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Bullish or bearish? It depends on …

posted on June 18, 2010 at 3:34 pm
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Question: Jim, are you bullish or bearish?

Answer: It depends on what time period we’re talking about.

In the very short-term, say the next 4 to 6 weeks, I’m bullish. I think the market is gradually inching its way higher after breaking through resistance at 1108 on the Standard & Poor’s 500. The summer rally could take us up another 30 or 40 points on the S&P 500 from here. This isn’t likely to be a huge rally but it is a rally. (For more on the summer rally see my post http://jubakpicks.com/2010/06/15/did-the-summer-rally-begin-today-and-will-it-be-more-than-just-the-return-of-son-of-bounce-ii/ )

In the middle-term, say the period from late July through October, I’m bearish, especially on developed market stocks.

This is the weakest period for stocks in most years and we’re looking at major unresolved worries about the euro debt crisis, the strength of the economic recovery in the United States, and higher interest rates and monetary tightening in China and other developing economies. (For what worries me in the middle-term see my post http://jubakpicks.com/2010/06/18/three-bombs-that-could-still-wreck-the-recovery-from-the-global-financial-crisis/ )

In the longer-term, say the year that begins in September, I’m bullish on developing market stocks. I think we’ll see an end to interest rate increases from central banks and a gradual lessening of worry about the pace of economic growth in the developing world, especially China. (See my post on what indicator will tell me that the time to buy is approaching http://jubakpicks.com/2010/06/16/4306/ )

I’m selling into the current rally because 1) I don’t think it will last terribly long, 2) I think stocks will decline in the August through October period in developed markets, and 3) I want to have cash to invest in developing markets when the time is right.

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21 comments

  • darylwhitman on 18 June 2010

    Jim, I’m assuming this is subject to change if any of the 3 bombs (referenced earlier today) go off?

  • donzelion on 18 June 2010

    I note that Jim is 40% or so in cash right now, with the sale of IMPUY – a South African developing markets commodity play relinquished now, even though you expect developing markets to outperform (and even though you see it as a viable long-term hold).

    That speaks far more loudly than bullish/bearish calls.

  • randa11 on 18 June 2010

    Appreciate all the work you do, Jim. You’re the first blog I read every morning. I made good money on STD, but not for the reasons you mentioned in your post. Decided to get out after 23% profit. Am also moving to more cash as I’m beginning to wonder just how much longer this will last.

  • Virtus on 18 June 2010

    donzelion:

    I believe the sell in IMPUY was related to broader market concerns. As Jim explained platinum, in addition to being a “precious” metal, is also an industrial material. It’s far more related to total global demand issues rather than developing/developed markets.

  • southof8 on 18 June 2010

    Ed, in response to your two points made on the post regarding European Bank stress tests:
    southof8,
    1. Eliminate Fannie and Freddie and every other government program designed to subsidize mortgages (or at least stop them from adding any more mortgages). By doing this, banks will immediately tighten their lending standards, since their money will be on the line. This will immediately cut down on the number of mortgage applications, and the real estate market will drop significantly. While people will lose a lot of equity in their existing homes, new home buyers and low income housing buyers will find it easier to buy into the dirt cheap housing prices.

    2. Absolutely! That is one of the single best ways to create inflation. How much inflation would depend on several factors: First, how much do the people spend as opposed to saving? And second, how much money is being handed out in relation to the overall money supply? If you recall when Bush did it, it had very little impact on inflation, because the amount handed out was trivial in comparison to the money supply.

    Putting aside whether intentionally tanking the values of the 100 million SFRs in the country, there is the little problem of not long ago, the Feds chose to intervene (there’s that damn word again) to nationalize what you now propose to dismantle entirely. Please recall that in September, 2008 Bush nationalized Fannie and Freddie, explicitly guaranteed their bonds, and assumed the explicit obligation to service those bonds and repay the principal. (Bill Gross made a bundle, having loaded up on GSE debt in anticipation of Bush doing just that.)

    Now you’re suggesting the Obama administration eliminate Fannie and Freddie entirely…. do you also mean the US should renege on the promise it made less than two years ago, albeit under a different president, to service the existing GSE debt and repay their principal? Didn’t those who bought the GSE’s bonds based on the government’s promise to guarantee the bonds have the right to rely on that promised guarantee? Does it matter that the promise was made by a prior president?

    Would anyone ever buy government bonds from the US if it could so easily renege on its promises, simply because one president’s term expired and a replacement president doesn’t like the decisions of his predecessor?

