What Might Get The Market Moving Higher Again
November 26, 2007
I'm optimistic for a rise in the market.
I wrote last summer that oil would rise higher before falling lower for a while, then continuing another leg higher. That forecast is unfolding.
Lower oil prices are probably not far away. There's no economic reason for oil prices to be this high. Peak oil theorists aside, we're nowhere near the end of oil. Production is actually increasing and is ahead of current demand and projected demand for at least another ten or 15 years.
Some economists say the main reason oil prices are high is that they're denominated in dollars, and the value of the dollar is sinking. Some economists say the opposite is true: the dollar is falling against the euro because oil prices are rising and Middle Eastern nations sell dollars they receive for oil as soon as they receive them.
Either way, there's more to rising oil prices than just a falling dollar. In the past five years, oil prices are up more than three-fold while the dollar has lost less than one-third of its value. Not exactly a hand-in-glove moment that would make O.J. proud.
As with the chicken and the egg, we're not sure whether high oil prices or high euro values come first, but we're sure they come together. What also looks increasingly likely is that both are getting set to reverse course.
As week after week goes by with no economic fallout from the weak dollar, the headline will lose impact. Even now, smart foreigners are taking advantage of lower real estate prices in some parts of the U.S. combined with stronger foreign currencies to buy property at 25% off. That could turn the low dollar into a real estate support asset, which would help the economy, which would help to boost the value of the dollar again.
Another factor shaping up to get the dollar standing tall is the unpegging of Asian currencies from it. India has been letting its rupee rise, South Korea has been letting the won rise, Singapore has hinted at a similar policy, and even China is grumbling about the high price of gas and food and thinking that maybe a rising renminbi would be a quick fix.
If the world goes closer to a free float, the higher return on capital in the U.S. economy should one day get the dollar back on top, or at least closer to the top than the bottom.
Currencies are very complicated, actually, and no matter how much we talk about what influences them, what might happen, what happened in the past, and so on, there may be a much simpler way to get a handle on the odds.
Here it is: think in cycles. Markets tend to move in cycles. The euro weakened against the dollar for the first two years of its existence. Then, for the last seven years it's strengthened. If you know nothing else about why or when, don't you think it looks about time for the worm to turn for a while?
Barron's reported over the weekend that GaveKal, a top research firm, thinks so. It expects that worm to turn down hard, in fact, to where the euro will fetch only $1.05 or $1.10 within two years, down from its current level of nearly $1.50.
So, let's say the dollar strengthens, the price of oil drops, and we get those Fed rate cuts everybody is sure are on the way.
Then, say the consumer keeps on shopping -- as happened over the weekend. That will bring retail profits in higher than expected, because nobody expects much of anything at the moment.
As the above come to pass, financial companies wind down their one-time loss announcements and will have successfully set the stage for rosy backward comparisons in future quarters. How hard is it to do better than losing $11 billion, after all? Not very.
Finally, to cap it all off, GDP keeps coming in positive and recession is officially avoided.
While that may not be a recipe for a rip-roaring stock market, it sure seems like a recipe for a higher one than we have today.
Let's not give up on a rosy medium term just yet.Labels: Market Timing
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The Kelly Letter
The Bad News
November 16, 2007
Greg writes:Don't you think people are too optimistic for a year-end rally to make it actually happen? You know what they say: when everybody's in agreement, everybody's wrong. I'm not sure what optimism Greg's referring to in his note. I find an abundance of negativity around me.
John McClure at ProfitScore just emailed me this:The reason that recessions are so devastating is that few see them coming. We are still in a pre-election year which has historically been the best time to be in the market and, for this reason, many have remained steadfastly bullish. But this factor would be more than offset by the bursting of one or more of the bubbles that exist today so that when it comes, it will cause assets to get rapidly re-priced. Based on the data we are now seeing, if this time has not come, it looks like it's just around the corner. With all the talk of recession, it's sometimes hard to remember that we're not in one, nor are incoming data showing one on the way. The latest was well presented yesterday morning by Dick Green at Briefing.com:New claims for unemployment for the week ended November 10 rose to 339,000 from 319,000 the week before but remain at levels well below recessionary trends.
The NY Empire State index of manufacturing conditions for November was stronger than expected at 27.4, but down a bit from 28.8 in October. This is just a regional survey but is seen as an early read on November conditions. It is good news. Then, there's Enzio von Pfeil who wrote on Monday:We have just now asked the Bank to sell all individual stock positions, the view being that this is the beginning of the end. That is because markets not only swing from buy to sell, but they also start discounting news. So, as we put forth recently, we thought that that by selling in mid-December we would beat the rush to the door. Today, we have fast-forwarded this and sold out completely. . . . We have taken the sales proceeds and will be going into a "short" ETF on the S&P. Regular readers will recall Mr. Von Pfeil from my disagreement with him about October. He went on "red alert" for October, saying that many of the market's crashes have happened in that month. I said that you should not fear. Indeed, the S&P 500 gained 1.4% in October while the Nasdaq gained 5.8%.
