** Dow Jones Plows Through 10,000...Where Stocks Go Next
-- by Michael Lombardi, CFP, MBA
Sometimes we need just to take a step back, put the emotions aside,
and look at what really is going on in the financial world from a
purely logical, common-sense approach.
I remember the dark days of March very well. On March 9, 2009, the
Dow Jones Industrial Average hit a 12-year low of 8,776.39. Most
people (and our government) were running scared. Mutual funds had
huge net redemptions (more money going out than coming in). There
was concern about banks going under and people losing their money.
And here, at our little publishing company, we had subscribers
calling in and canceling their subscriptions like never before,
because they wanted out of stocks.
As a contrarian, I know that the public is always wrong when the
majority of people have the same view. That view, in March, was
that the financial world was coming apart. I didn't share that view,
because the Federal Reserve and the White House were doing
everything they possibly could to save the economy. I've never seen
interest rates fall so low; I've never seen so many companies bailed
out by the government. Monetary and fiscal policies, thanks to our
government, were the most favorable I had ever witnessed. Based on
this, I turned bullish on stocks.
Two to three months ago, as the market rebound picked up steam; I
predicted that the Dow Jones would break through the 10,000 level.
My wish was granted by the "markets above" this past Wednesday,
October 14.
Okay, so now that we realize March 2009 was not the end of the
financial world, that all the government stimulus was smart and
really helped turn the economy around and that, while job losses
continue, big companies are posting solid profits, where does the
stock market go from here?
As word "spreads" about the economy and stock market getting
healthier, more money will come off the sidelines and into the stock
market. There are literally billions of dollars on the sidelines that can
enter the stock market. As the job loss report we hear each month
shrinks, as some life comes back to the real estate market, you can
bet your bottom dollar that the billion in cash on the sidelines will
come back into the stock market. Dow Jones 11,000 is not out of the
question.
But I'd like to add two very big warnings:
The stock market has now gone up 56% since its March 2009 low
without a significant correction. I would not be surprised to see the
market correcting soon.
I don't expect 2010 to be as good a year for stocks as 2009 has been,
because interest rates in the U.S. will ultimately need to rise
(especially to support the falling U.S. dollar). If there is something
the stock market dislikes, it is rising interest rates.
So you can say I'm short-term positive, but a longer-term bear. To
my readers: enjoy this market rally while it lasts.
Michael's Personal Notes:
All of a sudden, everyone wants to be my best friend. That call I
made two to three months ago when I predicted that the Dow Jones
would surprise everyone and break through 10,000 has gotten a lot
of media attention. We are only halfway through October and we've
already signed-up 7,507 new readers to PROFIT CONFIDENTIAL
this month. The power of the Internet, I guess.
Yesterday, we sent an e-mail to all our readers about our "Michael's
Monday Morning Profit Forecaster." Unlike other newsletters we
publish, which tend to be long and with many stock
recommendations, "Michael's Monday Morning Profit Forecaster" is
short, only two pages long, and makes only one or two stock-picks a
month. Right now, this weekly service (which goes out every
Monday morning, as the name insinuates) has nine open positions
and all nine are making money. I really think it is worth your
attention. In case you didn't have time to read yesterday's e-mail
about "Michael's Monday Morning Profit Forecaster," we are
sending out a friendly reminder tomorrow.
Where the Market Stands:
This past Wednesday, I opened this paragraph by asking, "Will today
be the day...the day the Dow Jones Industrial Average plows through
the 10,000 level?" Well, my wish was granted that very same day.
The Dow Jones is now up 56% from its March 9, 2009, multi-year
low. For the year as a whole, the Dow Jones is up 14.7% so far. Who
would have thought this would have been a great year for the stock
market, except those who read this column? So much for those many
analysts who warned us about September and October being "bad"
months for the stock market!
What He Said:
"Starting two years ago, I was writing how the housing boom would
go bust and cause the U.S. economy to suffer sharply. That's exactly
what is happening today. From what I see happening in the U.S.
economy, I'm keeping with the prediction I made earlier this year:
By late 2007/early 2008, the U.S. will be in a homemade recession.
