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.
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".
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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Until next week – be safe.