Wednesday, December 30, 2009

Consumer Confidence Rises While Current Conditions Are Poor: Implications

The nearby chart found on a Zero Hedge post was interpreted at ZH bearishly. On this one, I might take another view. Granted the chart is not a very long-term one, but my eye sees a pattern in which expectations in fact lead the present situation. It looks as though the two parameters diverge and come together; the two bear markets were presaged when stable to declining expectations plunged.
Yours truly believes that very high-quality stocks, not necessarily global in that the US dollar is probably no better or worse than the Euro or yen, will probably outperform cash on a multi-year horizon; at least there will be periods where that will be true. The more core belief here is that almost all financial assets are overvalued relative to earnings, so that cash is a rational place even at no interest.
How many people know that IBM today hit a more than 10-year price high? Or that Oracle is at an almost 9 year price high? Or that McDonald's is churning near its all-time price high that was set in August 2008, well into the bear market?
In other words, this has been a stealth bull market in selected stocks. Furthermore, it is quite easy to envision IBM, which has an amazingly strong chart, to run way past its 1999 high of $137 to the $180 range simply based on fundamentals ($12/share earnings for 2010 times 15 P/E). Of course, at some point the cycle will turn, Hewlett-Packard may pressure IBM in services and IBM could earn $8/share and given about zero tangible book value for the company, the stock could be halved from here. In fact, considering that oil prices had a 4-fold range last year, IBM stock could do the same. For now, however, the political imperative is growth and rising asset prices, and the feeling at EBR is not to fight the Fed or the trend.
The stocks that have garnered the most attention, such as Bank of America, are struggling. Quiet bull markets are marvelous things.
Gold was in a quiet bull market this summer. When it got noisy, it was time to sell.
The single best chart of a major asset class continues, in fact, to be gold. It is felt here that it is likely to continue to be strong, though likely not the single best asset for appreciation, but rather to be a superb asset on a risk-reward basis. Either growth will be strong, goosing commodities, or "money" will be "printed" to create either growth or the illusion of such. Not shown is a 2 year chart of gold, but it is ordinary bull market stuff, showing about a 14% annual appreciation from about $842 per ounce to today's sub-$1100 price. Not only that, we are close to two years out from the prior price high over $1000/ounce. In that context, the latest sell-off looks jejune and very possibly finished. Absent a major geopolitical action or major Fed money-printing announcement (which appears unlikely given decent economic data lately), fireworks in gold are neither expected nor desired. A move to GLD $113 from about $107 now would not be surprising in the next month, however. Gold is already off the headlines and thus has reverted to a quiet bull market though not a forgotten one; in other words the gold bull market is far from young.
Copyright (C) Long Lake LLC 2009

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