Thursday, September 22, 2005

Hays Advisory Long-term Bulls

The good folks over at Hays Advisory (subscription required) recomend long term investors should be 90% invested in stocks. The firm sees reasons to be cautious for the next month or two but cheap valuations keep them virtually "all-in".

The firm post an excellent series of indicators in chart form. These are not your fly by night charts showing flags or heads and shoulders. The charts include psychological indicators, monetary indicators and valuation indicators.

I tend to agree with about 95% of what I read on the site . Thus I give the company my strongest recommendation.

The one area of disagreement: I believe the FOMC is correct in moving up short rates the 25 basis points today and I am not opposed to another 25 to 50 points if the FOMC feels the need. I remember too well the mistakes made in the mid 70's. In those years, the Fed fell behind the interest rate curve and only caught up around 1981 by pushing short rates up to 21%.

It seems to me that too much focus is put on short term considerations. I believe it is a tricky thing to know when to put on the brakes to a moving economy. As a general rule, the FOMC needs to start touching the brakes long before the economy is moving too fast and it needs to pour on the gas long before the economy slows to a crawl.

The inflationary risks have been foretold by the run up in the price of gold after Katrina hit. If short rates were too high gold would not be zooming. We all should keep in mind that when the value of gold goes up, the value of our paper currency goes down. When the price of gold goes up, you can bet on the price of other commodities to follow as they must be purchased in paper dollars.

From memory, I believe the price of the Hays Advisory service is around $250 per year. I spend a few thousand per year for access to data and reputable opinions. I can't share too much info from these sources and no one can call short term market moves consistently. However, again, I believe Hays Advisory has it right to be in stocks for the long haul. I conceed to the knowledgable bears that historical returns while starting at PE ratios greater than 15 have been weak. However, the waves of technological innovation and open markets continue to keep inflation at historicly low levels. The FOMC has shown deternination to not let inflation get out of control. Stocks generally do very well during periods of moderate to low inflation!