Weekend Reading – It’s Never Too Early to Predict the Future!


 Barron’s already has the 2011 Outlook on the Cover.  

outlook timelin

We were discussing the generally bullish in Member Chat and Barfinger said "So, Phil, what is your response to the bullish preview?"   That was a great question because it made me think.  Does he expect a "rebuttal"?  I can understand that as I’ve been fairly bearish but let’s not confuse caution (I called for a cash out when the Dow hit 11,200 in early November, it peaked at 11,444 on the 5th and closed Friday at 11,491) with bearishness – it’s just that my now 45 days of running around saying "the sky is falling" while it stays in place does make me seem like a perma-bear.  

The "October Overbought Eight" was my first bearish virtual portfolio since April 28th’s "Hedging for Disaster – 5 Plays that Make 500% if the Market Falls" (and it did, and they did).  THAT was a bearish outlook!  We are not that bearish here, otherwise it would have been the easiest thing in the World to re-up those plays for the new year.  We expect a correction, but hopefully not the kind we had between May 4th and July 2nd, where the Dow dropped 1,600 points in just over 2 months.  We are HOPING for a nice 20% pullback off the 15% gain from 9,800 to 11,270 back to the 11,000 line and holding that would make us very bullish going into next year.  

That would be 1,180 on the S&P (the declining 200 dma) and just 5% down from Friday’s close – THAT’s how bearish I am!  Where we are now is simply where the 5% Rule told us we’d be back on May 5th, where the chart pointed out that 1,240 is 20% off the upper, non-spike consolidation at 1,550 that marked the high for the S&P.  20% is the most powerful level in the 5% Rule and that’s why it’s been safer to wait and see how this line resolves than place long-term bets in either direction into the slow and volatile holidays.

Obviously, I am fairly convinced that Global "leaders" are making all sorts of policy mistakes handling the economy and I do believe it will all end in disaster but that does NOT mean I am market bearish.  

Think if it this way:  If you come across a fire that is consuming a house from the inside and the firemen show up and spray water on the outside, then I will stand there and tell you that the house will still burn to the ground.  However – I will also tell you that the house is going to be soaked in water.  The two things are not mutually exclusive – just as a slow-moving economic collapse and a booming stock market are not mutually exclusive – especially if that collapse is the result of a transfer of wealth from the working class to the investing class (see the 1920s).    

So the Fed and other Central Banks can print money to paper over a Global Economic melt-down and they can funnel Trillions of Dollars into the Global Banking system that still has a multi-Trillion Dollar hole to fill (see John Mauldin’s comments this weekend) and we can have the ILLUSION of a growing economy through top-down inflation.  Money is poured into the top through tax breaks to the wealthy (actually the extension of existing tax breaks that have already destabilized the economy so they now cost money but provide no new benefit), which includes Corporations who are already sitting on $2Tn in cash and not hiring – as well as the Fed injecting it directly into the banks in case the lack of taxation doesn’t leave them with enough money to hide the gaping holes on their books.

This is, I believe, a tragically flawed policy as we are pouring water into a leaking pool without fixing the actual leak.  Over time, that rots the foundations until one day, it suddenly collapses catastrophically and everyone stares at the damage all surprised saying no one could have ever predicted that.  So I am pissed, I am outraged, I am fearful for our nation’s future and I still believe that it will take the smallest of shoves to knock the entire global economy off the ledge it’s perched on BUT THAT DOES NOT MEAN I’M BEARISH ON THE MARKETS!  

I am, at the moment, not sure that enough is being done to fill our global pool but we’re getting there and, like our burning building example, in the short run – enough money is being spent to at least make us wet.  We need to invest like we’re in the late 90s but, as I said earlier this year – is it mid 1998 or December 1999?

That’s pretty hard to tell.  With the new Republican Congress coming in next month, we need to be careful as any real attempt at austerity in the US may have global repercussions.  Right now, we are doing China a huge favor by sending what used to be our middle class running for Wal-Mart and the Dollar Store to buy all their goods but what happens when they can’t afford that anymore?  