Other dire forecasts include Outstanding Investments editor Byron King calling for $150 oil by December, Bank of England Governor Mervyn King saying that stocks are headed for a severe fall, and the estimable Economist writing that "the United States may well be heading for recession" and expounding:Dearer oil is set to squeeze households further (this week's drop in crude prices notwithstanding). Consumer confidence has already fallen sharply. It cannot be long before consumer spending stumbles, which in turn would hurt companies' profits and investment. The weak dollar will boost exports, but at only 12% of GDP, exports are too small to make up for a weakening of consumer spending, which accounts for 70%. I'd say there's plenty of negativity to go around, and that the minority viewpoint would be one looking for higher share prices, not lower.Labels: Market Timing
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The Kelly Letter
The Kelly Letter is Buying
November 02, 2007
We're buying into one of the bargains created by yesterday's sell-off around sub-prime. The Kelly Letter watches and waits for sometimes months before a stock reaches its target price. Yesterday, we went well below our target price and are jumping on the chance.
Do not be afraid of this market. The experts called for an awful October. I responded that it would be fine, and it was. More on that soon.Labels: Market Timing
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The Kelly Letter
Back On Track
October 28, 2007
My continued bullish stance last weekend following a drop in the market was correct.
Last week, despite weak home sales data and high oil prices, stocks rose dramatically:
Dow ................ 13,807 +2.1%
Nasdaq ............. 2,804 +2.9%
Nasdaq 100 ......... 2,195 +3.0%
S&P 500 ............ 1,535 +2.3%
S&P Midcap 400 ..... 895 +1.9%
S&P Smallcap 600 ... 428 +3.0%
People are too worried about the market. Everybody is afraid of getting in at the top of the Dow. They're concerned that sky-high oil prices will sink stocks. They're convinced that housing is doomed and will take down the economy. We'll soon be in a recession.
We've seen these same fears before. Usually, when they're high, the market is poised for gains.
Right now, they're high. Get ready for more gains.Labels: Market Timing
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The Kelly Letter
Here's Your Chance, Latecomers
October 21, 2007
Friday was the crowning moment of a bad week. Caterpillar came in with weak earnings and fell 5%. Such a stalwart collapsing was enough to fold weak hands on the anniversary of Black Monday 20 years prior. Forecasters of gloom raised their arms in victory as the Dow shed 2.6% for the day.
I wrote last month that we would not see another Black Monday, and we haven't. Some disingenuous pundits are using Friday's sell-off to claim prescience in warning us of an impending repeat of 1987. Please. Twenty years ago, the drop was 23% in a day. Friday's 2.6% drop is fairly routine. Anybody in this business knows that and should not exploit the coincidental timing to capitalize on fears.
Another idea I wrote last month was that any weakness this month would be the opportunity for latecomers to finally join the rally underway. I still feel that way. We have weakness, so now's the time to get into the market if you haven't already.
Look carefully at the reasons behind last week's drop: sub-prime, high oil prices, declining dollar, economic uncertainty, accusations of a befuddled Fed. Do you see anything new there? No. It's the same bear list we've seen for a long time. New fears -- unforeseen -- would be greater cause for concern because big drops are usually surprises. Last week was just a normal amount of market shakiness. It's weakness that should be bought. It'll probably persist a little longer, but is nothing cataclysmic.
Keep your perspective here. The market stepped down three rungs on a tall ladder that's gone almost vertical for two months. The dizzying heights have been reduced, but the ladder is still in place and the climbing will resume.Labels: Market Timing
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The Kelly Letter
Getting Killed By Leverage
October 17, 2007
Yesterday's article on leverage sparked conversation. It's the conversation that's always sparked by leverage because you invariably have to say that "it works both ways." Andrew Tobias pointed that out in his inestimable The Only Investment Guide You'll Ever Need.
Wade asked:If the index falls 50% and you are leveraged 100%, don't you lose everything? With most investments, yes. With leveraged mutual funds and ETFs, however, no. The reason is that they maintain constant leverage by daily rebalancing of equity and debt, whereby they buy shares when the market rises and sell when it falls. Even though they are selling shares by the boatload as the market plummets, they'll always have some shares leftover.
The main point, though, is whether you can be severely damaged by a leveraged index investment in the event of a big bear market and the answer is: absolutely. This is their downside.
However, can't we say the same about any investment? If you bough Sharper Image for $13 last June, you'd be in bad shape now. It closed at $1.81 yesterday.
Tom wrote:If we start looking at your example from another date, the results would be very different. Let's say I had invested $10,000 on April 1998, at the start of a short bearish period:
04/98 to 08/98: -50%
08/98 to 08/00: +186%
08/00 to 03/03: -59%
03/03 to 04/06: +220%
04/06 to 07/06: -23%
07/06 to 10/07: +55%
This gives me a return of only 8.86% per year for the past 9.5 years, well below many actively managed funds. Am I calculating this right? Yes, Tom is calculating right. The unfortunate person who started their investment program in April 1998 is still waiting to see much success.
Is it really the fault of leverage, though?
The total return of the leverage in the period Tom specified was 124%. During that same period, the total return of the Dow was 53% and the Nasdaq 45%. That gives them respective average annual returns of 4.6% and 4.0%.
As for how 8.86% per year since April 1998 stacks up against mutual funds, according to Morningstar, it makes the top quartile. That's pretty good considering that Tom deliberately chose one of the worst times to have begun the investment program.
