All-Time Highs in Off-Price Retailers

Consistent with the themes of an impoverished nation and redistribution, today we saw new all-time highs in the price of McDonald's and several discount retailers, most notably Dollar Tree (DLTR), which surged over 5% on the news of an accelerated stock buy-back that will retire about 5% of its market cap with no offsetting stock issuance. TJX and Ross Stores also moved up to all-time highs. DLTR, which now trades around $60, would have to reach about $72 by summer simply to trade at its "value line" per the eponymous publication. From that price, it could easily be a strong long-term performer.

In other words, the "right" stocks may have a long way to run.

The stock market as a whole is, however, an entirely different kettle of fish.

Of some interest today is the decline in Treasury yields concomitant with the rise is stock prices. That has not happened much lately, and Treasuries rallied Friday morning when stocks opened down. In other words, the crisis feared and predicted by Bill Fleckenstein and many others, that of declining stock and Treasury bond prices, is not a happening thing.

The Chicago Fed National Activity Index was out today and showed some weakness in February, some of which might in fact legitimately be weather-related. This index also has an inflation predictor in it, perhaps related to the Phillips curve. In any case, every can see that all sorts of economic indicators look identical to multiple other post-recession charts, and sooner or later they all have given way to growth or outright boom conditions. Will past be prologue?

Probably, but from a market standpoint, methinks much of that is priced into all markets except perhaps gold.

In the meantime, I prefer Dollar Tree at under 15X predicted current year earnings to Tiffany's at 20X. And a vegetarian Big Mac.

Plus the long bond (TLT) for a trade.

Copyright (C) Long Lake LLC 2010

Chi-Fed National Activity Index and Markets

The Chicago Fed National Activity Index was published Nov. 23. It cannot be readily copied to here; please click on it. The first graph on the second page suggests negligible inflationary pressures. This analysis supports the idea that the 10-year Treasury can drop in yield, perhaps a lot, given the intensity of the move lower in rates out to at least 2 years. If you buy a 2-year Treasury at market rates, in 2 years you will have about $101.40. And the $1.40 or so in interest is taxable.

Yours truly is going long the 7-10 year Treasury IEF unless it opens up a lot. It was said that the stock market rally off the March bottom was the most hated in history. Ha! It was one of the most loved rallies. The problem is that the market was probably only around fair value at that bottom. Any hatred from pros was probably due to aversion to asset inflations, of which stock versions thereof are pernicious. Meanwhile, Treasuries are truly despised. That does not guarantee that they are a good investment, of course. But it helps.

Bonds have a safety factor that stocks lack: bonds revert to par, or at least Govvies do. Stocks are perpetual absent liquidation or a takeover. No exit for stocks, planned exit without a trade for bonds. Of course, this thinking is the opposite of what the financial community wants people to think. They want "investors" to trade stocks frantically. Liquid bonds have two ways to win: yield, and capital gains (i.e., a drop in yield to less attractive levels).

The other graphs on the Chicago Fed site suggest that there is no clarity that the economic banana is truly over. Times are tough (by 21st Century standards), overcapacity remains rampant except for such matters as common sense amongst policymakers, and the evidence that financial assets are simply overpriced can be seen by understanding the amazing web and interlocking towers of debt, guarantees, financial swaps between and amongst the American people and their companies and governments. There would be no need for such complexity if capital could earn a good return in a straightforward manner.

As a related situation, physical gold is an asset without liabilities, unlike Federal Reserve Notes.
Gold is now extremely widely followed, but its chart is more like the NASDAQ of the late 1990s than even its own chart of the 1970s, when it gyrated wildly up and then down in partial corrective manner. My father, who is not given to easy enthusiasms, was skeptical when I put him and my mother into gold at lower prices this year; he is now convinced and has instructed me to sell no gold, and is happy if I buy on weakness, as I did Friday on the Dubai-related selloff.
He is a strong holder and just the sort of buyer on the gold breakout to new highs this fall that a sustainable bull market must have.

Ignoring rising prices for very short-term Treasury debt, gold is the only major asset class I am aware of that is in a true bull market, defined as an asset at new nominal price highs with good relative strength.

The other intermediate- and long-term bull market that is near record price highs except for the panic a year ago is the 7-10 year Treasury market.

Meanwhile, the media wants you to trade pre-owned common stocks.

Irritate the media. Think different. High quality dividend-paying stocks will probably do fairly well on a multi-year total return basis, but only in a setting in which the average stock is substantially overpriced; so if you own a strong company in an industry not under siege a la the financials 2007-early 2009, please be sure you can ride out market declines and perhaps a weak quarter or two.

There is a reason, not yet revealed, why two-year Treasuries yield almost nothing. It's eerie and so abnormal in what is allegedly a decent economic expansion that it suggests that even more caution than usual is appropriate. Dubai is not the answer. Retail brokerage clients have not been besieging their brokers saying, "Get me in" on this 2-year Treasury bull market in price (lows in yield)! Thus it's some form of smart money that's been bidding avidly for safety for such a long period of time.

Markets can be discontinuous. Investors must have their ducks well in a row before any sharp market moves and keep their eyes on the downside ball.

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