Our last bullish virtual portfolio was October 23rd’s fairly conservative "Defending Your Virtual Portfolio With Dividends" and that’s a good one to read as we talk about the benefits of a long-term, conservative investing strategy.  I’m sorry it’s not "sexy" but this is a dangerous environment to be placing directional bets in, as we can see from the very mixed performance in our very aggressive $10,000 to $50,000 Virtual Portfolio over the past 3 weeks.  The premise there is that we stand a far better chance of making big gains to the downside than the upside but we’re getting pummeled in our bearish bets as the market grinds up against upside resistance.  If we do punch through, then great and we can start playing more bullish but not until.  Dow 11,500 should not be too much ask for as a show of good faith from a true bull market, right?

Clearly the Barron’s article is very bullish, CNBC and Cramer are very bullish and even the blogoshphere, as polled by Bespoke, is very bullish (see chart).  Everyone thinks rates will rise but not so much gold yet the dollar will be stronger while oil goes up anyway and home prices recover and China goes to the moon.  Sounds like fun to me – is it any wonder I refuse to participate in these silly things?  

I shouldn’t say that because our new newsletter is going to be mass-marketed and they are going to want me to do this sort of thing for "exposure".  Anyway, the bullish premise I feel most comfortable with is the inflationary one.  There is simply more money floating around and that leads to a weaker dollar with higher rates (so bonds go down) but gold goes up and it’s oil that flat-lines (other than compensating for the weak dollar) because people simply can’t afford it and buy as little as they can.  Higher rates depress home prices in the US, keeping pressure on banks to hoard cash and China is forced to go on an global buying spree to keep the Yuan in check – something they’ve already been doing with commodities.  By the end of the year, China will begin to run out of cash as they spend another $1Tn to keep things going (just $769 per citizen).  

I’d be gung-ho bullish now if I wasn’t worried the Euro will collapse as that is the fly in the ointment.  If the Euro falls apart then the dollar rises quickly and China may lose control of the Yuan peg (they don’t want it going up vs. Euros or Yen) and, of course, commodities will drop fast and trigger a market sell-off, which will hold housing prices down despite what should be lower rates.  We already know it is all about the dollar and, as you can see from this chart – we’re pretty low at the moment with the S&P, Gold and Oil up about 10% on a 3.5% down dollar (UUP is a 2x ETF) – so my bearish caution flag lasts until Europe stabilizes, once again making the US Dollar clearly the worst currency to invest in:


I know it is very tedious waiting for a solid investing signal but, as we learned from our very small commitment in the $1050P, it’s just as tedious to put your money on the wrong side of a bet.  If you read the notes from other bloggers about their best and worst calls of 2010 – they are individual stocks.  My best calls for the year are calling the entire market at a top in April and at a bottom in July, if you get that right, the individual picks sort of take care of themselves!  At the moment, my worst call may be calling a top too early in early November.  As you know however, we pick dozens of individual plays in both directions every week so this isn’t about that – We have our "5 Trades to Make 5,000%" on a breakout from last weekend and, while we made a lot of short-term bearish bets this week, we also had long ideas (mostly hedged) on HMY, XLF, CAKE (Monday), TNA, IWM (Tuesday), CCJ, CHK, EXC, TNA, XLF (Wednesday), UNG, GLD, AAPL (Thursday), GLW, TOT and AXP on Friday.  

Actually, the bullish picks outnumbered the bearish picks 2:1 last week BECAUSE we were testing our breakout levels and needed to beef up the bull side.  It’s OK to take a walk over to the edge of the cliff with our positions as long as we KNOW there’s a cliff and we are comfortable in our ability to pull back from it before getting dragged off the side.  That’s where we are now, at that point of "maximum uncertainty," when things could move in either direction.  

