the higher labor costs associated with a tighter job market.
If part of the picture looks bullish, and the other part looks bearish, where does that leave us?
Exactly where we want to be.
Dr. Strangelove or: How I Learned to Stop Worrying and Ignore Mr. Market
If you only take one single lesson from your entire experience with me, make it this one:
No one, myself included, can accurately predict the direction of the stock market, interest rates, the U.S. dollar, the economy or any other macro-economic factor which “pundits” and other “experts” spend all day speculating about.
Sure, some lucky people get it right once in a while. But the reality is that no one can accurately predict the future of America’s macroeconomics for extended periods of time.
(And so far, neither can computers. All the programmers I know creating the “black-box” systems buried deep within the ground at the major brokerages still chuckle when I ask them if they’re getting any closer.)
The good news is that we don’t have to be able to predict, say, the direction of the market to make money as investors. In fact, many of the world’s greatest investors (Templeton, Buffett, Lampert, Kerkorian, etc.) have suggested that even trying is a waste of time.
They unanimously agree that spending time on thoughts which are beyond their control distracts them from thoughts within their control, namely the study of individual companies.
A private businessperson, they argue, doesn’t care if October is usually a bad month for stocks. All he/she wants to do is to buy another business at a good price.
Why should we spend time focusing on anything else?
I endorse the same logic: all I care about when I buy a stock is which way it goes in the long term – nothing else matters.
I bring this up today because I want to remind the newer members of our family (and there are many) to review my analysis and make your own judgments because there are no guarantees for success.
There are educated guesses and historical speculation.
As far as I’m concerned, predicting the direction of the market is nothing more than just a fun mental exercise that should be treated as such.
That said, let’s have some fun and begin “exercising”.
The Market “Handoff”
There is an old adage on Wall Street that says most people don’t know they’re even in a bear market until the market has already hit bottom. At that point they begin to sell.
Conversely, the old adage states that most people don’t know that they’re in a bull market until the market is at a top. It’s at that point that they
begin to buy.
The point of the saying is that it can be very difficult to notice the beginning of a shift in the market. And yes, I do think that there is a “shift” happening in the market right now.
Let me explain what I mean with the following chart:
A Classic Market “Hand-off” from Bull to Bear
|
|
Period1 |
Period2 |
Period3 |
Period4 |
Period5 |
|
Stock Market (perception) |
BULL (market begin to rally/things are great) |
BULL (market is hitting new highs/things are still great) |
BULL (the market stays strong and continues rallying) |
MIXED (markets begin to nervously discuss a “soft landing,” but remain strong nonetheless) |
MIXED (novice investors still see nothing but blue skies ahead, while veterans become cautious) |
|
Economic Fundamentals (reality) |
BULLISH (growth is strong and inflation tame) |
75% BULLISH/ 25% BEARISH (the Fed begins raises rates to slow growth) |
70% BULLISH/ 30% BEARISH (investors marvel at “Goldilocks” economy as Fed keeps raising rates) |
60% BULLISH/ 40% BEARISH (the reality is that there has never been a “soft landing” and the economy keeps getting weaker) |
50% BULLISH/ 50% BEARISH (the economy shows signs of strength and signs of weakness and could go either way) |
As you can see from the chart above, it is very likely that we are still in “Period 5” which means that things could go either way from here.
So what direction do I think this market is headed? It doesn’t matter, really.
That’s because I never make investment decisions based on where I think the market is headed.
Instead, I make investment decisions based on where I think individual stocks are headed, and that should continue to serve us well as we plow through 2007!
Best Wishes for a wonderful and healthy and prosperous New Year,
Dylan Jovine
Chief Investment Officer
Fallen Angel Stocks
(For those who are interested in discovering the stocks he thinks are poised for even greater returns, we invite you to take a 30-day Risk-Free trial membership to Fallen Angel Stocks right here: http://www.fallenangelstocks.com/fas.asp)
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Dylan Jovine
Contributing Editor
The Tycoon Report
