Wednesday, March 09, 2005


Today's market has been a curious one. Trader Mike at reports that he sold into the market when the NASDAQ failed to hold above its 50 day moving average. The NAS has the Great Wall of China to get over at 2100; it will need a little extra push. Easy traveling is available on the other side of the wall.

Late in the day, the DOW is down 100. The NAS is holding at down 8. An intelligent sounding CNBC guest spoke about the NAS needing to break above 2100 before the market can go higher. I did not catch the fellows name but several things he said fit the current situation well.

The oil market got the attention of traders today when crude traded above $55. By the end of the day, crude held only a small gain, so what was all the excitement about? Was it any big surprise that oil might test earlier highs? Until new power plants are built and other new supplies come on-line surely most of us expect oil to go up more.

The curious part is that the energy sectors sold off. XLE is down 1.7%. The Amex index is down. OOI and OSX are down 2%. (The airline index is only down 1.3%; a very positive sign.) Does any of this make sense? Why did oil stocks turn down when the price of oil hit an extremely high nominal price?

The answers lie with the really big losers of the day. The ten year treasury bond and a broad based real estate trust index each dropped better than 3%. These were the big movers that shook the market.

It is an old story. A GDP forecast was raised and indications are that the US economy is "too strong". Tomorrows refinance of the ten year notes, the trade deficit report and the unemployment numbers are scaring the pants off traders. The bond market is like an angry mob, ready to hang all gunslingers in town. Who is willing to hold long bonds at 4.4% when there is a risk that tomorrows numbers will indicate the economy is growing at a nominal rate of better than 6.4%?

Isn't it neat the way the market tries to buck off the weak? If you search my blog you will find a quote from Ken Fisher written during the BOOM of the early 1990's suggesting the market is like a bucking bronco trying to buck you off.

The currency markets participated in the move. Traders took the dollar down almost 1%. A 1% move in the entire US currency is a lot of money. Ironically, the decline in the dollar increased the relative value of our hard assets such as real estate. In this case, the higher rate on the long bond (which includes the implication of higher mortgage rates) is frightening to real estate holders and the the drop in the dollar scares them as well.

A reader asked about my use of the "term" BULL BOOM BUBBLE BUST. This is simply the way an economic cycle plays out. Before the economy gets strong, the stock market leads the way. Then the economy is strong. After a while both the market and the economy are strong during the BUBBLE and finally the market leads into the next BUST.

University types use the word discount to describe the way the market leads the economy. Theoretically stock buyers discount future earnings. The price one is willing to pay is based on the present value of future earnings. Future earnings are "guesstimates". Sophisticated investors rely on complex mathematical calculations but their "guesstimates" are also based on assumptions.

After the market has lead out of the recession, there is an economic BOOM. Stocks often struggle during this phase; interest rate pressures and leadership changes cause problems. Stocks that did well during the "recovery phase" will not necessarily do as well in the "expansion" or BOOM phase. In the recovery phase, there was little pressure on interest rates. Empty factories and laid off workers were available to help rebuild the economy. During the expansion phase (BOOM), capital spending is necessary; new factories must be built. Incomes rise and workers are often hired away from other companies. Inflation is a potential problem.

The BULL and BOOM last for an extended period and after a while everyone is happy. Salaries are up, corporate profits are up, dividends are up, capital gains are up and life is good. There is a party going on and free refreshments are being served. Most everyone joins the party and everyone has a few stories to tell. Some tell about the utility they bought for yield, that has doubled in price and that has a new technology that saves fuel. The real BUBBLE mouths are telling about the high growth stock that is selling at only 80 times earnings and is going to take over the world. The BUBBLE market is a volatile one. To hang on to make the big profits, traders must be willing to ride a wild and crazy market.

When the BUST finally arrives, it looks like another roller coaster bottom and lots of people buy more. After all, this stock traded at 300 last month it must be a bargain at 250 a share. The hard-headed buy more at 100 because the stock stabilizes around this price for a few weeks.

The simple and best strategy is to invest cash during a recession. By the time
everyone knows the economy is in recession the recession is almost over. The stock market will go up 6 to 12 months before the official end of the recession. One should continue to invest available cash until both the economy and the market is strong. One should scale out of the market during the BUBBLE phase in order to have cash available to invest during the next recession.

Today's market was not a Blow-Off or a Blow-Up but just a regular day in the life of the BULL BOOM BUBBLE BUST. We are currently in the BOOM phase. The market is not going to go straight up; but over-time it will go up.