This Week in Barrons – 2-3-2013
Inflation is Under Control:
This
week the market regained its glory by reaching the DOW 14,000 level again. The
last time it was this high, was October of 2007 – just weeks before it all
imploded and ended with the DOW at the 6,600 level. But this time, is it different?
On
Friday, Mr. Dick Bove said: “The banks are on the cusp of a 14 year bull
market, that could take them as high as levels they reached years ago.” This came from the very same gentleman that never
saw the single greatest economic collapse in 80 years coming. He now knows that we're in the sweet spot of
investing. Somebody pinch me.
Most
people compare the stock market with the health of the economy. Unfortunately, the stock market has very little
to do with the economy, and (in the last 20 years) has had little to do with
the health of the businesses that trade on it.
But when the market goes up, people
point to it and say: "See the economy is doing fine, look at the
market". This is a mistake. IF a rising stock market were the indication
of a strong economy, then one should ask – “What country’s stock market has produced
the best returns over the past 8 years?” The answer would be the small, African country
of Zimbabwe. But, take a look at the
following picture please:
This
past holiday season, my sons exchanged GENUINE 10 Trillion dollar Zimbabwe notes,
and here is a picture of one. This is
real, legal tender. And for 10 Trillion
Zimbabwe dollars you can purchase: a
shoelace, a pack of gum, 2 eggs, OR a daily newspaper.
You see, Zimbabwe has inflated
their money supply (printed more money out of thin air), so badly that inflation
has surged to levels not generally seen in a modern economy – leaving the 10
Trillion dollar bill to be worth about 11 cents. According to our own U.S. Government’s
website: $1 in 1916 is now worth about 6
cents. Prices have risen over 1916,
given a pound of bacon is now $7, butter is about $4.50, and coffee is between
$9 and $11. Wages have also risen. However, in 1916 we normally paid 3% of our
wages to taxes, medical, etc. – and today we’re over 40%. All of that aside, we know that inflation
exists. Energy, medical, food,
insurance, and education are all going up between 9 and 12% per year. Combine that with The Ben Bernanke printing $85
Billion a month – how long until we have our own $10 Trillion note?
There
are many components to an economy, and one of those most misunderstood and
forgotten is the "velocity" of money. Velocity is simply how fast the money goes
from person to person to person. For
example: I print a million dollars out of thin air, and hand it to George. If George locks this money in a safe and does
NOT spend it – there will be absolutely NO inflationary pressure. The butcher, baker, cabinetmaker did not see
an influx of orders – because George just sat on the money. On the other hand, I print another million
dollars out of thin air, and hand it to Mary.
Mary rushes out and purchases: 4 new cars, 20 new outfits, a new pool, etc.
If those merchants feel that even more
orders are coming, they're going to take their new money and rush out and
purchase even more items. The "Velocity"
(because of Mary) is high. And when a
lot of money starts chasing goods and services quickly, the goods and services go
up in price.
Currently,
price inflation is bad, but not yet hyper.
Maria Bartaromo (on CNBC) constantly speaks of “All the money on the
sidelines.” How many people have held
off buying stuff because they are still worried about the economy? How many businesses are holding back because
of uncertainty? How many banks are not
loaning because they're still repairing their damaged balance sheets? Bernanke's billions are making it into small
pockets of the economy such as the stock market, and some defense and energy
companies, but the bulk of the money has NOT been spent, yet.
At
some point the spending will start, and all of that saved cash and demand for
loans will come full circle. That is
when we'll start to feel the real hyper inflationary effect of all this bogus
money that has been printed. That is
when the Treasury will have to start printing $10,000 dollar bills again. That is when we start seeing bread at $7, milk
at $10, and gasoline at $8. Currently
corporations are sitting on trillions of dollars they don't want to spend for
fear of: Obamacare, taxes, etc. But
nothing lasts forever, and this hoarding won't either. There's going to be a time when it rushes
forth, and history shows that it usually comes in a big wave, not a slow
trickle.
