Don't Be Seduced By a Sexy Stock Market
Tuesday, March 21, 2006 | Dylan JovineRating:
We met on vacation in South Beach. She was beautiful, sexy, fun, intelligent - everything an enterprising, twenty-something such as myself could ever want in a woman. She even did some modeling in her teens, which allowed me to casually leave her portfolio on my dining room table for all of my friends. Of course, I feigned surprise when they would walk in and begin gawking at the pictures.
"How did that get out here?" was all I could muster as I proudly took it all in.
Within months, we decided to move in together. By the end of the year we were actually debating children. They say that youth is wasted on the young. I wasn't going to let a single drop escape my grasp.
To this very day I'm not sure how such a pretty picture turned into the burning wreckage it became when I finally escaped for my life and we called it quits.
From my perspective it was simple.
She turned into the old lady from the Shining, and I did my best Jack Nicholson impression to escape for my life while she chased after me.
Growing up, we've all had relationships with people that were sweet on the outside but had a sour center.
While I would argue that that may be the best part of growing up, I can say without a doubt that - now that I have grown up - chasing "fool's gold" has become an endeavor I choose not to engage in.
And that's what I think about when I look at the market we find ourselves in today - fool's gold.
Which brings me to Teeka's article below, in which he explains why it pays to be cautious before making any investments.
Don't lose sight of the forest for the trees right now.
Yes, it's true that the economy seems to be doing well.
The positive economic news, which paused at year-end, seems to be a "validation" of the bulls' Goldilocks economy argument. They believe that the U.S. economy is beginning to hit the right balance between growth and inflation, between spending and saving.
But, as is often the case with the capital markets, it can often seem that they operate under split personalities. On certain days of the month, it seems that everything is honky-dory. On other days it almost feels like the world is coming to an end.
So in the spirit of Freud, who spent a lifetime studying psychology, I'll spend the next couple of days discussing what appears to be a stock market that is in need of some Lithium.
In the Bullish Corner …
The bulls believe that the US economy, while prone to hitting rough oil-type patches, is in a "sweet spot": Business investment is picking up; inflation appears moderate; employment is climbing (even if real wages aren't); and existing home sales are "leveling" off.
This has led many economists to keep their growth forecasts at a respectable 3.5 percent, the highest of any industrialized country (as the "powers-that-be" are fond of reminding us).
But the real reason for the optimism is that the pattern resembles the handoff from consumer-led growth to business-led growth that many market watchers were hoping for.
By far the most encouraging trend is business investment: Spending on equipment and software rose an impressive 13 percent last year, and at an annual pace of 18 percent in the fourth quarter of 2005.
The bears minimize the growth in capital spending, arguing that much of what was spent last year was to replace and repair old equipment. In contrast, the bulls believe the spending to be for completely new equipment to expand production capacity.
This translates into business being optimistic about the future, and a willingness to spend on machines, people and factories. This was confirmed once again by the recent unemployment rate, which showed an increase in US jobs (who cares that most of it is for people working at Mickey D's).
The bottom line in the eyes of the bulls? All the economic indicators suggest the payroll data was strong enough to indicate a buoyant economy, but not so strong that Bernanke will have to raise interest rates too quickly.
To borrow from the Goldilocks analogy, the economic porridge is "just right."
That's why the stock market has rallied in such wonderful fashion during the first quarter.
But will this lovely lady turn out to be that grizzly chick from the Shining?
It's too early to tell, but tomorrow I'll look at the other side of the argument.
Enjoy,
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Dylan Jovine
Chief Investment Officer
The Tycoon Report
