Monday, October 12, 2009

The Message of the Markets and a Master of the Markets on How to Allocate Assets

Skeptical minds are wondering why Bloomberg.com is running Rallying S&P 500 Never Cheaper in Europe on Dollar. I don't recommend that you read all of it. That would IMO be a waste of time. Its point can be summarized as follows: The U. S. stock market has been going nowhere in international units of money. The article is dangerous because it suggests that despite the massive inflation in asset prices of stocks, the media continues to flog them. What are we to make of the prominence given to an obscure financial researcher, as follows?

“The valuation for the market is still below normal levels,” said Jason Pride, director of research at Haverford Investments, which oversees $6 billion in Radnor, Pennsylvania. “We still believe there’s a fairly good, positive bias in the direction of the market.”

What is that valuation?

The MSCI World was valued at 27.7 times the earnings of its 1,659 companies in September, exceeding the S&P 500’s ratio by 7.75 points, according to monthly data compiled by Bloomberg.

In other words, global stock markets are at bubble valuations. The U. S., the epicenter of the latest global financial crisis, is merely at fully-priced valuations that were sustained for a while in the 1950s but still has emergency zero short rates in place because . . . supposedly there's a crisis.

Meanwhile, as I complete this post, GLD is up 0.80% and SPY is up 0.6%. Quietly, gold continues its outperformance. Someone is accumulating it and has been doing so ever since the U. S. began a guns and butter-type economy following the 9/11 attacks. In general, the collective accumulator is to some degree the public via exchange traded funds, but the signs of a peak in public enthusiasm for gold are not very visible. Check out the small ETF with the symbol GTU to see that it is only today even beginning to emerge from a bearish chart pattern of several months duration, despite the bullish configuration from the better known ETF GLD for quite some time. If the public were fully engaged, GTU should have been flying.

Technically, gold has no overhead resistance. Think stocks, circa late 1982 or early-mid Clinton years. Fundamentally vs. other asset prices, gold is neither overvalued nor undervalued. More fundamentally, the massive Federal deficit is a gift that keeps on giving. So, it is not hard to see gold moving toward a richer valuation, and possibly an over-rich one (think NASDAQ late 1990s). IF that happens, then it would be a "don't buy" or "sell". But that has not happened yet and may not.

To conclude with a quote from John Paulson (from Your dollars are just Monopoly money by Bill Fleckenstein), the hedge fund manager who made billions in 2007-8 largely from shorting subprime at the right time:

"What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-à-vis the dollar one year from now, three years from now, five years from now. And I think, with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point."

If by 2012 it is Springtime in America again and Barack Obama is headed for a 49 state electoral sweep because the economy is growing and adding lots of jobs and he has justified winning the Nobel Peace Prize, and therefore my gold holdings have underperformed inflation, I will be so happy for my children and for the majority of my assets that are not gold that I will be a happier person than if times stay unsettled and I own gold that continues to outperform cash and stocks.

In other words, one does not have to be a "gold bug" to own gold. One simply has to ignore the spin from the MSM and focus on facts and preservation of purchasing power of one's mostly electronic assets we call money.

Copyright (C) Long Lake LLC 2009

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