Is The Secular Trend About To Change?

Daily State of the Markets
Monday, December 17, 2012

Good Morning. Here’s a thought. What if the secular bear market that we’ve been dealing with since the turn of the century is in the process of morphing into a secular bull market? The answer, in short, is that like we saw in the 80’s and 90’s, the wind would be at investors’ backs for a change. Equity market returns of mid- to high-teens would become the norm again. Cocktail party conversation would once again involve your favorite stock picks. And a buy-and-hold mentality might make a comeback.

I know, I know… I’m guilty of wishful thinking, right? If you listen to the guru’s talk these days about their expectations for the economies of the world you probably aren’t thinking about using your margin account or borrowing from your credit cards to buy more stock (remember those days?). No, instead you’re likely wondering if you can figure out a way to avoid the coming calamity that everyone still seems to be talking about.

But here’s the rub. First, the investing public (self-proclaimed guru’s included) rarely, if ever, sees the really big moves coming. To make my point, let’s look back over the last 14 years or so. Raise your hand if you sold all of your technology, emerging market, and/or growth stocks after New Year’s in 2000 because you thought things couldn’t keep going. And if you did manage to sidestep the bursting of the tech bubble, who was ready for things to get better in 2003?

Actually, those were the warm-up questions. Now – and please be honest here – how many of you and/or your advisors saw the biggest crisis of our generation brewing and as a result were prepared for the devastation in 2008/09? How many of the brokers and financial planners out there even understood what was happening as the S&P went from 1550 to 667? How many of you knew what a credit default swap was before 2009 or that a brokerage firm going under could affect your money market account?

And then if you were lucky enough to avoid some of the credit crisis carnage, did you know what to do on March 10, 2009? Were you able to look past the doom and gloom and buy when many stocks were selling at less than the cash on their balance sheets?

Let’s look back even farther and hopefully my point will become even clearer. Think back to 1982. Did anybody want to invest in stocks back then? Believe me, the answer is no. Back then oil & gas and real estate were all the rage. Interest rates were sky high and BusinessWeek had even run a cover citing “The Death of Equities.” And with interest rates at double digits, how many of the guru’s told you to lock in those rates by buying 30-year bonds? (Wouldn’t earning an almost risk-free 12% return over the last 30 years have been nice?)

The point here is that knowing what to do when the market is at major turning points is oh-so easy with the help of a little hindsight. However, the emotion of the day usually makes it nearly impossible to see the forest – because all those darn trees are blocking your line of sight.

One of the biggest mistakes investors (professionals and individuals alike) make is they wind up fighting the last war. With the knowledge in hand of what they should have done during the last “big thing,” they go forward looking for what has just happened to happen again. And in my humble opinion, THIS is the reason everybody on the planet is on “bubble watch” these days. Nobody saw the Credit Crisis coming, so they are looking high and low for the next one.

However, the problem is that the next “big thing” is rarely a duplicate of the last “big thing.” No, with the exception of the annual freak-out over Europe during the summer months, the next big move in the market usually has little to do with what caused that last big move.

So, I ask you: is there anything happening now that could prove to be historic? How about record low interest rates? How about the assumption that the economy isn’t ever going to recover? What about inflation running at low levels? Or how about the record deficits that countries are running these days? Will any of these present historic investment opportunities for investors in the future? Or should everyone just keep burying their heads in the sand and continue putting all of their 401K contributions in bond funds?

The bears will tell you that interest rates have to rise at some point in the future and that shorting bonds will wind up being one of the best trades in history. Our furry friends also suggest that stocks won’t be able to withstand rising rates and as such, we should be preparing for the Dow to go back toward 7,000 soon.

While I’m onboard with the first idea – that shorting bonds will be a wonderful opportunity at some point – I believe there is a big, fat hole in the thinking that rising rates will push stocks down. While such an assumption has some merit when looking at history, you do need to understand cause and effect. You see, when rates start to rise this time around (and yes, it is a question of when, not if) it won’t be because the Fed is trying to slow things down. No, the rise in rates is likely to be in response to an improving economy. And an improving economy will likely mean an improving profit environment. And of course, rising profits means higher stock prices.

The big point I’m attempting to make is that investors need to recognize that something big is likely to happen in the next year or two (or three) and that there will be great opportunities for profit. You just have to be ready, willing, and able to act when the time comes.

Turning to this morning… Although there is still no agreement it does appear that progress is being made on the fiscal cliff talks (Repulicans have offered to raise tax rates on those making more than $1M a year and have agreed to put off discussions of the debt ceiling for at least a year). In addition, the election in Japan is providing some hope for better times ahead for the long-struggling Japanese economy. However, Apple shares continue to fall in early trade due to growth concerns and a downgrade at Citi. With all of that said, S&P futures are still pointing to a positive open on Wall Street.

On the Economic front… We’ll get the Empire Manufacturing reports and TIC Flows this morning.

Thought for the day… Wanting to be someone you’re not is a waste of the person you are. -Kurt Cobain

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

Major Foreign Markets:
– Shanghai: +0.45%
– Hong Kong: -0.41%
– Japan: +0.94%
– France: -0.34%
– Germany: +0.02%
– Italy: +0.16%
– Spain: -0.15%
– London: -0.42%

Crude Oil Futures:

-$0.15 to $86.58 !========>!========>