Both Wade and Tom make valid points. Any leveraging strategy has the downside of magnifying losses. It's possible to time it just wrong and do lousy. Any measure that can be taken to reduce the steep losses helps immensely. We can't count on that skill, however, so I leave it out of my calculations and always include full losses with full gains.
My own ability to time the market has proven to be pretty good, which is why I'll be launching a timing service around these leveraging strategies next year. My hope is to add value by reducing the impact of down markets by being in cash during a portion of them.
A simpler approach is to only use this leverage after the market has corrected at least 20%, or to double your regular contributions to the portfolio during such corrections. Setting a concrete percentage on the decline required to use leverage removes the need for intuition, which is unreliable.
I'll show the benefit of using set percentage levels to change your contribution in a future article.Labels: Market Timing, Perma Ports
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The Kelly Letter
Now They Say We're
Climbing The Wall Of Worry
October 14, 2007
Inflexibility makes for bad forecasting. The best forecasters possess an ability to change their minds on a dime, the moment it looks like they've made a mistake, and to re-formulate their assumptions. The worst forecasters maintain their initial forecast even as its reasons disappear, thinking that the market should have done what they predicted and that, therefore, it will get in step any day now.
Five weeks ago, I changed from cautious to bullish. It was a controversial move, attacked on several fronts for its "carelessness" and "ignorance of systemic issues." I was told personally that I had no "regard for the hard-earned savings" of my subscribers. One person told me to "wake up."
As one week of solid returns became two, then four, and now five, the tone of criticism has changed. Instead of re-visiting the initial call, some competing forecasters are just re-forecasting from now as if we're starting fresh, slate clean, forget about what happened five weeks ago. "What's going to happen from here?" they ask, and then re-state their market fears as though they hadn't been wrong for more than month, or more than several years in some cases. It's a clever change of subject and comprises the modus operandi of most in the forecasting business for a simple reason: they're usually wrong.
Typical is the weekend note sent by EquiTrend's John McClure, which always ends with the sign-off "Working for your wealth." Last weekend, it was titled "We Are Climbing The Wall Of Worry" and contained these excerpts:It was back to a bad news, good action week for the most part as investors chose to look at the data through rose-colored glasses. . . . Dow Theory states that for a trend to be confirmed, both the Dow Transports and Dow Industrials must be trending in the same direction. Although the Industrials have recovered all the territory lost since the July melt, the Transports have struggled. This week the Transports lost ground while the Industrials ended slightly higher. Until they both are heading in the same direction, the trend is in question.
And after falling since September 14, the Market Volatility Index (VIX) jumped this week to 17.73 from 16.91 last week as volatility (and fear) crept back into the market. . .
There are clouds growing on the horizon.
Given that a number of indexes are at or above their 2 standard-deviation trend channel top lines, the next correction could come at any time. Volumes also remain low and there has yet to be the flood of new buyers entering the market that normally accompanies -- and confirms -- a sustained rally. Mr. McClure is hardly alone when it comes to this type of forecasting. Those who look for sustained rallies are by definition leaving themselves out of the early parts of the rally. That makes their eventual bullish calls risky because they come closer to the day of reckoning, when the market reverses course and heads lower. Then, such forecasters keep their readers invested as the market goes down, down, down until they can confirm that it's a "sustained" bear market.
I wrote about Marc Faber and Enzio von Pfeil on September 25. Mr. Faber said that the U.S. economy is heading toward recession and that the bull market will end. Mr. Von Pfeil wrote, "We are now on 'red alert' for the current month of October."
Mr. Faber has been bearish this entire year. He told Barron's in January, "This economy is in the greatest bubble ever." He then outlined various reasons that the bubble would burst.
In his Oct. 10 article, Mr. Von Pfeil wrote:Here are some more market chillers protruding from Wall Street:- This year, 10,000 guys lose their jobs on Wall Street.
- Industrial production rose by an annual 6% last September; this August, it rose by 1.7%, i.e. by less than one third. Adieu, turnover.
- Retail sales peaked at an annual growth rate of 9.2% in 5/06; by this August, they were limping along at 3.9% , i.e. by less than half. Adieu, turnover.
- Unit labour costs rose by an annual 2.4% in March, 2005; by this July, they were rising by 5.1% -- or by over twice that rate. Goodbye margins.
- Profits, unsurprisingly, are cooling. Having risen by an annual 6.6% in 1Q05, by 2Q07 they were sputtering at 4.7%, which represents a slow down of nearly 30%.
So how can profits rise if The Economic Time is worsening? We keep sensing that stagflation is on the way. It's not hard to see the wall of worry. It's also not hard to see who builds it brick by brick.
Nevertheless, the Dow is up 13% this year. Portfolios from The Kelly Letter are up much more than that, as usual:- +42% The Dow One
- +24% Double The Dow
- +22% Maximum Midcap
The cover of last weekend's Barron's read "Black Monday" and made comparisons with October 19, 1987 when the Dow lost 23% in a day. I already wrote about that in the October issue of The Kelly Letter, from which this is taken: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. The solid returns of the past five weeks have not dulled my enthusiasm for stocks. I expect 3Q earnings growth and forecasts of good 4Q earnings to keep this rally going.