Clearly from the S&P chart above, we are either in the bottom of a huge breakout channel or the top of a rollover and, as you can see from the chart on the right – fools rush in where professionals tread lightly.  Overall, it’s more fun to be a fool, Motley or otherwise, but this is a site that’s about investing, not gambling and we are waiting for a confirming signal before making any serious commitment.  We’re already in the right place – we just have to wait PATIENTLY for the right time.  

We are able to take bullish positions as we already have downside hedges (our failed attempts at making bearish profits) and, we don’t really expect a massive sell-off (but it is still a concern).  If we don’t fail by Tuesday, I expect us to drift into the New Year and, over the next two weeks, we’ll get a little more deeply into the big picture stuff that is likely to move us in 2011 but, sadly, politics may have something to do with what happens to the stock market so cover your eyes and ears if that sort of thing worries you!  

For now, we have two weeks of very light trading and it’s been a fairly uneventful weekend so no reason for us not to test 11,500 on the Dow yet again on Monday.  Whether we actually hold it or not – that’s the Million Dollar question!  



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Philip R. Davis is the founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to eHarmony.com. Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock and options trading. To watch Phil in action, click here to view his March 6th appearance on LiveStock, where he called the market bottom on the nose and gave viewers 13 winning trades in 3 hours that returned 469% over the next 6 months. Note how Phil calmly talks viewers through a crash, explains the crash and explains why the markets will turn up the next week. This is what Phil does in chat at PSW every day - we discuss the market and the news that's affecting it and Phil, Optrader and other members put up trade ideas and discuss new entries and adjustments along the way.
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This market sure is confusing. 


 I’m not sure I understand how this ends in disaster. I’m not disagreeing though. I’m probably just confused.  If the Timmy and the Bernank continue devaluing the dollar doesn’t that ultimately make our products more valuable outside the US. Ultimately doesn’t that help the exports and overall economy by strengthening business? I realize this is at the expense (in the short term) of the US consumers pocket book and potential inflation but isn’t this what China has been doing anyway? Keeping the worker poor in exchange for economic growth?


Well, a prediction that it will "all end in disaster" sure SOUNDS bearish, even if there are no further bearish bets being recommended. To me, there are two categories of problems that lurk in the weeds to threaten this recovery. First is the well documented trend toward non-recovery of the middle class. In fact, the middle class did not do that well during the recovery from the last recession, and this time around, its worse. Increasingly, this country seems only capable of rewarding the prepared. Although I would be greatly relieved should things change, I don’t expect they will, and I don’t think this is fatal for the general economy. We will continue to grow corporate profits, and this will continue to be the result of "productivity" gains.
The squeeze will come when these large budget deficits (and they were always inevitable) are not eaten away by growth. In fact, I expect growth, perhaps even decent growth, but that will not close the deficit gap by much. Taxes can not be raised (responsibly) without robust growth, and the general demand for government benefits will rise steadily as people fall victim to the weak job market for the less-prepared. Phil was quite correct, I realize, when he said hyper-inflation was the only way out. He might well have also been correct when he observed that we are stimulating the wrong kind of inflation – in commodities, but not wages.
So, I believe the current flailings of our clueless government leaders have produced movement in something like the right direction. It had always been satisfying to complain about deficit spending, and that such spending was often useless, but I no longer believe that the austerity program that our government so richly deserves would produce favorable results.
Liberals did not really want to raise taxes to close the budget deficit, they wanted to raise only the taxes at the top, to punish the winners in our society. There, in a nutshell, is the reason it is impossible for me to be a liberal. I really believe most of those people would be quite satisfied if the current winners in our society were brought down, regardless of the outcome for the current water-treaders and losers. And in fact, no relationship has ever been established between the robbing of the rich and better outcomes for the poor. It suffices that the rich be robbed, apparently.
So, it may end in disaster (as Phil suggests) or it may not. It seems likely that corporate profits will continue to be strong, although possibly at a slower rate of growth which might be a problem for the market. I am not bearish on our corporations, and in the end, the stock market is all about corporations. I do believe what I read recently, that the market is priced for perfection, but the term was a reference to corporate profits, not the human condition, or government brilliance.
I am no expert, and I don’t comb over data to arrive at insightful observations. I am a collector and analyst of opinions. I have sensed that some people just can’t get past the plight of the regular American, and because of that plight, they sound plenty negative. A friend of mine recently asked me what I thought would happen in the next year or so, and I said, things will be perfectly fine (for us and our corporations and the stock market) UNLESS something actually went wrong somewhere or the government blunders incredibly.
In other words, things will be fine unless they aren’t. I suppose that’s pretty much what Phil said, after all.


