Friday, June 30, 2006


A couple of regular readers have asked if yesterday's huge rally is the start of the BIG BULL I have been writing about. I don't know!

I know stocks are cheap relative to bonds and real estate.
I know public investors are as negative toward the market as they typically get before big rallies.
I know the FOMC hinted that rates have gone about as high as they need to go.
I know that bond market indicators show the probability of lower long rates in the months ahead.
I know that lower bond rates support higher stock prices.
I know that there is more oil in storage than at any other time in the history of the world.
I know that the law of supply and demand should bring oil prices down.
I know that the price of commodities tend to trade together, if oil goes down it is likely that aluminum will go down.
I know that lower commodity prices would dramatically decrease the cost of many companies, such as DELL, GT, CAL, F, GLW and WMT.
I know that current mortgage rates are causing a dramatic slow down in home sales.
I know that consumers have cut back significantly on discretionary spending, such as trips to the beach and amusements while at the beach.
I know that the interest rate ball has been kicked to the other mans court, Japan in particular is going to see a rise in their currency if they do not continue to take action.
I know that the Globalization of markets has dramatically reduced the risk of high inflation but has made the FOMC less powerful.
I know that corporate profits continue to surprise to the upside.
I know that a different kind of investment works in the second half of an economic cycle.
I know the evidence is clear that "first half" investments are dying.
I know the amount of spending on new communications technology is going to be huge over the next few years.
I know that Google has shown again that the Internet allows innovative companies to introduce win-win-win services; providing numerous benefits to consumers while giving the service provider a high profit margin.
I know that tax law changes typically occur at or near the start of phase one of the four stage real estate cycle and it is clear that phase 4 is over or nearly over.
I know many more things but there are many more things that I do not know; knowing what the market will do in the short run is one of the things I do not know.
However, I am very confident that, like the last 200 years on average, stocks will outperform most other investments over the next 30 years.
I know that the perception of most people is that stocks are more risky than bonds, while the evidence shows that over 30 years bonds are more risky than stocks.
I know that inflation will gnaw away the principle of CD's, Bonds, Insurance Equity and other fixed incomes.
I know that hiding gold talents in the ground is not the act of a wise person.

Over the past week or more, I have mentioned several times that when the public becomes very negative toward stocks, it is a good time to buy. The various bull-bear ratios have reached extreme levels and when the market moved up, public short selling went up dramatically. This reaction is a very positive sign. Although, I never recommend option buying, the risk of loss is very large, my family owns options on thousands of shares and yesterday was a lot of fun. Our QQQQ options do not expire until the third Friday in December. We are long stocks on margin. We expect to hold most, if not all of the stock positions, for the long haul. Our trigger finger will always stay close to the option sell button. We are excited about the market.

So many things could happen, good and bad. One possibility is that the congress could pass a law to allow drilling for oil along US coastlines and in ANWR. Trillions of dollars of assets would suddenly become available. Iran is under extreme pressure to "make a deal". The trouble is that surprise is what moves the market. I believe it will surprise most investors if the US allowed drilling or if Iran made a deal. I don't think the average person realizes the amount of effort expended over the past 5 years to set up a deal with Iran.

I do not know if the market will go up today but I know that conditions are ripe for a strong market in the months ahead.