We have yet to see strong individual investor participation, which is usually what brings the blow-off top to a bull market. That top is where lots of gains are made. You need to be in ahead of it, not after it's gone on for a while and there's reason to believe it's sustainable.
The market will decline again someday. We can all agree on that. For the time being, though, it's better to own stocks than avoid them.Labels: Market Timing
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The Kelly Letter
Too Many End-Of-Year Bulls?
October 11, 2007
John wrote:I've been following the debate on whether the pessimists are correct or not, and so far the market is going our way after your bullish call [one month ago]. I have no idea what will happen next. However, my one comment is that I worry about the "sure thing." It is "common knowledge" that the market runs up at the end of the year. It "always happens."
It may well happen again, as it usually does. It's just that when we count on something to "always" happen, the market has a habit of doing what it likes, and sometimes the sure thing evaporates.
I get worried when everyone agrees. I do, too, but there's nothing near a bullish consensus now. In fact, the switch from cautious to bullish here was met with heavy resistance, even insults.
We're one month into solid returns, but frustrated bears are only nibbling at the idea that the market might rise after all. Read forecasts carefully and you'll see a lot of reference to downside risks remaining high, the October surprise lurking in the shadows, and such. We've decided to charge ahead in full bull regalia despite those fears -- which are always present, by the way -- and so far we've been right.
Even the Fed is hedging, though:St. Louis Fed President William Poole said Tuesday that the Labor Department's recent employment report implies the economy is not in as much danger as was feared, but conditions remain delicate. On the same day, San Francisco Fed President Janet Yellen said she is uncertain whether further rate cuts will be required to stabilize the economy. "Financial markets appear to be stabilizing, but they have not returned to normal and are still fragile," said Poole. He cautioned that housing will likely remain weak for several more quarters. Yellen believes the rate cut helped to contain downside risk, but she said it is too early to tell whether the economy "dodged a bullet." "I have a totally open mind about what, if anything, is going to be needed from here on in," she said. [Full Article] While it's true that there's a seasonality to the market, saying everybody is on to it overstates the case. In fact, that "everybody" is generally the Stock Trader's Almanac, which advocates a mechanical strategy that looks to be getting into the market about now for what it dubs the "best six months." I criticized the Almanac yesterday for its rough conclusions about the presidential election cycle, and its best six months strategy deserves equal disdain.
Creating skepticism around the strategy doesn't even take financial analysis. Just think about it. Don't you suppose that if winning in the market were as easy as putting your money in every fall and taking it out every spring, we'd all just create an automatic timer with our brokerage accounts? Sure we would.
Unfortunately, the strategy isn't all it's cracked up to be.
From 1995 to 2005, the Almanac's prized strategy of combining its "best six months" approach with MACD timing to get better seasonal entries and exits returned a cumulative 225%. Just owning the Nasdaq 100 returned 332%, and that's including the dot com crash. How much investment acumen does it take to just put your money in a Nasdaq 100 index fund or ETF? Not much, yet it was far better than the Almanac's seasonal timing strategy.
If you really want to see the lack of research going on at the Almanac, compare its performance to my permanent portfolios. My Maximum Midcap strategy returned 526% just as a lump sum. The extreme volatility of the strategy combined with regular monthly investments did far better, still. In fact, it's that pairing of extreme volatility with assured recovery that makes the strategy so perfect for the way most people invest: by sending additional funds each month or quarter.
One weakness of the Almanac is that its strategies are based and proven with data going back to 1950. That sounds good in theory because they're tried and true. Unfortunately, they appear to be a bit old and stodgy. They certainly don't stand up to the "what have you done for me lately?" rule that most investors employ, whether consciously or not.
For example, the Almanac is proud that its "best six months" with MACD has not had a losing year since 1983. Nice soundbite, but it doesn't mean much when looking at the bottom line. Volatility is your friend when it eventually moves upward. From 2000 to 2005, the Almanac generated these annual returns: +5%, +16%, +6%, +8%, +2%, +8%. Not a losing year, true, but not much in the way of winnings, either. Maximum Midcap speaks for itself.
So, I wouldn't worry about the impression that everybody is on board for an end-of-year recovery. First, they're not. Second, that impression is mostly from the Almanac's touting of such seasonality, which has not proven to be the most profitable approach to stocks.
This comes up every year, we get through it every year, and I'm sticking with my forecast of a strong medium term -- for reasons that have nothing to do with the Almanac's strategy.Labels: Market Timing, Strategies
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The Kelly Letter
Stock Experts In Typical Disagreement
October 09, 2007
The following exclusive report is from Dave Van Knapp of Sensible Stocks, a frequent contributor to this site:It's not unusual for "the experts" to disagree on where the market is headed, but the mid-summer credit crunch seems to have sparked a special debate. Here are three expert points of view culled from last Friday's news (October 5, 2007).
From "Daily Trader's Alert" by Sam Collins and his accompanying article at ChangeWave:At times like these, the sentiment indicators are often referenced in order to give some idea as to where the "smart money" (i.e., hedge funds, institutional traders) is going and whether it is heading in the opposite direction of the "dumb money." (The latter is generally considered to be the investment advisers and the public.)
