01/04 Kelly Letter Topics
Weekly market review
Seasonal rally
Abysmal manufacturing
Horrific housing starts
Crumbling consumer conf
Rising oil price
Obama's cabinet
Is the Fed a failure?
Platinum 5-star stocks
Market forecast on track
Oil price trends
When to short Treasuries
We've now passed the third higher week since The Kelly Letter changed from a medium-term bearish to a medium-term bullish stance. The validity of that change is still doubted by many and angers many, as evidenced by the volume and tone of hate mail I've received. It comes mostly from people who are not invested, naturally.
The letter's take that the overall market will move higher while housing moves lower, has been spot-on.
Housing continued taking a beating last week. In August, existing home sales fell 4.3% and new home sales fell 8.3%. Prices in 20 of the biggest cities fell by 3.9% in the year to July, according to the S&P/Case-Shiller home-price index.
Also, the most important statistic regarding home builders is, of course, the one that went unnoticed last week. There's a new record of supply on hand, now at 10 months, meaning there's no impetus to ramp up construction soon. In fact, builders need to cut back on construction and consider dropping prices. No growth in construction means no growth in earnings, which means there's no near-term catalyst for stock price improvement.
Fannie Mae CEO Daniel Mudd put the end of the housing crisis a year away still, and said that even from that distant point it will take time "to work its way back." Prior to that, we should see companies with the weakest balance sheets declare bankruptcy. That's always a good sign before bottom fishing a dropping sector.
Consumer confidence hit a two-year low of 99.8 in September, sounding alarm bells to those who don't know any better. There is no correlation whatsoever between consumer confidence and stock market performance. None. Write it down somewhere near your desk for future reference.
That didn't stop CNBC from trotting out its market morticians to predict that this year's holiday sales will produce more coal than carols. Yep, it's that time of year again. The forecasts will be for a weak holiday season and the consumer will, yet again, surprise on the upside.
Your own research is useful in this area. Are you or is anybody you know planning to cut back on Christmas spending because of sub-prime headlines? Probably not, and you're not alone.
The media is making a comparison between conditions at this time of year in 1987 and now. I wrote Tuesday about a forecaster named Enzio von Pfeil who is on "red alert" for October and expecting the onset of stagflation to cause an epic crash.
I do not share these concerns.
Monday, October 19, 1987 is known as Black Monday because on that day the Dow fell 22%, its second-largest one-day drop in history. It's coming again, some say.
There are some interesting similarities. The dollar was dropping back in 1987 and is doing so now. Both years are the second-to-last of a Republican administration. Both years are the fifth in a bull market.
In 1987, the stock market began the year strong, sold off over the summer, and began a nice recovery into October. That's the same pattern we've seen so far this year.
These comparisons are fun for Trivial Pursuit buffs, but don't pack a lot of analytical power for our purposes. There are a lot of years in market history that look similar, but their similarities provided little predictive power even to those who called the patterns early on. Why? Because the patterns generally showed the market to be likely to move higher, hardly a breakthrough because the market moves higher 66% of the time.
If in doubt, bet on a rise, as we do in our permanent portfolios, which are up 15%, 20%, and 22% so far this year.
Where 1987 and today differ is in the valuation of the market. Heading into October 1987, the S&P 500 had a P/E of 22. Today it's just 18.
More damning for 1987, though, were performances. In August 1987, the S&P 500 was up 45% year-to-date and Treasury yields went from 7% to 9%. Those were major warning flags. This year, the S&P 500 topped out at a gain of 10% and Treasury yields never moved beyond 5%. The market is not wildly overvalued.
Don't fear a calamity in October. If we get a sell-off, it'll be a good time for late-comers to join the party that will see stocks higher in the medium term.
That's all it will be.
Last week, the bulk of what we own rose and all of what we're watching fell dramatically. That's the second week in a row we've seen such perfect conditions.
This is a time to be invested. Show what you're made of. Put your money to work against a backdrop of worries, a legion of angry people who swear this market must fall, and a frothy-mouthed media that sees calamity behind every statistic.
We're making money. Are you?
To see what we're up to -- and why we always come out ahead -- please click here.
