My Thoughts II

[HenryTo]

Dear Subcribers,

I hope no one got caught shorting Google or other tech stocks recently. FWIW, I think there is still more upside to go in these stocks and in large cap growth as well - even though the market is getting overbought very quickly.

That being said, has anyone here read the latest work from Jeremy Siegel? This is a must-read, IMHO. One of the things that it mentions is that out of the top 20 performing companies on the S&P 500 (from March 1, 1957 - when the S&P 500 was first created) 17 of them were consumer products companies or big pharma companies. The proven strategy is to go for the "tried and true" with a great business model and a great brand name over the long run. Second lession: Valuation nearly always triumphs growth for retail investors who can't get in during the venture capital process:

http://www.amazon.com/exec/obidos/tg/detail/-/140008198X/qid=1116992870/sr=8-2/ref=pd_csp_2/103-4728423-2671018?v=glance&s=books&n=507846

Anyway, I digress. I am a proven worrier - and I am starting to get worried in that sentiment is getting bullish quite quickly. Indicators like the ARMS Index, the McClellan Oscillator, and Mark Hulbert's HSNSI, etc. If this is what I think it is, then this rally will probably have a few weeks to six weeks to go at the most, and then we go ahead and suffer another correction - right into the Fall that will take us to lows that we haven't seen before in the last 18 months. For now, we just sit and let the market tell us what to do.

Take care everyone,

Henry

[nodoodahs]

Occasionally on a Friday night. I'm also nursing a resentment that the market isn't open on weekends.



Currently I'm neither enthused nor frightened by the market conditions. I think the next quarter will be mostly sideways, probably not beating the historic 2.8% return per quarter. There is a slightly-greater-than-average chance for an upside boom, and pretty much no chance of a bust or crack-up (loss of 10% in the quarter). M3 is starting to accelerate back into the system.

Staying in, will add to long positions next week.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

I will go check it out as soon as I can - probably sometime at the end of this week or even the week after since you will be writing the commentary for us for the 26th.

That depends - do you look at them on a Friday night?

Henry

[nodoodahs]

Some of us are sicker than others ...

I browse http://econpapers.repec.org looking for research papers that might help my investing. How embarassing is that?
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

No... you don't understand Bill. I live and breathe numbers.

I actually BOUGHT new textbooks AFTER I finished college.

Take care,

henry

[nodoodahs]

You just proved you are a "math nerd" Henry. You KEPT your old textbooks?



(BTW so did I)
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Thanks, Bill.

Just clicked on the first link - there are some stats involved but probably not too bad for any college student who took elementary statistics. Probably just need to dust that old textbook off the shelf.

Henry

[nodoodahs]

There's been a LOT of work on THIS subject. Whew! It seems like everyone's got a pet theory about whether the market is under, or over, valued.



I'm neutral on the different "market" valuation methods but I'm providing a few links for any math nerds to follow and do some reading. Meanwhile I'm just gonna take the plays one at a time and look for signs of extreme monetary instability as my signal to hit the exits.

Here's the links - knock yourselves out!
http://econpapers.repec.org/scripts/redir.pl?u=http%3A%2F%2Feconwpa.wustl.edu%3A80%2Feps%2Ffin%2Fpapers%2F0312%2F0312011.pdf;h=repec:wpa:wuwpfi:0312011

http://econpapers.repec.org/scripts/redir.pl?u=http%3A%2F%2Feconwpa.wustl.edu%3A80%2Feps%2Ffin%2Fpapers%2F0311%2F0311005.pdf;h=repec:wpa:wuwpfi:0311005

http://econpapers.repec.org/scripts/redir.pl?u=http%3A%2F%2Fwww.clevelandfed.org%2FResearch%2Fworkpaper%2F2001%2FWp0113.pdf;h=repec:fip:fedcwp:0113

http://econpapers.repec.org/scripts/redir.pl?u=http%3A%2F%2Feconwpa.wustl.edu%3A80%2Feps%2Ffin%2Fpapers%2F0412%2F0412008.pdf;h=repec:wpa:wuwpfi:0412008
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Guys,

I am not sure about the U.S. dollar to U.S. equities relationship. I don't think you can say that U.S. equities may do well if the U.S. dollar rises - there are just too many (more important) variables involved. One thing that has been true for the last 20 years or so is that whenever the dollar has done well, some kind of economic crisis has always ensued.