Recent reports from Investors Intelligence (which tracks the advisers) and the American Association of Individual Investors (AAII) (which follows the public) show that both advisers and the public are now strongly bullish -- and that's not good.
In fact, in July -- just three days after the failed market breakout -- both were at the most bullish levels in months. And in August, again just three days following the market low, both were very bearish.
Now, both are very bullish. And so, you may be wise to continue to hold some cash rather than taking a flyer on the latest tip from your barber. So Collins is bearish.
But consider John Waggoner's Friday column in USA Today.
Experts point to the fact that investors pulled more money from stock mutual funds in August than in any month since June 2006 as evidence that mutual fund investors (dumb money) have remarkably bad timing at pinpointing market bottoms.
Mr. Waggoner wrote: "Over the years, Wall Streeters have found different ways to watch what the smart money is doing. In theory. . .you'll make good money doing the opposite of what the public [dumb money] is doing. . . . Mutual fund flows are a classic contrary sentiment indicator, under the classic Wall Street belief that the public tends to buy high and sell low."
Stock funds had a net outflow this August (the last month for which data are available). The last time funds had a net outflow (June 2006), the S&P 500 gained 14% in the next 12 months. In August 1998, there was a net outflow, and the market gained 26% for the next 12 months.
Mr. Waggoner concludes, "Buying when most of the public is selling is usually a pretty profitable move. . . . In short, it's better to run to your fund than away from it when other investors are fleeing."
So, looking at virtually the same data as Collins (smart money versus dumb money), Waggoner reaches the opposite conclusion and is bullish.
Waggoner also points out that TrimTabs, which tracks flows of money into and out of the market, is bullish for a different reason: stock supply is shrinking because of all the buyback programs. "We have never seen a contraction like this," said Conrad Gann, TrimTabs's president.
By my count, that's one expert (Collins) who is bearish, one (Waggoner) who is bullish based on the same data, and one (TrimTabs) that is bullish for an unrelated reason.
Jason Kelly and I "put in the call" to enter the market at the end of August and in early September. Of course, we don't know what the next few months have in store, but so far, here are the results of my own stock purchases beginning in late August:- Apple - purchased 8/27 - up 20%
- Bank of America - purchased 8/20 - up 2%
- Berkshire Hathaway - purchased 8/31 - up 1%
- Chevron - purchased 9/20 - down 2%
- Cummins - purchased 8/27 - up 21%
- Diageo - purchased 8/31 - up 7%
- Diana Shipping - purchased 9/27 - up 8%
- GE - purchased 9/25 - up 3%
- Goldman Sachs - purchased 9/21 - up 10%
- Johnson & Johnson - purchased 8/20 - up 7%
- McDonald's - purchased 9/17 - up 2%
- Noble Corporation - purchased 9/24 - down 6%
- Pepsico - purchased 8/31 - up 8%
- Powershares QQQ Trust - purchased 9/21 - up 5%
- Raytheon - purchased 8/31 and 10/1 - up 1% (averaged)
- Spider BRIC (Brazil, Russia, India, China) ETF - purchased 9/20 - up 12%
- Synchronoss Technologies - purchased 9/25 - up 5%
- United Health - purchased 8/20 - down 5%
- Zoltek Companies - purchased 8/27 - up 11%
You can see that there are a variety of conservative and aggressive investments, large and small caps, and so on. The simple average of those purchases is up 6.4% in an average of about 4 weeks. Sixteen of the 19 positions are up, and their average gain is 7.7%.
Don't be deceived by the large number of purchases. I am not a short-term trader. (Several of these purchases were additions to positions I already held.) But I had some money to put to work, and when the time seemed right (and my evaluations of the companies and their valuations were encouraging), I put it to work. I am essentially "fully invested," as they say.
So far, the main bases of my bullish call -- the rate cuts, money infusions, and verbal signals of the Fed -- remain in place. I continue to believe the market will be higher in February (six months after the call) than it was in August.
Things are off to a great start. Indeed things are off to a great start in the past month. As I pointed out over the weekend, The Kelly Letter's permanent portfolios rose an astounding 29%, 14%, and 14% since I changed our stance from medium-term cautious to medium-term bullish.Labels: Market Timing
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The Kelly Letter
Still Bullish After All These Gains
October 07, 2007
Sung to the tune of Paul Simon's "Still Crazy After All These Years," I am still bullish after all these gains.
Stephen writes:You reported over the weekend that your permanent portfolios are up 29%, 14%, and 14% since your bullish call a month ago (wow!). My question is, Am I too late to the rally? I'm afraid he's too late for the excellent start to the rally but, no, the market is not done yet.
If you're determined to get in a little cheaper than the levels we saw last Friday, then wait for a slight pullback, but not too much of one. If you wait for doubts to dissipate entirely, you'll wait forever.
