Stock Market: The Case for Higher Prices

Why Michael believes that stocks will surprise on the upside.So here we are: the last trading day of the month for stocks. And what has August brought us except a lot of pain during those 400- and 500-point single-day sell-offs on the Dow Jones Industrial Average?

Depending on how stocks close today, stocks are ending this August at about the same place they started 2011. We are doing a lot better this year than we did in 2010. Last year, stocks were down five percent in the first eight trading months of the year—but stocks ended 2010 10% higher than they started.

In my humble opinion, too many investors, stocks advisors and analysts have turned too bearish on stocks and this is the main reason that I believe stocks will surprise on the upside. I’ve been writing for months that the bear market rally in stocks that started in March of 2009 is alive and well and I’m sticking with that opinion.

Yes, eventually the bear market rally will end and stock prices will turn south, but I believe that Phase II of the bear market rally still presides. Phase II of a bear market is that period when the bear lures investors back into stocks under the belief that the economy is improving and stocks are safe again.

Just look at these facts:

The yield of the 10-year U.S. Treasury, issued by a country that is technically bankrupt, pays about 2.16%. The yield on the Dow Jones Industrial Average is more attractive at 2.6%. Stocks are a good alternative to bonds.

Consumer confidence in the U.S. fell this month to the lowest level since March 2009. Since consumers are usually wrong on their view, this is actually a positive for stocks.

After the Dow Jones Industrials experienced a couple of those 400- and 500-point single-day drops earlier in August, investors pulled more money out of stock mutual funds than any other time since October 2008. Again, investors are usually wrong when they have the same opinion on where stocks are headed. Stocks actually rose 50% after October 2008.

Finally, the percentage of bearish stock advisors is now at the highest level since August 2010. We all know what happened after last summer—stocks rallied.

The facts above cement my view that there is too much pessimism in the marketplace. In the past, stocks have climbed “the wall of worry” when such pessimism prevailed. The bear market rally that started in March of 2009, although long in the tooth and tired, has more upside left in it.

Michael’s Personal Notes:

Just returned from Europe again…

There is no doubt about it; many European countries are close to bankruptcy. Jobs are scarce and earnings are low in Europe. But I believe the economies of many European countries could be close to bottoming out. The one factor that will determine their future: inflation.

My opinion is that the media was too late to report on the story of the European sovereign debt crises. Europe was in trouble long ago…late 2007 and 2008. Their debt problems, which were predictable, were not really covered by the media until 2010.

Countries like Italy and France are working on balancing their budgets. Italy is promising to deliver a balanced budget by 2014. Germany, we know, has led Europe out of the recession. Hence, I believe things are actually starting to bottom out in Europe.

The problem is the euro. As time has passed under the euro regime, it has become more and more apparent that each of the 17 countries that are members of the euro currency has different goals and objectives. For example, manufacturing is dead in Italy. Italy wants tourism. Manufacturing is booming in Germany — Germany wants to export more of its goods.

Long-term, I don’t believe that so many countries with such diverse economies and goals can share one currency. Hence why I believe the euro will not survive in the long term.

Finally, should rapid inflation return, interest rates would rise and economic problems in Europe would worsen. However, we must remember that the European central banks did not print money at the rate the U.S. Federal Reserve did during and post-recession. There is a good chance that the coming rapid inflation might be restricted to the country that printed the most money: the U.S.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings, is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.