Oil is going to $200 per barrel !
Oil is not going to $200/ barrel! In fact I think we’ll be lucky to see $90 in 2009. Yes I realize the price has risen from $35 in March to current $70 and I would guess that a realistic and sustainable price is around $80 given the supply and demand equation. Oil was too cheap in March, just like stocks and after a near vertical rise back to a more reasonable market level, I think we can expect oil to stabilize and find its true range. While I do believe that commodities of all sorts offered investors a very attractive entry point several months ago, I think the strongest part of the early move is behind us now and we’ll have to remain patient for the real commodity cycle to begin well after the economy begins to grow again.
US Dollar is going to zero!
Not so! I’ve heard all the arguments and I can’t get behind the consensus opinion that the US dollar has further to fall. The value of the US dollar versus a basket of foreign currencies, fell 40% from an extreme high in 2001 to an all time record low in April of 2008. This is the United States green back folks, still the world’s reserve currency and likely to be as long as I’m alive. Currencies tend to track the economic health of any country and we have seen an improvement in both the US dollar and our economic stats since late last fall. At present, there is a notable extreme in the amount of short selling against the US dollar and therefore the odds strongly favor at least a healthy rebound. In most years, currencies do not fluctuate to the extent that we have seen in the last couple years. For instance for the entire decade of the 90’s, the value of the US dollar rose a total of 24% - the S&P 500 gained 345%. The US dollar can and will rise slowly from these levels which is generally healthy for our economy as well as our financial markets with the exception of gold. I understand these are extraordinary times but no more extraordinary than any other generational wipeout of which there have been three in the last century (including current events). At the culmination of each event in which stocks managed to close at a 12 year low in price, the value of the US dollar gradually rose as well. See the chart of the week for an illustration.
Japan will never rise again!
Investors have given up on Japan. After 20 years of recession and a falling stock market, I can only surmise one clear conclusion. WHAT A GREAT BUY! The Nikki stock average, the equivalent of our Dow, put in a long term bottom in April of 2003. Since then, investors would have been better off in the Nikki index than the S&P 500. Yes, Japan has outperformed the S&P 500 by almost 30% through last Friday since April of 2003. I realize that difference is marginal over a 6 year period but I do see a pattern of outperformance especially on the upside during bull market phases. This weekend, the NYTimes told us that the US stock market was richly priced again after a mere 40% gain since early March. The Japanese stock market has also risen 40% in the same time period but is still dirt cheap on a macro scale. For as much as this trade seems unpopular, Japan might be one of the most overlooked, undervalued investments out there.
US Stocks, Bonds, Real Estate who knows?
Among the big three I thankfully find very little consensus about the future and thus I will assume that the current trends persist until we hit some extremes. At that point, we’ll want to practice good contrarianism.
Stocks have moved up at an annualized rate of 233% off the lows on March 9th. That is not sustainable by any measure. If there is a consensus view here it is simply overly bullish in the short term. Nothing a stiff 8% correction won’t heal. I am expecting the S&P 500 to move down to the 892 area which serves as our current uptrend marker and then transition into phase two where the markets move higher but at a more sustainable pace with clear leadership. Today the Dow closed down 187 points and should work down to around 8350 along the same lines. So far, I see nothing more than a healthy technical correction in stocks that could lead to an unexpected and very robust summer rally. Remember, we are still in the early phases of a new bull market by most measures so we should be prepared to give it the benefit of the doubt unless our intermediate term trend lines are broken. Breaking those levels would be cause for more concern and we will remain hedged in our models until we see new buyers emerge at the trend line. Smart investors will be very watchful of the sectors that hold up the best during this decline as they will no doubt lead any summer rally by a wide margin. I’ve started making my list.
Treasury bonds are beginning to behave as they usually do following a 25% decline in price over the last couple months. Given the economic backdrop and recent events, it would certainly make sense for bonds to continue down in price as long as the stock market holds together. In the short term investors have become very negative on bonds and thus we should expect at least a short rebound rally, perhaps for the remainder of June as stocks finish this correction. When grandma sells her very last Treasury bond position in total disgust and the media tells us that treasuries should not be held in any portfolio, THEN we’ll want to consider a longer term position in treasuries. Until then, the trend down in price should persist but again at a less dramatic rate.
Real Estate is tough to call and again the consensus here is mixed so not of much help. I do hear many opinions offered by real estate agents and other industry beneficiaries suggesting prices have bottomed. My sense is that too many people are still looking at real estate as something that can offer a return on capital. Consequently, I will assume that we have more price deterioration ahead on the back of rising interest rates, high supply of unsold homes, average time on the market, falling rents, tight credit markets and generally tougher economic times ahead. When you hear the headlines that there is no end in sight for falling real estate prices, that will be the end of falling real estate prices. Best guess, sometime in 2012 or 2013.
And that is the consensus opinion of me, myself and I
Cheers
Sam Jones
