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Buy, sell or hold? ‘Bulls make money; bears make money; pigs get slaughtered.’ Are we climbing a wall of worry right now or just being piggish? Here’s my conundrum:
There are several places to put cash, the top five being:
Companies are doing all five right now. Dividend payments are increasing along with share buybacks and M&A activity. If these companies have so much cash available to either acquire another company or buy back their own stock then in my opinion it’s just another indicator of an undervalued stock market, as valued by the CEO’s of these same companies. And these same CEO’s have been pretty good a calling market tops as evidenced by all the insider selling that was going on in the late 90’s. From where I sit the U.S. economy looks and feels like it’s recovering. Job prospects are up, especially in the U.S. energy services and health care sectors. Tech is rebounding, both is sales and revenue forecasts and job recovery. Outsourcing is slowing down or even reversing (FORTUNE Magazine, 8/8/05 p.95 “Pulling The Plug”) Yet, on the flip side of the coin, the large U.S. deficit is scary and recent revaluation of the Chinese Yuan has serious implications going forward for U.S. investments. Long term this equals IMO a weaker dollar, foreign selling of U.S. Treasuries with accompanying higher interest rates, declining corporate profits, lay-offs and higher energy and commodity prices. Following these events I look for a slow down in home construction and the real estate bubble to deflate as higher rates and unemployment reduce the pool of marginal home buyers and foreclosures accelerate. The US is highly geared to the real estate industry and financial services and America will be in a world of hurt if the real estate bubble begins to fall apart. from the Wall Street Journal, May 24th, page C-1, “Betting against the House”: “In the end, whether the housing boom is a bubble may matter less than the fact that the U.S. economy has become highly geared toward the real-estate market. Northern Trust economist Asha Bangalore points out that employment in housing and housing-related industries has accounted for 43% of the rise in private-sector payrolls since late 2001. If housing cools, what will take up the slack?” These are the two forces waging war in my head right now. All the newsletters I subscribe to say “Buy – the market’s going higher,” “I’m losing a golden opportunity,” “America has the strongest economy in the world right now.” Yet I also know the bond market leads the stock market and the bond market is selling off. In the last 3 years every time the bond market has sold off the stock market has usually followed within 3 to 6 weeks.
The notations are my own, but the chart suggests we are in the processes of topping out for this cycle and a corrective phase lies ahead. When the correction starts, how long it lasts and how deep it drops are open to much conjecture, but for the time being I’m betting on a weaker dollar and therefore investing in copper, gold, energy and foreign equities, with a 40% fixed income (cash) exposure to maximize my ability to capitalize on expected future market weakness.
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According
to an article in Investor’s Business Daily, 5/26/05 “… cash
reserves of 418 of S&P 500 companies’ rose 10.4% from a year
ago…and…cash reserves topped $766 billion, thanks to several strong
quarters of earnings.”
Early in January when faced with a similar uncertainty
I turned to an old technical indicator that has always helped be to make
the right choice.