How can it ‘end in disaster’  when for billions, life is already a disaster and much more?
It’s already a rolling disaster wherein it engulfs more folk as events unfold, few of which are going to prove beneficial for the 7billion people on this planet.
Interesting anecdote: Attended a destination wedding in a small fishing village about 45 miles north of Puerta Vallarta. The town of San Pancho aka San Francisco, is a rapidly growing tiny beach town, most of whose real estate was bought up from the poor farmers for what we would consider pockt change from a couple of rich hermanos from Guadalajara.
In ten days it was possible to witness an entire eco-system of economic change from the depths of the most poor to the lower middle class thru the middle class, on up to the upper middle class and the very well off.  There’s likely only about 20,000 people in the entire ‘metro’ area.  The upper middle class consisted of our cook and her husband who was a driver of taxis, limos, and other transportation for the vacationing folk from other parts of the world. We  saw them at night spending some of their money, dressed in their best clothes, as were their two children (they will have no more because they want to have more stuff) at the local food prep stands that line the street. The cooks at those stands were the lower middle class who worked hard during the day and supplemented their income with the chickens, fresh tacos, and other treats that the locals and turistas would buy, and they had a half dozen kids running around all over the place.
The very very poor just sat around on the street doing nothing. Spending nothing. just lolling around, seemingly with not a smidge of ambition, and just as content to have none.
Everyone seemed to be relatively happy with their lot in life.
I visualize the citizens of the United States, the great majority of the 311,000,000  them, unable to find happiness on the ‘way down’ to this  —what we might consider—bare survival level of economic  activity.


Good read on Bespoke’s Site on 2011 from many market bloggers. 


 Hey – does anyone have any opinions on URE? Maybe if the economy really starts to recover next year, URE will continue its slow (but steady) ascent. Thanks


 hanna5…..My brother in California will give me notice when URE is about to start upward.  He’s a contractor and building inspector in the Napa Valley area.  He used to inspect hundreds of homes per year, and build about 6 or 8.  Building permits in his town have dropped from over 700 per year 5 years ago to less than FIVE per year the past 2 years.  He’s doing remodeling jobs instead of building new homes.  He will let me know when new home permits start to rise and when he feels the time is right to build another ‘spec’ home.  And I’ll let you know.  It’s then we’ll all buy some URE!


 Thanks Phil for your thinking on the outllook.   Even when there is not a clear direction forward,  when you write posts without the political commentary, the impact on my thinking is that much greater.   A humble request if you can:   Assume that members DO have the current political malaise and your viewpoint established in our minds and drill into the market analysis with your commentary.   I find the value so much more enhanced when you do that!
Anyway,   I agree with you if you are saying that we wait for a buying opportunity to enter the market with an outlook that the market will be higher at the end of 2011.    I like flip’s view that we are experiencing a rolling disaster and the market is somehow digesting it in small bites, rather than building pressure for another seminal black swan type breakdown.  
What I think is causing my own risk aversion is the increasingly unstable geopolitical environment and the greater uncertainty therein.  Korea, Iran and Pakistan and the everpresent terrorism event could swing the market back into a bearish mode and a double-dip recession.   I suppose the only way to address this risk is to structure a bullish portfolio for 2011 and wait for the buying opportunity or leg into the positions and also put into place disaster hedges.   Is that the general gameplan Phil?


Phil  I have FAS Jan 20c short,  want to roll,  I am thinking 2x not sure where, suggestions?