Hence, I expect housing prices to continue declining, soft auto sales,
soft consumer spending and a lower stock market." Michael
Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You
would have been hard-pressed to find another analyst predicting a
U.S. recession in the summer of 2007. At the time, the stock market
was soaring, with the Dow Jones Industrial Average hitting its all-
time high of 14,164 in October 2007.
** Buying Low & Selling High vs. Buying High & Selling Higher
-- Ahead of the Street Column, by Mitchell Clark, B. Comm.
It's a great time to be a miner. Metal spot prices are on the rise, and
with those higher spot prices come higher stock prices. This makes it
a lot easier for a precious metal company to acquire other firms. If
you work in the world of corporate finance, one of the hottest areas
to be doing deals in over the next 12 months will be mining resource
companies.
You can expect a lot of newly issued shares to hit the market over
the coming months. As is always the case, stronger stock prices for
resource companies mean that companies can more easily raise new
capital for expansion. Nowadays, there isn't as much debt being
offered in the marketplace and you can thank the recent financial
crisis for this. Banks are still wary of lending money to businesses,
so most resource companies opt to issue new shares to finance their
mines.
A lot of precious metals stocks have gone up tremendously in value
over the last several months. For most gold producers, their stock
prices have risen commensurate with the spot price of the
commodity.
If you wanted to consider taking on new positions in precious metals
now, you certainly would be getting in at the top of the market. The
investment wouldn't be a case of buying low and trying to sell high.
Rather, it would be a case of buying high and trying to sell higher.
Inefficiencies in equity prices are always prevalent and there is no
one right valuation for a company. With resource companies,
however, because the underlying commodity (e.g. oil, gold, wheat)
plays such a strong role in the financial success of the business, stock
price inefficiencies tend to be much less prevalent. If the price of
gold goes up 10%, then very often a well-recognized gold producer
will see its stock price go up 10%.
A lot of investors become bandwagon investors without even
knowing it. They follow the capital markets, they see the headlines,
and then they sit on the sidelines for a while before making an
investment. Very often though, by the time a lot of investors actually
decide to take on a new position in the stock market, the big money
has already been made. A lot of people buy into the trend rather than
trying to buy low and sell high.
This can be profitable, but usually less profitable than being a patient
contrarian. So, the next time a basket of commodities or a particular
stock market sector is sitting in the doldrums, perhaps you might
give it a second look. It takes courage to buy low and sell high, but
that's how you make the big money. Right now, gold is strong and
it's in all the headlines. Gold prices and gold stocks may very likely
keep ticking higher, but don't forget that the big money has already
been made.
** Does the Good News Mean You Should Jump Back in?
-- Calling the Trend Column, by George Leong, B. Comm.
The DOW closed above 10,000 on Wednesday for the first time
since October 8, 2008. Leadership from the banks and technology
helped to drive stock markets in what was a frenzy-like day for
stocks.
The markets continue to trade at recent highs. At this point, about
92% of all U.S. stocks are above the 200-day moving average, up
from 91% a week earlier and in line with 92% a month ago. The
same goes for the shorter-term moving averages. For the market
sentiment to improve, we need to see the moving average continuing
to trend higher
Earnings optimism is driving stocks. Intel Corporation
(NASDAQ/INTC) delivered an excellent third quarter on both a
year-over-year and a sequential basis. Revenues of $9.4 billion and
earnings of $0.33 per diluted share were well above Street estimates.
The gross margin was impressive at 58% and estimates call for it to
rise to 64% in the fourth quarter.
In the banking sector, JPMorgan Chase & Co. (NYSE/JPM) blew
away estimates, and is driving buying. Yet there remain massive
debt and liabilities on the balance sheet, which could impact future
operations.
The rise from the March low has been nothing but impressive. With
the DOW finally breaking back above 10,000, where do we go from
here? The index remains down 30% from its high. Over the next
several weeks, watch to see if the markets rally from here or stall.
We are mixed on the near term. Markets are at a pivot point. My
view is that 10,000 is important psychologically, but for the rally to
continue, earnings and economic data will need to be positive.