A rising dollar usually means less confidence in emerging markets, and when capital flees from emerging markets... well, you know what usually happens afterwards.

Best,

Henry

[nodoodahs]

I will leave the charts to y'all. I'm more of a fundamental guy.

From a valuation standpoint, there's a lot of means regression in E/P yield and div yield in the S&P. This sends a signal that currently we're overvalued and due a crash, what happened over the last 5 years isn't "severe enough" to be a crash compared to the historical record. One could argue that, with today's competing currency devaluations and relative ease of credit, that the "norm" E/P and div yields should be adjusted upwards and we're just about right, right now.

Looking at it from the "Fed model" or "equity premium" model, the falling yields have made stocks more attractive, relatively speaking. With a 6% treasury and equity premium of 4%, that makes a PE of 10 not adjusting for growth or beta "acceptable." With treasuries closer to 4%, now we're looking at PE of 12.5 before beta and growth. Some think the moves between preference for equities or bonds is driven by this type of comparison. All I know is, it makes the yield and appreciation of CVX look a lot better to me than a 10-yr bond!

Collies_99 has a good point about dollar appreciation, if the consensus is that dollars will go up over the next few months then "consensus" money will move to U.S. equities.

From my M3 and S&P model, it's hard to figure, simply because we haven't been in too many situations like this, historically. I've tried a few different simulations and basically come up with the same results:
1. average total return or slightly worse than average for this quarter
2. pretty much no chance of major bust this quarter
3. slightly better than average chance of significant negative return this quarter
4. slightly better than average chance of significant positive return this quarter
5. lots of variance in the results.

We've not had a market crash (-20% in a quarter) in the post-Bretton Woods era without first having M3 growth in excess of 6% year over year. Given that and our sideways motion over the last 5 years think the pain is more from the variance than from the negative return.

Just my two cents. My open long positions haven't changed in months, and I will probably add some value stocks this month.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[Dubious]

Appears the pain train is about to leave the station.

[Dubious]

Col

Hope you post.

There are some smart minds here.

I am humbled to post here.

Happy trading!!!!!!!!!

[collies_99]

Hi all, decided to start reading and possibly post here as a future forum option for moi.

I'm at odds about Henry's latest neutral rating (and possibly suggesting that the DOW may top out soon?)

http://stockcharts.com/def/servlet/SC.web?c=$INDU,uu[w,a]waoaynay[df][pb10!b30!f][iLb14!Lh14,3]&pref=G

Trying to keep things simple and just simply being simplistics, I see the current market condition similar in technical signal above as the summer of 2003, just at the inception of the big move in the DOW from the 8500 to 10000 level.

http://tfc-charts.w2d.com/chart/DW/M

Looking from an EW prespective (and I am no expert), the move up from the 2003 low appears incomplete as a 5-waves affair, being the current consolidation is still wave 4 and I think it is an irregular flat suggesting move up-side (above +11000) for wave 5 is yet to come, once wave 4 is completed.

One general market thought would be, that a rising USD would pull in foreign investors (or more money) into the US equity market to capitalize on share price appreciation and acts as a currency hedge against their own country's currency. Thus is my case for being 100% long in US stock and I have benefited as said, being a Canuck, from the share price increase and currency exchange gains. Couild this be a self-reinforcing trend.

The 30year USD chart suggest that a flat bottom triangle may be in play with an 80 bottom on the USDX and a declining DT line to be intersected by the curent rally in the 100-105 level, perhaps in Q1, 2006. Sorry don't have a link for such chart.

Food for thought.

Cheers and good luck all.

[Dubious]

Hmm. Thought I posted here I was going to flip and short at noon?

Oh well. Tomorrow the pain begins for the longs. .

Take care Henry. You do good work here.

[HenryTo]

Again, Dubious - glad to see you back. Hopefully, we do get some kind of morning rally tomorrow since we are anticipating a move to a completely neutral position in our DJIA System tomorrow morning.

We will send out a "special alert" tomorrow morning once we have made our trade.

Henry

[Dubious]

Thank you!
I believe was the last hour was the smart money coverning their shorts and going long for Monday.
That is what I did.
Not saying I am smart money.
Just exploit trends.