I have been accused of being a "permabear" more times than I care to count. It's not that it bothers me; it's just that the title simply doesn't fit. Right now, I am heavily in cash, but I do have a nearly equal wait investment in equities, on a dollar basis, on both the long and short side (50%/50%, approximately). I have grown increasingly bearish this year (since late December), however, and I do tend to post more bearish than bullish articles I come across, maybe because I am predisposed to the bear logic. But enough about my opinion and the rest of this - here is a very good, short article, containing some nice data points that both bears and bulls can cherry pick to support their argument as to whether it is likelier more correct to be bearish or bullish right now. I like this article because it presents is rich in data, and short on allegory: Market Outlook: The Bull and Bear Cases Posted on May 24th, 2007 Faisal Laljee submits: So what are you? A bear? Or a Bull? Of course, if you are a smart investor like Warren Buffet, George Sorros or Carl Icahn, you don't pick a side. You just buy good stocks and hold them for the long term. Bull Case * Wall Street Journal had an interesting front page article on Tuesday titled "Why Market Optimists Say This Bull Has Legs". The primary reason given is the strength of the global economy today over the past when bull markets were shorter. Indeed it is true that investors have access to global markets today, whether it be in the form of private investments, ETFs, ADRs or hedge funds. Such easy access was not around 10 years ago. In fact, most investors back then thought China was something stored in buffet tables. India was tough to even locate on a map for most people. Now, these markets present the fastest growing economies in the world. * On Tuesday, Jim Cramer predicted the Dow to rise another 1000 points before year end. That is a total annual gain of 16% on the heels of a 16% gain last year. * All this when the frenzy of M&A activity is at all time highs with a deal announced 1 almost every 3 days this year. Now that gold, real estate and bonds are no longer the areas of double-digit gains, investors are plowing money into the financial markets. * At the same time, according to the people that frequent CNBC shows all day, individual investors are not heavily invested in the market. In fact, a lot of retail investors are on the sidelines, waiting to get it, which makes any pull back, a short-term one that lacks depth. * Statistics thrown around in the media state that there is hardly ever a time when the broader US markets decline in the 3rd year of a presidency. * Interest rate and unemployment are still at historic lows, while inflation is under control. Bear Case * Bull markets typically last 4 years. This one is in its 5th year (or nearing the end of the 4th year depending on when you think the bull market began). * Meanwhile, addressing a meeting in Madrid via teleconference, Alan Greenspan said yesterday that the recent boom in Chinese stocks could not last. "It is clearly unsustainable," he said "There's going to be a dramatic contraction at some point." While his object of affliction is China stocks, a decline in China markets has a significant impact on US equities, as evidenced by the 4% drop in DJIA and S&P 500 on Feb 27th. * The Dow is up 27% in less than 18 months. A correction is long overdue. * Consumer spending is slowing and debt levels are at all time highs. * Interest rates have bottomed and are on the way up. * Mortgage default rates are rising and the effect of this could spill over to other aspects of consumer wealth. * National budget deficit is high (although the bulls argue that it is lower as a percentage of GDP than in the past). * The US is engaged in 2 wars that don't seem to end. * Oil is near all time highs, natural gas is near $8 and demand will probably drive these prices higher.
Being labeled a permabear as well I must say, even my "bullish" sentiment is more about squeezing the last drop of gains out of the markets than anything having to do with rationale...the bullish points in that article are pretty much pure phooey other than #1 maybe and some of them(Cramer reference in particular) could be lumped in with bearish calls. Sometimes the markets just go up, doesn't matter why, but as long as it looks like there's not going to be a major fallout, and there's even some safety in that it seems, throwing caution to the wind seems to be the creamiest idea on the street. I'd have to say that better reasons to be bullish are: - Lack of selling and/or care to sell anything(until maybe this week when indecision and selling has been a bit more in favor). - Endless free money from Japan. - After months of negative economic indicators showing health of the economy and bad news about the credit crunch markets just keep going up. - Rather low(until today when it started to tick up more) Volatility. My reasons for being bearish are: - The liquidity crunch from tightening of lending and HELOCs and rate resets happening really starting about now through next year could put the fucking smackdown on the credit sluttiness that Americans have made their way - Breadth across the indices in general has been horrible on up days - More info about the potential problems and attempts to thwart private equity LBOs by bondholders. I'm sure I could think of more for both categories...there are a million reasons...it just seems to me that the reasons for the market to keep going up are more about chugging a little bit longer and higher, not necessarily about actually thinking the economy is healthy. The bears definitely have reason and logic that can't be denied forever. Mostly the tightening of credit in my opinion. You don't just keep letting lenders/creditors open their doors of their credit malls wider and wider to allow fatter people in and then tell them they can't let in such fat people which have been making up the bulk of their business for the last few years...you'll get some nasty indigestion inside. Who the fuck will continue to support the expansion of stupid boutiques like Sharper Image when they can't get money out of their behemoth house that they can't afford? Has anyone else ever wondered why the pizza delivery guys are able to afford $40k Acuras with modified rims and sound systems? I'm from Southern California and you can finance rims for your car...it's either a sad sign about the economy or the apocalypse is coming. I think we either grind to a stop and go lower in a bad economic period, or we keep going up and crash. One thing that does make sense though is that the dollar has been falling to pieces while the markets rock so anyone making index style gains is pretty much spinning their wheels.
That's a pretty good summary, BLSH. One thing that's been getting covered a bit in the biz press today is the absence of any beneficial agreements coming out of the recent meetings between Paulson and the Chinese rep. Paulson gave a performance that is sadly typical of Bush adminstration officials - namely, grabbing his ankles and getting hammered up the ass. I don't believe in trading off of diplomatic meetings but, with the prolonged runup in stocks we've had along with the other minor irritants for the market, the complete absence of concessions from China and the resultant threats from Congress are not good for the market or the economy. It could hit both Chinese stocks and US stocks. http://www.bloomberg.com/apps/news?pid=20601070&sid=aMS6NSeupfhE&refer=home "Congress Considers New Tariffs on China as Wu Visits" By Mark Drajem and Yanping Li May 24 (Bloomberg) -- Congress branded yesterday's U.S.- China agreements on financial services and aviation inadequate and moved to consider new trade measures against China even as Vice Premier Wu Yi met with lawmakers. The Senate Banking Committee considered legislation yesterday that would allow companies to petition for new duties on Chinese products. The House Ways and Means Committee will consider a similar measure, chairman Charles Rangel told reporters as he emerged from a closed-door meeting with Wu. His committee also delivered a letter to her saying it has ``serious concerns'' about the ``artificially low'' valuation of the Chinese currency. ``If China and the Bush administration won't take action to bring about more balance, there is growing sentiment in Congress to act,'' Senate Majority Leader Harry Reid said after meeting Wu today. ...``Frankly they are doing things to advantage themselves, to disadvantage the U.S. and we can't stand idly by and allow that to happen,'' Bayh said in an interview."
I read the bearish reasons and they seem pretty weak. The market has been going up for the last 18 months so it's bound to collapse? Mind you the bull reasons are not much better, but the economy is solid and the fed has stayed on the sidelines not getting involved. This week has been pretty volatile, I think the worst that could happen is to see the market go sideways for a while.
I heard that historically bull markets last 1.5-2 years. Either way, I am still a child in this arena, I respect your opinion I will keep researching and growing wiser, but right now I see no reason for a big correction. Slowly Asia is tightening, but we're not. The bull story is easier to sell.