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A Forthcoming Bull Market in Equities?

Puru Saxena of Money Matters recently wrote an article entitled "Birth of a New Cyclical Bull?" in which he offers arguments for why we may see 2009 be a bullish year for equities. His basic points:
  • Inflationary actions by the Fed and declining TED Spread have proven effective in fighting falling asset prices and reducing risk
  • Treasury bonds need to have higher yields or money will go into equities
  • Equities have "overshot" to the downside, thus resulting in excessively low valuations
I agree with Saxena's basic premise that the Fed's actions will be successful in creating in inflation in the aggregate; it is only a matter of which asset class will reap the benefits of the inflation, and who will pay for it.

The chart below compares various asset classes against one another for the month of January.


A key question we may wish to begin asking and examining is just how much inflation the Fed has really created for us, something that will become more apparent as lending resumes and money that is "on the sidelines" returns to the game. I'm of the viewpoint that the global economy is currently improperly structured, and needs a complete restructuring, one that will likely require abandonment of the US dollar as world reserve currency, a corresponding decline in US consumption, and a significant restructuring of the FIRE (finance, insurance, real estate) economy in the United States. From that perspective, an equities rally will be unsustainable, unless there is currency debasement to the extent that all markets rise nominally. If that is the case, though, the inflation will result in significant dollar devaluation.

Trading Implications

The fall in Treasuries was the story for January, and will be of importance so long as it continues. If money comes out of Treasuries and into equities and commodities, it increases the likelihood of seeing consumer price inflation. As I've stated before, though, I expect commodities to outperform equities once money comes out of Treasuries and dollar devaluation resumes. And as all currencies around the world are having trouble, gold will continue to rise as fiat currencies continue to struggle.

Disclosure: Long gold.

Simit Patel
InformedTrades.com

5 Comments:

My Wealth.com said...

Go, Gold! haha.

About time to move into oil, as a beaten down "value play" at this point.

Anonymous said...

Bull Market coming??...YOU ON CRACK DUDE ?

My Wealth.com said...

Bull market in gold..and could be one starting in equities soon if the market feels that the "bad bank' and stimulus, etc. will actually help. Plus, we've had extra low interest rates for quite some time now. They were at 1% for the longest before dropping to essentially zero.

So I'm with Simit on this one. It may not happen tomorrow, I think we'd both agree...but it's time to start nibbling away while the prices are still discounted.

Because if one waits for the actual economic recovery, stocks will already be "bid up" at that point and much of the discounted pricing out of them since the stock market cycle precedes the actual economic cycle.

John said...

Guys:

I like Anonymous' comment! Perhaps now that everyone has finally given up on a ralley this dead cat will finally get his grove on? I also want to be bullish on oil. I have been watching the USO, but it still doesn't look pretty. It closed below $29 today...not good. Still it DOES look like a double bottom eh and the declines appear to be on reduced volume now. Still the oil bull seems to be one step away from being pushed over a cliff by the bear and the bull case technically seems week to me. I WANT to buy this, but I am trying to hold my fire for now! Perhaps the bull will prove his metal and get himself back up above 30 tomorrow?

My Wealth.com said...

Get greedy when others are fearful and get fearful when they finally get greedy as Warren Buffett says.

You can invest by that motto if you invest with cash, not margin and you are willing to hold on for a few years (even though that probably won't be necessary).

But your contrarian thinking is the right direction to head...correct.

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