For instance, I found this on The Capital Spectator:The Fed cut rates because it perceives the odds have risen for an economic slowdown, if not worse. If that's good for stocks, how does one explain the past few years, when the Fed raised interest rates in the face of a strengthening economy? . . . Some trouble makers are starting to use the phrase "sucker's rally" to describe the action of late. . . . If now's not a good time to cut back on equities, particularly U.S. equities, when might such a moment come? Call us crazy, but selling high and buying low is still the only game in town. Beyond that generalized view of money management, the devil remains firmly entrenched in the details. What a lot of folks missed, and won't admit, is that the time to have bought low was a month ago. The time to have sold high was early in summer, when I advised caution over the medium term.
I've analyzed my reasons for being medium-term bullish in recent articles and in The Kelly Letter. In this short installment, I'll just say that the reasons still apply, that you should ignore the bears, and that this is a time to be getting in -- not out -- of the market.Labels: Market Timing
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The Kelly Letter
Don't Miss Any More Of This Bull Market
October 06, 2007
Are you missing out on the bull market?
Bespoke Investment Group wrote on Thursday:The current bull market is different than any other on record because there has actually been a large contraction in p/e ratios. At the start of this bull in October 2002, the p/e of the S&P stood at 29.06. It is currently at 17.84. There have only been two other bulls that saw contractions, but they were very small. This data bodes well for those arguing that this bull still has legs. Then, on Friday, "Today's run to new highs in the S&P 500 officially erases all the declines we saw during the summer credit crisis."
As expected here in The Kelly Letter, the credit implosion story has lost its fear factor. The market rose strongly last week against a backdrop of bad news from the credit and housing sectors, because the economy remains strong.
Warnings from financial companies came as a relief since they clarified the extent of losses from sub-prime. Citigroup, for instance, warned of a 60% drop in 3Q earnings because of a one-time write-down. One time. The problem won't last forever and had little effect on anybody except those in high finance. Few waste tears on their paper losses.
Those fearing a recession missed out on a big part of this fall's rally. There are still some calling for a crash of epic proportions this month. The market appears to not share those concerns yet.
It's now been one month since we changed from our medium-term cautious stance to a medium-term bullish stance. I am proud of that courageous call, and subscribers should be proud to have followed it.
In the past month since we went bullish, amid forecasts of recession, a global credit crisis, and a housing meltdown:
> The Dow gained 7.3% and the Nasdaq gained 9.8%
> Our Dow One strategy gained 29.3%
> Our Double The Dow strategy gained 14.4%
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Less than two weeks ago, a reader named Brent attacked my bullish call. He pointed out warnings from Marc Faber and Enzio von Pfeil, the latter having just gone on "red alert" for the month of October. Brent told me to "wake up."
I concluded my response:While I welcome all viewpoints around here, the most important remains my own and I continue to believe that we're not entering a recession, that the housing "meltdown" just means a great time to be buying a housing stock, and that any weakness in October is another chance for those slow on the uptake to get their money into the market. You can see the article here.
The fact is we've been right, and that's making people who sat on the sidelines angry. They're looking for ways we got lucky, why the odds were against the market rising and how it was foolhardy for us to have bought in.
Don't pay attention. The best times to buy almost always look the way they did a month ago: scary, lots of emotion, a lengthening list of reasons the market couldn't possibly go up, threat of recession, inevitable systemic collapse, and so on.
Such times are often shrill with the warnings of eminent commentators, people with impeccable credentials who are nonetheless proven wrong.
We haven't seen the end of volatility. I'm sure any whisper to the downside will blare trumpets of "I told you so" from the cowering crowd, but you'll know the truth.
When it was time to buy, they didn't. My subscribers did, and they're richer for it. That makes them investors.
If you'd like to join the ranks of the knowing and have a penny to spare, try the letter's one-month trial. If you like it and continue, it'll only run you five bucks a month -- and you can stop that at any time, too. Odds are you won't, though. A full 85% of those who try the letter keep receiving it forever.
It's easy to see why. We're good.
Our permanent portfolios destroy almost every other service and are the very picture of relaxed investing. Just look at their performance since inception in 2002, and consider that as of last Friday they're up 27%, 23%, and 23% so far this year. They're so good that they're the subject of an upcoming book.
But the permanent portfolios are just part of the letter. Each weekly missive includes market commentary that cuts through the media fog that misleads people, as it did in the past month. It also includes our portfolio of individual positions that gooses performance beyond the core portfolios. We do well there, too.
If you join us today, you'll get the straight skinny on the housing market. We've been watching it for months now for a good entry point on beaten down homebuilder shares. Last week, Citigroup sent the whole sector flying nearly 20% higher as it called the bottom. We don't buy it for a second, partly because Citigroup issued the same call for a bottom last December -- and then watched the stocks lose another 60%. Be careful who you listen to.
Start by listening to me. I'll send you this weekend's note tonight, which includes the scoop on housing, a peek at Yahoo's pending recovery, and a look at whether gold is a good hedge against inflation.
As I mentioned, it's only a penny, you can cancel at any time, and you just might finally join the ranks of those who beat the market, without all the silly fretting that goes on elsewhere.
See you soon! Click here now to join.Labels: Market Timing, Perma Ports
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The Kelly Letter
Do Not Miss This Market
September 30, 2007
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.Labels: Market Timing
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The Kelly Letter
Thoughts From The Non-Disaffected
September 26, 2007
Occasionally, it's good to know that not everybody reading my views thinks I'm nuts.
