Stock-Market-Observations

MARKET MESSAGES

1/22/13

The following comments were prompted by an email that I answered.

POSSIBLE PROJECTION ??

I harbor a weird thought that this bull market might “possibly” last a lot longer than anyone expects. At some future point, it could be interrupted by a decline “looking” similar to the 2011 correction, but it would be longer and deeper. It could possibly last over a year and stop somewhere near the October 2011 low. That would seem like a bear market to most people because it would be about a 30% correction, but it could be looked at as a large correction in an ongoing bull market (providing that new highs followed the deep correction). We’ll see if this has any chance of taking place, but I will be looking for an indication of it whenever we approach the October 2011 bottom.

BEST BOND STRATEGY

In Terry Laundry’s Best Bond Strategy, the system of moving back and forth between junk bonds (like JNK) and treasury bonds (like TLT) is a conservative method of capital appreciation and I’ve liked it since Terry Laundry introduced me to it. There isn’t any really long term data on this method as junk bond funds haven’t existed long enough. One of the oldest junk bond funds is PRHYX and it was introduced in 1990. The data we do have gives us a possible picture into the past.  I think it seems likely that Terry’s Best Bond strategy can endure through the years.  In the years ahead it seems reasonable that comparing junk bonds to treasury bonds, one should be a better performer than the other and that’s the backbone of the Best Bond Strategy.

BOND CYCLES

Certainly at some point the bull market in bonds will end. The present bond bull market began in 1982 (simultaneously with the stock bull market) and the bond bull is about 31 years old.  Edson Gould said that bonds moved in very long cycles and on October 1, 1975 Edson Gould said in his publication “Findings and Forecasts”,

“The present market affords, we believe, one of those rare, once-in-a-lifetime opportunities to buy bonds at bargain prices.

The last time it occurred was in 1920, 55 years ago.

The prior occasion was in 1869, more than 100 years ago.

Each was followed by a great bull market in bonds lasting for decades.”

The bear market in bonds didn’t end  until 1982, but Gould was on the right track predicting a major bottom in the not too distant future.

As Gould pointed out there were only three bull market buy points from 1869 to 1982.  This indicated that there were 2 complete cycles during those 3 buy points..  This tells us that the bond cycle lasts an average of 56.5 years. This 51-62 year cycle includes both the up and down part of the cycle.  Presently we have an elapsed time in this cycle of 31 years with a possible end of the cycle coming in the next 20 to 31 years.  Of the remaining cycle time, you must reserve a fair length of time for the correction.  A decline lasting 20 years (rough estimate) would mean the end to the bull market in bonds could occur anytime over the next 11 years.  Anytime over the next 11 years means the window is open right now, so we should be on guard for the future fundamental development that will cause this to happen.  Anticipated fundamental results drive bonds unlike stocks, which are driven by fear and greed.  There are many factors that could cause this fundamental shift, but an out of control dollar “could” top the list.  The falling dollar is is part of the deficit problems this country continues to have.

What did Warren Buffet have to say about the deficit in Adam Smith’s book the “Roaring ’80s”

“I asked Buffett whether he worried about the trade deficits and budget deficits and all the other problems that upset the financial community.

‘We would certainly be happier and our growth rate would be higher if we could close the deficits,’ he said, ‘We’ve traded consumption – those cars and VCRs – to the foreigners and they have claim checks on us and they can cash those claim checks. So every few weeks the Japanese buy another office building. When they bought the ABC building in New York, that one hundred and seventy-five million dollars was one day’s trade deficit. So we’re trading real estate for trinkets like VCRs, but there’s a certain amount of justice in that because Peter Minuit originally got Manhattan by trading trinkets for it. It took just three hundred years to complete the circle.’

So how will we come out, then?

‘Either we will make the IOUs the foreigners hold considerably less valuable by having a lot of inflation, or eventually we will produce more than we consume.’

‘I like the gas tax because oil is a resource we’re running out of. We keep sucking it out of the ground like a giant soda we’ve stuck straws into. If we don’t close these gaps, there’s real intergenerational unfairness. We consume more than we produce, the foreigners have the claim checks, and they can present them to the next generation.’

So for the moment you’re not pessimistic?

‘It’s an enormously rich country, and we can continue trading it away for a very long time. It’s a powerful machine, and it can take a lot of abuse’.”

JEFFREY SAUT

Our friend Jerry Goodman, whose nom de plume is Adam Smith, authored the book “The Roaring ’80s” in 1988. The aforementioned quip is a quote from that book; I find it interesting that if you substitute the word “the Chinese” for “the Japanese,” the aforementioned quote is as valid today as it was 25 years ago. To be sure, “It’s an enormously rich country, and we can continue trading it away for a very long time. It’s a powerful machine, and it can take a lot of abuse.”

I revisit said quote this morning because today we are releasing this month’s Gleanings report where we try to discuss what could actually “go right” with the economy and the stock market. The “we” involved are Scott Brown (Chief Economist), Art Huprich (Chief Technical Analyst), and myself. As for me, I have remained constructive on stocks for some time, a stance that was called naive by certain folks as we approached the “orchestrated drama.” Nevertheless, I remained convinced that a last minute solution would be achieved because that is the way Washington works. As stated in previous missives, it was interesting to me that the media, once the drama passed, immediately refreshed the headlines to focus on the next Armageddon regarding the “debt ceiling.” What was lost in “the cliff’s” aftermath was that Congress came together and consequently our government became just a little bit less dysfunctional. Having railed against the government’s dysfunction, this is not an unimportant observation. Accordingly, if our elected leaders can show the same resolve in the “debt ceiling” debate, a lot of things could go right in the months ahead.

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This entry was posted on January 22, 2013 at 1:53 PM and is filed under . . . Best Bond, 1 - T THEORY®, 2 - EDSON GOULD, JEFF SAUT, UPDATE. You can subscribe via RSS 2.0 feed to this post's comments. You can comment below, or link to this permanent URL from your own site.