Thursday, November 4, 2010

Would I be presumptuous to state that we have been in a Bull Market now for some time?

Hindsight is 20/20, yet it looks like we’re in a bull market. We’ve been climbing that wall of worry now for some time and gradually our worries disappear one after the other. If you were courageous enough to have bought stocks and preferred shares or convertible debt during the downturn you have probably done quite well now for some time.

You may have recovered most of your lost portfolio value. In fact you never lost money if you did hold on to your investments. By buying additional good investments during the lows of 2008-2009 and during the following big wall of worry, chances are that you accelerated your personal recovery and you are now about to exceed your old net worth highs.

There is still lots of money on the sideline and there is still lots to worry about, but investments also are still far from overvalued. Real Estate is a bit different in particular in Canada’s largest cities except for Edmonton and Calgary. In those latter two cities there are still good deals to be found. If the stock market is a leading indicator and the real estate market is a lagging one, then it looks as if there are some very good months to come for the real estate investor. Never forget, in real estate you work in local markets there is no national market just some misleading national averages.

So we're climbing the ‘Wall of Worry’ and I would think we have now scaled about 2/3 of its height. Worries seem to be disappearing as snow in the recovery sun. This is still a good time to look for good value, but based on an earlier estimate on this blog, we are now well on our way to a TSX top of 18,000.

The TSX low was 8000 in March 2009; next we reached 12,000 after which we all got the jitters about 'European Debt' and 'Double Dipping'. In real life there was not even a 15% correction and against all expectations of major market turmoil, we experienced a fabulous September and no October Crash. Even better the market broke out of its whiny trading range and we are approaching 13,000. Like upon climbing any decent wall to worry about, corporate earnings are yet again better than expected and even the unemployment rates are on the mend.

My guess is that we are on the half way point to the next market top. Not a straight trip to the top though, but one that kind-of-zigzags. It won’t be long and you`ll hear all those gurus shout ‘Buy on dips’. Of course you, the prudent investor only buys when the price is right and if you haven’t employed all your cash yet (I still have a lot), then maybe the next month or so should be one of action – but remain careful. If you are not an experienced stock evaluator yet, consider buying ETFs of the TSX60. And ... don’t forget to use your powerful Canadian Buck in our neighbour’s market and buy an ETF reflecting the Dow or SandP500. Because, guess what, Uncle Sam is starting to wake up as well.

But watch out for the words: “Buy on dips”, the more often you hear those the closer we get to the top. My estimate of the top is just that. So once, we’re getting past 17,000 I suggest you stop buying and consider consolidating your profits and rebuild your cash position. 18,000 may be still some years away but when?

Here is another flag you want to watch for: declining or flattening corporate earnings, followed by more and more disappointing earnings. When that happens be ready to cash all your shaky investments, refocus on dividends and cash flow and take profits. Build cash for the next down turn.

How long? Well if you really believe in 18,000 then assuming a 10% annual stock market appreciation it is about 4-5 years away. If you assume 15% annual appreciation we’re less than 3 years away from the next major down turn (this is all straight line, elementary school math). In my books, forecasting is so unreliable that my simplistic math is probably just as unreliable as the most sophisticated computer model. Duuuh!

With high consumer and high government debt, first consumer and next government deleveraging will restrict economic growth rates. Do I really think that government will voluntary start cut spending? Yeah, when hell freezes over! So I suspect that the next major economic downturn is related to high government debt, rising interest rates resulting in higher budget deficits, inflation and finally frantic deficit reduction. You saw it across the pond in Europe; governments keep on spending until there is no further choice than spending cuts under the riotous auspices of an angry electorate. Alternatively the financial powers of the world will no longer lend to the country. We saw it in Canada 10 years ago; we’re seeing it in Europe and we will see it next time around in the U.S.A.

Is that our future Godfried? Well how the h.ll am I supposed to know?  But it sounds to me as a likely scenario. That is what investing is all about: creating scenarios, setting yourself up for the good ones and protect yourself against the bad ones. What will really happen? Nobody knows and it is probably different from any of the scenarios we have ‘foreseen’. As good scouts however, we investors must always follow our scout motto: “Be Prepared”.

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