In response to yesterday's article, John writes:You have to be thick skinned to be in your profession.
Over my 40 years of investing I've observed that about 75% of newsletters have a negative slant most of the time. It seems that only about 5%-10% of newsletters actually give reasonable forecasts in up and down markets.
I have also observed that the more dour the consensus of newsletters, the more the market seems to climb (the wall of worry). I normally subscribe to or read both types of forecasts as at any time you can find both points of view.
Then, based on information from the newsletters and my personal observations, I make my own investment decisions. I usually find myself on the other side of the consensus. I'm not sure that makes me a contrarian, but it has made me a successful investor.
On the basis of my subscription to your letter for the last year, I put you in that 5%-10% of better investment newsletters. Thank you for that, John. I agree that the majority of letter editors are bearish, and even touch on that point in my stock book. It's always safer to call for trouble and then leave everybody pleasantly surprised when it doesn't come -- people are happier than they expected and nobody complains.
I also agree that a letter is a starting point on the road to better investing. It's a good place to get new ideas and guidance, but a lousy place to turn of the brain and blindly follow.
Chris agrees, too:I pay a very reasonable price to a smart and successful investor to hear his best ideas for buying individual stocks.
Buying individual stocks is exactly what an intelligent investor should do in a bear market. Stocks go up. Stocks go down. But there's always a bull market somewhere. All of the macro stuff is interesting and not without importance, but much of it is simply noise.
I have investigated a lot of investing services and passed on all except for two. I feel I have more than enough bang for my buck with your newsletter and my Motley Fool Hidden Gems subscription. Thanks for your newsletter as I approach my first year with you. You're most welcome, Chris.
Finally, Dave Van Knapp of Sensible Stocks has this to add:Not all predictions are correct (by definition), and yours may not be either. Alan Greenspan just the other day put the chance of a recession at about 33%. I would put it lower, but it is not zero. So your detractors are not 100% sure to be wrong, any more than you are 100% sure to be right.
But my belief is that the market will be higher six months from now, and that the chance of a recession is low. I have been greatly swayed by the Fed's actions a couple weeks ago and its rate cut last week -- that's the main reason I don't think there'll be a recession near-term: the Fed is going to try to stop it, and I think they acted in time.
The only thing I know about the clock theory is that even a stopped clock is right twice a day. To those who think Brent's comments yesterday were out of line, just remember that maintaining the poise that the market requires for success is not easy for anybody, much less somebody just starting out. It's natural to be buffeted by greed and fear, more the latter these days.Labels: Market Timing
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The Kelly Letter
The End Is (Not) Near
September 25, 2007
Hate mail from the bears keeps coming. Brent writes:I don't know how you snuck into the top ranks of market forecasters, but your latest call to buy stocks here is nuts. Don't you read anything? Look at Faber, a guru much more experienced than you. Look at that economic clock guy. He's also been at this a lot longer than you -- and his clock is ticking down to one of the great crashes in history. Wake up. The abundance of fear is what's still providing us with chances to buy select stocks on the cheap. Specifically, I've targeted the beleaguered housing sector where the stock we want to buy plunged 9% yesterday, and we're still waiting.
Marc Faber is indeed a guru who has been investing longer than I. He told ABC TV's Inside Business yesterday that the U.S. economy is heading toward recession and that the bull market will end. He also worried that the Fed would print money to escape the immediate crisis, thereby causing inflation. He believes that housing stocks have farther to fall, a point with which I agree, as mentioned above. Finally, he suggests owning precious metals as a hedge against inflation caused by an excessive printing of paper money.
While Mr. Faber is well respected and indeed more experienced than I, market forecasting and investing has been my job for the past 15 years. In that time, I've learned that the U.S. economy is the world's most resilient, that fearful times are the best for buying stocks, that somebody is calling for a recession nearly every year, but that the market nonetheless rises two-thirds of the time. That means the bears are usually wrong, and I think this moment is no exception.
As for "that economic clock guy," I assume Brent means Enzio von Pfeil, the Hong Kong based creator of Enzio's Clock, an investment cycle timing service.
Mr. Von Pfeil wrote yesterday:We are now on "red alert" for the current month of October. Many of the bigger market crashes have occurred in October, but nobody knows why. So we are just going to accept the reality of this perception.
Another long-held belief of ours: stagflation is returning. Those of us who survived the oil shocks of the seventies and eighties know this scenario: growth stops and inflation rises. He cites four reasons that stagflation will return:- A strengthening Chinese currency leading to more expensive Chinese products in America, thus inflationary pressure.
- The weakening of the dollar and his belief that it, like all superpower currencies, must collapse.
- Rising commodity prices.
- Slower productivity growth, as evidenced by unit labor costs rising 6x faster than when they bottomed.
With all due respect to my elders in the business, I don't see much rigorous analysis here.
My research into market history shows that currency markets and stock markets are different animals. A direction in one does not say much of anything about the direction of the other.
A "weak" dollar sounds bad, but it's not if you're a Dow investor. Every member of the Dow Jones Industrial Average is a multinational corporation based in the United States. A weak dollar means that when they bring foreign currencies home, they get more dollars of profit. Despite my being still wet around the ears in the eyes of some, I know that more profit is good for stocks. You probably know that, too.
