Monday, March 07, 2005


My aggressive stance is being nicely rewarded this morning. My aggressive portfolio has reached another all time record high. What a move in the NASDAQ 100! It is almost doing as well at the airline sector! (100 up 1.86% and air up 1.88%) The NAS is playing catch up to the recent big moves in the big stocks. Of my top ten performing stocks this morning, two are airlines (DAL and CAL) and the other 8 are techies!

Please note that the market is back "in the pattern". The pattern of a lower dollar, a higher gold price, a lower long-bond rate and higher stocks. As best I can remember this pattern has been in force most of the time since October of 2002. I did not take the time to look up the numbers because the start is not important; the end is. Since no one has ever shown the a high degree of economic clairvoyance, the best option for us all is to follow the trend; the trend is your friend; never fight the trend.

I read a number of studies Saturday. I focused on studies of inflation through the decades. The USA had very low inflation when I was born in 1950. The average birth date of all baby boomers was 1952. Inflation rates climbed until the average baby boomer reached 29 years of age. My parents and millions like them tackled and won the fight to raise and educate their children. By the time the youngest of the boomers were in college, inflation rates had soared.

Laws were changed to dig-allow the deductibility of consumer interest and inflation rates have declined ever since. When the average baby boomer reaches 58 years of age, he will have lived half his life during times of rising interest rates and half his life during times of declining interest rates. The pattern will have gone full cycle by 2010.

A friend reports that his friend is having no success selling bonds. This friend has sold bonds for 20 years but can find no takers now. No wonder the stock market is moving. Billions of dollars are piling up in short term debt instruments because the public is afraid to commit to even modest durations. Wow! Bond rates must still be high! Is inflation going to average less than 2% like it did in the 1950's? Is the long-bond going to settle to 3.5% or less? Are home mortgage rates going back to 4%?

Probably not right away. In fact, rates will probably inch up in this very strong economy. After the next peak in stocks, (my guess is around 2009), you might want to be very careful. Indeed the FOMC may have to fight de-flation, after the next peak. I have written about this pattern before, the first great bull market in the 20th century ended with the great depression and the second great bull market ended with the great inflation. Generals tend to fight the last war. At the end of the next peak, the FOMC may make the mistake of fighting inflation when they should be fighting to avoid depression.

In the mean-time, the trend is up. If you always catch the long middle part of the trend, you will do well. I among many others have suggested the end of the long decline in interest rates is near. So far, we have all been wrong. The good thing about being fully invested in stocks is that being wrong about the bond market has been a blessing. We are currently at a point seldom reached. That is the trailing earnings yield on stocks is higher than the 10 year treasury rate. You are getting paid well to own stocks that tend to grow the yield over-time. You are being paid less to own bonds whose yields do not grow. Buy stocks and be happy!