The
Year of the Tiger
A
Market Update
 The
Chinese New Year, or Spring Festival as it's been called since
the 20th century, remains the most important social and economic
holiday in China. Originally tied to the lunar-solar Chinese
calendar, the holiday was a time to honor household and heavenly
deities as well as ancestors. 2010 is termed the year of the
Tiger. The tiger is a fierce and strong animal and also quite
unpredictable at times. I’m sure you can see where we’re
going. Our expectation for the 2010 market is very positive,
but we will more than likely experience quite a bit of unpredictable
and volatile behavior as we move forward.
In our estimation, there are four legs holding up this bull,
or Tiger, market:
1. Improving fundamentals: "V-Shaped Recovery"
- The economy shows signs of the beginning of a V-shaped recovery.
You can see this in the leading indicators, the Purchasing
Managers Surveys, and a host of other indicators such as credit
spreads and industrial commodities. Further, it's not just
the U.S. economy. We are seeing improvement across the global
economic landscape, especially in the Far East. Inventories
have been depleted, workers have been laid off, but now orders
are returning.
2. Unprecedented stimulus: "Don't Fight Central
Banks" - The second leg is the Fed's and
other central banks "Quantitative Easing" mode.
Quantitative Easing is a fancy way of saying "printing
money." Central banks rarely print money because they
are usually fighting inflation, which requires the opposite
approach (i.e., raising interest rates and shrinking the money
supply). The banks resort to money printing when they have
to fight deflation, as we see now. If you read the papers
and watch TV, you will see the “talking heads”
screaming about the potential for huge inflation. However,
most central banks around the world are not focused on inflation,
they are worried about deflation. They will eventually raise
rates to combat inflation (see Australia), but deflation is
the “kiss of death” for an economy and much harder
to fix once it’s taken hold.
3. Strong technicals: "Don't Fight the Tape"
- The old saying "don't fight the tape" is very
much in force today. Market breadth, the relationship between
advancing and declining stocks, has confirmed new price highs
for the major averages. Often at price tops there will be
a breadth divergence, but this hasn't happened yet. That said,
most global markets have not hit new highs while the US has,
probably a reaction to our more stable economy. But, internals
have been strong across the board and most global markets
should hit fresh highs before it’s all said and done.
4. Favorable sentiment: "The Rally Everyone
Loves to Hate" - There are just so few
signs of bullish capitulation . Investors who have not wanted
to buy stocks are finally caving in and buying at high prices.
Normally everyone is bullish at the top. At the March bottom
everyone was bearish and no one was bullish. That's no longer
the case. There are very few bears left, but that doesn't
mean that the majority is now bullish. Sentiment in general
seems to be "skeptical" for lack of a better word.
Everything is not rosy with our economy. But, things are certainly
better than what is represented by most news services. For
now, are holding our cash levels in expectation of a normal
short-term market correction. We think any correction in this
time frame will provide us a great opportunity to reposition
into some new sectors and set the portfolios up for the next
market run. We’re not expecting a huge selloff, but
feel if we’re patient, we can use market volatility
to our advantage.
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