While I welcome all viewpoints around here, the most important remains my own and I continue to believe that we're not entering a recession, that the housing "meltdown" just means a great time to be buying a housing stock, and that any weakness in October is another chance for those slow on the uptake to get their money into the market.Labels: Market Timing
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The Kelly Letter
Fight The Fear And Invest
September 23, 2007
Two weeks ago, The Kelly Letter changed from a medium-term bearish stance to a medium-term bullish stance. Since then, the market has done well:- Dow +5.4%
- S&P 500 +5.0%
- Nasdaq +4.1%
The letter's permanent portfolios have done even better:- The Dow One +18.2%
- Double The Dow +10.6%
- Maximum Midcap +6.3%
Now, people are wondering if they've missed their chance to get in the bull market. This note from Hank is typical:Your change from cautious to bullish in the middle of the housing collapse and sub-prime debacle looked reckless to me. Then the market rose that first week and I thought I'd wait for a correction to get in, but last week was the best in 2007 so far.
But I'm still queasy. Jon Markman -- who is a proven market genius -- wrote on Friday that we're on the verge of a bear market of epic proportions. Housing data came in bad again last week. Oil is at a record high price. And on and on.
You need to be careful, Jason. This isn't a game. It's people's money on the line and you shouldn't tell them it's OK until there's no reason to fear.
With all that in mind, when do you think will be a better time to start? I've never in my career seen a market free of fear. Never. People who've been in the business longer than I will tell you the same thing. There's always a reason to gripe, worry, and fret, yet the market has risen through most of its history and we have every reason to believe it will continue doing so.
More importantly right now, I just plain disagree with the prevailing view that the sub-prime mess, housing sector downturn, and credit crunch are dangerous. I've written that all along, even last summer when the market was falling and our bearish view in the medium term served us well. Even as I knew that the market would overreact on the downside, I also knew that there was nothing to fear in the headlines then scaring the market. I still feel that way.
In his Friday article, Mr. Markman passed along the views of a credit derivatives expert named Satyajit Das. Mr. Das believes that we're on the verge of a bear market of epic proportions because:Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way.
He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up. There are problems with this approach to forecasting.
First of all, long-term forecasting -- other than to say that the market will rise in the long run -- is an exercise in coin flipping. The only honest thing to say about the market's course over the next five, 10, 15, and 25 years is that we haven't the foggiest idea.
Second, "the jig" in credit markets was supposedly up two years ago, then last year, then at the beginning of this year, then last spring, then in August, and now yet again. Notice that all we've seen reported are near failures in the system, never actual failures. There's a reason for that. Central banks, hedge funds, investment banks, institutional managers and others have been on top of this credit problem for a while now. It's not inconsequential, but it's not a systemic shutdown and certainly not worthy of the label "epic proportions."
Third, companies are doing well. Did you see Oracle's strong report last Friday? How about Nike's? Apparently they've managed to keep the register ringing during this end-of-the-world moment.
Finally, I am careful and do realize that this is not a game, that it involves real money earned by real people. That's why I work very hard to try to understand what's really happening in the market, not what's being reported. To keep money growing at its maximum velocity requires boldness based on sound research.
It was bold for us to charge back into the market two weeks ago, but it was not reckless. I wrote then that the medium term would be strong in the market, and I still believe that. I also believe that if you haven't put your money to work yet, you should fight the fear and invest.
If you're waiting for a green light and a market that presents no reasons to fear, you'll be waiting forever and your money will stagnate.
Be bold. Join us. Profit when others panic and see the news in a whole new light.Labels: Market Timing
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The Kelly Letter
Van Knapp On The End Of The Credit Crunch
September 20, 2007
Contributor Dave Van Knapp of Sensible Stock Investing updated his thesis on the credit crisis yesterday, and sent it to me last night. I'm pleased to share it with you:I believe that the credit crisis of 2007 is over, at least insofar as it is likely to impact the stock market. To be frank, it ended somewhat sooner than I expected.
A few weeks ago, I published a thesis about the credit mess. In a nutshell:
1. The credit crunch, begun by sub-prime mortgage lending in the USA, had spread into all areas of the credit markets. Ill-advised loans, over-reaching by unqualified borrowers, and over-leveraged purchases of loan packages had led to spreading defaults, the failure of some hedge funds, and the tightening or withdrawal of credit availability not only in the USA but around the world.
2. Investor sentiment had been badly shaken and would continue to yo-yo. Investors would fret over the credit situation, possible effects on the economy, and the ability of the Fed and central banks around the world to contain damage. They would have hair-trigger reactions to any signs, positive or negative. Therefore, severe market volatility was inevitable. Up and down days would exceed 200-300 points repeatedly, with an overall downward trend until the situation clarified. At the time of the article, stocks had already dropped 6% to 7% from their high on July 19.
3. The Fed and other national banks had begun to respond by injecting massive amounts of money into the financial systems to stave off panic, illiquidity, and recession. It was not at all clear whether such moves would stave off a true economic crisis. However, the initial moves did suggest that the central banks recognized the gravity of the situation and would try to head off grave d |