Therefore, the stock market has NO connection to the
economy. The stock market is being
pushed by free money printing, and there's going to come a time when all that cash floods
the economy. At that time we will see a
huge pick up in economic activity, prices will soar and then become
"hyper". When that happens,
the economy will suddenly contract again, as everyone gets tired of chasing
prices and stops buying. However, until
that happens – there’s no reason the market can't hit 15K or even 16K. Gold and silver are in a holding pattern
right now for the same reason that the inflation rate isn't insane just yet. The velocity of money is subdued, and the two
"anti inflation" metals are sitting where they're comfortable given
the inflation we have. When the money
spills out of the safes and mattresses, then inflation will soar, and so will
gold and silver. Take advantage of their
low prices now, or chase them later.
The
Market:
We
talked in August about a rally into year-end and having the “January effect”
push up to challenge 5-year highs. I’m
always surprised when a plan actually comes together. The market is just running wild on Bernanke
bucks. The market has run so hard that everyone
looking for a pull back correction has been frustrated. The best we have gotten is a "pause",
where the market just ended the day flat.
I’m still waiting for that 5% (or deeper) true correction.
Remember
the market's main game is to frustrate and confound as many people as humanly
possible. As soon as enough people pile
in because a correction just "won't happen", is when the correction
will happen. If you're "IN"
the market, then staying in makes all the sense in the world. But if you've missed the last couple weeks of this
rally, does it make sense to try and jump in now? Yes and No. The all time highs are just 170 points away on
the DOW. That’s not much more than two good
trading days away. Are we going to blast
past that level, and just continue up? Yes
we should break through the level, not likely that we’ll continue straight
up. There is going to be a correction. So, if you are NOT in the market, then your
best bet is either to wait for the pull back, OR go in lightly – buying low
volumes and enforcing tight stops on your trades.
It
is hard to envision the market gaining another 6% in February, as it did in
January. So even if it does go up, (in
the short term) we should only be looking at a 2% move before it backfills to
catch its breath. Lately there has been
some fairly heavy sector rotation, bouncing from tech to pharma, from pharma to
materials, from materials to energy and back again. But each time they buy energy, the energy
stocks have moved very quickly higher. So
I’m sitting and waiting on the next round of buying, but I won’t be shy about
selling out if the overall market starts to deteriorate. No individual companies are going to hold up
when the overall market gets smacked with a round of profit taking. Just know that this market is overextended,
and way overdue for a quick drop out. Move
quickly if you smell danger.
It
is an incredibly fascinating time, and the fun is just beginning. Over the next couple years you're going to see
all manner of goofy things, and one of them could easily be watching the market
set new highs, just before it falls 2,000 points. As the Chinese say: "May you live in
interesting times".
Tips:
The
past week we sold out of LLTC (even), LNG (even), and NOG (even). But continue to watch: SPN, WFT, PTEN, and
NBR for entry levels – because each time the market concentrates on energy – it
moves quite a bit.
Also
the 3D printing space has been on-fire this past year, with companies like
Stratasys (SSYS) and 3D Systems (DDD) gaining over 100% per year. A new 3D printing company (out of Pittsburgh,
Pa.) ExOne (XONE) is going public shortly – and we wish them the best. It’s a speculative space – but as long as the
companies can continue to grow between 30 and 35% per year – their stock prices
should be very well supported.
My
current short-term holds are:
- ORCL – in at 35.14
(currently 36.23) – stop at entry
- PAY – in at 34.04
(currently 35.24) – stop at 34.50
- PTEN – in at 19.78
(currently 20.68) – stop at entry
-
HD – in at 61.53 (currently 67.36) – stop at
66.00
-
MS in at 18.50 (currently 23.47) – stop at 22.00
-
SPY in at 141.97 (currently 151.24) – stop at
149.00
-
SIL – in at 24.51 (currently 21.08) – no stop
yet
-
GLD (ETF for Gold) – in at 158.28, (currently
161.45) – no stop ($1,669.40 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 30.87)
– no stop ($31.94 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades
– my handle is: taylorpamm.
Please be safe out there!
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