    We can all question the wisdom of the decision to nationalize Fannie and Freddie. But having elected a president and vested him with powers to do just that, I’m not sure the next president can simply toss off the obligations his predecessor assumed.

    But he can certainly be called a socialist for not reneging, that’s for sure.

  • EHG on 18 June 2010

    should you/we be soon selling from the Picks Porfolio AMT, CMI , WHR and the like?

  • Foo on 19 June 2010

    Hi Jim, randa11 has sold his STD but I’m just trying to start buy as you mentioned the S&P may rise another 30 point. What is your advise?

  • faroos on 19 June 2010

    Fair enough, but where do you keep your money meanwhile. is cash then on what form; the Euro is not so predictable (looking at the speed of the drop in the past month) or the US$ but again printing so much really scare me. Government Bonds are no good i really dont know where one should keep the value until market clears.
    any advice anyone

  • grindy2424 on 19 June 2010

    Yuan flexibility is a game changer. A bit sooner than anyone thought.

  • vintonbuck on 19 June 2010

    The Yuan flexibility might be more talk than action. How much and how soon remains to be seen.

  • bsorge on 19 June 2010

    Jim,
    I aam in Xian, china and government stopping most real estate investing. people were speculating and buying multiple apartments.
    now they are putting money into stocks as shrt terms rates are very low. may be bullish for stocks!

  • Seaturtlelady on 20 June 2010

    Foo…

    I bought STD at 10.26 when Jim added it to his portfolio and it’s now 11.53. Ed gave us a link under one of Jim’s posts pertaining to good news on STD either Friday or Thursday of last week. Hope this helps…

  • Seaturtlelady on 20 June 2010

    Foo…

    Here is the link to read the article…
    EdMcGon on 18 June 2010
    To all you fans of STD, here is some good news:
    http://www.cnbc.com/id/37777834

  • EdMcGon on 21 June 2010

    southof8,
    That is why I added the part about “stop them from adding any more mortgages”. I fully recognize that you can’t shut off the promises already made. But the government can discontinue the ongoing stupidity of the program.

  • grindy2424 on 21 June 2010

    Now the question…..

    Is it time for the great China buy-in?

  • grindy2424 on 21 June 2010

    I think we still have an implosion coming from mortgage market…..

    If we can sell inventory @ 4.8% for 30 years we have some real problems. I’ve been working on Eds Deflationary theory to see what I can find. If we continue to have pressure her the market will be stuck (unemployment is factor as well). The more these sour the more we are paying for these

    Should we cut the rug or keep trying to plug holes until the economy gets through this?

  • EdMcGon on 21 June 2010

    grindy2424,
    We can’t plug the holes with money we don’t have. By financing our debt with treasury bonds, we basically cause corporate bonds to cost more (why buy corporate bonds when you can get treasuries?). When corporate bonds cost more, that means companies have to spend more to finance their own debt, which takes money away from financing business activities like hiring. If companies don’t hire, that leaves us with a high unemployment rate. A high unemployment rate reduces the demand for real estate, since people without jobs can’t afford to buy houses, or even pay the mortgages on the ones they have.

    As real estate prices drop, that also lowers the tax base, since many localities rely on real estate taxes for their income. Inevitably, local governments will be forced to lay off employees, adding to our unemployment problem.

    As real estate becomes less profitable, the housing construction industry will start cutting back production, leading to more layoffs.

    I could go on with side effects, but I think you get the picture.

  • grindy2424 on 21 June 2010

    Ed,

    Right with you on all. A whole lot of growth is the only thing that will help pull through this.

    China currency make you re-evaluate commodity short?

  • bsdgv on 21 June 2010

    Jim gives us the end of July for the short term bull to last. I think the bull will slow with the annoucement of quarterly results and the bear will take center stage by the beginning of August.
    So, 3 weeks to go, not 5.

  • EdMcGon on 21 June 2010

    grindy2424,
    I’m taking a “wait and see” approach to the yuan. In the short term, the yuan will probably appreciate. However, what about past this week? I have read a few things suggesting the yuan might actually depreciate against the dollar.

    Having said that, it really isn’t relevant what the yuan does as far as commodities, since we are playing them in the dollar, although an increased yuan might lead to increased demand for commodities and raise their prices. But that is farther down the road.

  • Foo on 21 June 2010

    Dear Seaturtlelady,
    You are lucky. I don’t get Jim’s message at that time. I’ve missed the boat. I’ll bought little and hopefully get the ride. Thanks for the sharing.

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