Breadth and sentiment are positive, but trading volume is somewhat
light, which is not what we want to see in an up market. Earnings
need to continue to be strong
Retail sales for September remained weak, as expected. The key
shopping season is nearing, and will be important going forward.
Gold prices continue to surge above $1,000 an ounce, largely driven
by the weakening U.S. dollar. The near-term technical signals are
bullish, but overbought. The trend is positive and, as long as this
holds, gold could be heading higher towards $1,100. Yet be careful.
If you hold some gold stocks, take some profits off the table.
The CRB Spot Index, a measure of 22 commodities, remains strong
at around 270. The near-term technical signals are bullish, but
overbought. The CRB is indicating that the global economies are
setting up for a turnaround, as the basket of key commodities is
showing some signs of turning up. The peak for the CRB was June 1,
2008, when the index traded at 467.60 prior to the subsequent slide.
The low was at the 180 level in late 2001.
At this point, you should continue to watch earnings as they pick up
over the next few weeks. Watch the guidance going forward.
Companies have a better idea of demand, as they are in the
marketplace.
There is plenty of cash on the sidelines that has yet come into the
market. Those that missed the rally are now thinking about joining,
but I advise prudence. Watch how markets trade in the near term and
take some profits. You may also want to hedge the downside risk by
buying put options on large stock positions or puts on indices.
** Why the Plummeting Greenback Is Good News
-- The Financial World According to Inya Column, by Inya Ivkovic,
MA
It seems there is a rare consensus around the globe among
economists, major market participants and politicians: the declining
U.S. dollar is perceived as a good thing, both as a symptom of the
disease and as its cure.
In the years before the Great Recession, the world was far too reliant
on the U.S. consumer. Such reliance created an environment of
indulgence among Americans, where money was easy, where credit
was cheap, and where saving was overrated. In turn, the U.S.
consumer created a treacherous platform upon which the global
economy grew, fuelled by excessive debt-based spending and aided
and abetted by advantageous exchange rates. When that platform
collapsed few months ago, along with the U.S. consumer, who
retreated into its shell like a turtle, the developed world started
looking towards Asia and how the consumer demand could be
revived and cultivated in that corner of the world. However, this
global consumer spending rebalancing process will have both as a
consequence and as a driving factor the weakening U.S. dollar.
The U.S. dollar is currently declining against most major currencies,
including the euro, the yen and the Canadian dollar. In fact, earlier
this week, an index that measures the greenback against six major
currencies hit its lowest mark in more than a year. Obviously,
investors are searching for short-term profit in currencies, as the
global economy gains traction. They are hunting for returns and
selling their dollars to buy futures contacts on almost anything, from
commodities to Euro debt to Brazilian reals. At this point, any
investment seems better than a country saddled with enormous
budget deficit, a near-zero key interest rate and the slowest GDP
growth rate among developed economies. What an odd contrast to
last fall and early into this year, when the global economy stood at
the brink of an abyss and when investors around the globe perceived
the U.S. and its currency as a safe haven, because the greenback had
the backing of a government that has never in its history defaulted on
its debt.
Of course, such a path is not pain-free for economies other than the
U.S. As the greenback weakens and other currencies gain
momentum, if not fundamental strength, these countries' goods and
services have become more expensive on the world stage, which is
already adversely impacted by low demand. But, at the recent G20
Summit in Pittsburgh, policies promoting this new balance have
been adopted, intended to restructure the global economy so that it is
less susceptible to financial disasters, even if it means at a
significantly slower growth rate.
How else is the plummeting greenback good news? As the U.S.
dollar weakens, imports become more expensive, thus putting a
damper on the Americans' habit of financing their purchases through
debt. At the same time, domestic goods and services become less
expensive in international markets, providing a much-needed leg up
to the country's bruised and beaten manufacturing sector, among
many others. And, as domestic products become more competitive,
more Americans will get off the government dole and back into
factories and offices across the country. In other words, the sooner
the world's largest economy recovers, the sooner the global economy
recovers.
---
Copyright 2009; Lombardi Publishing Corporation