Character Adjustment
Jan 26 2012 - Mike Williams - Bull VS. Bear
Good Afternoon.
The crowd has become well-trained to expect a sell-off as soon as markets become "overbought". They are indeed overbought as of this writing. The crowd is quick to rush to the "risk on" or "risk off" trade. One can always be fairly certain the crowd is too close to the flame when new buzz phrases pop up. By the way, who in the world thought of those "risk on/risk off" issues? Is there really a large group of people out there who feel there is EVER a time when risk is off? Revisit history, study hard....there is no time when risk is "off".
The interesting part about what is currently unfolding is that where we would have typically expected pretty steep red ink over recent months, we are not seeing it today. Sure, this could be setting up for yet another wake-up call and indeed, it could easily be set off by a perceived setback in Europe. Interestingly I find myself hoping we do get another stage of red ink. Oddly, my 30 years tells me that when you start hoping you get another shot at cheap stocks, odds increase that one has seen the lows. Remember: you are your own best contrary indicator.
The Dollar, Apples and Tractors
We were told for many moons that a strong dollar will cripple earnings for our companies who now sell over half their goods and services overseas. The dollar has been rallying and earnings have been too. The season has started off pretty well. The most analyzed company on the face of the planet beat by over 30% in one 90-day period. Of course I speak of Apple. We should be careful to expect those numbers to not repeat until we get another set of new products - or next Holiday Season - whichever comes sooner. Their breaking into to corporate world, surfing in on the iPad will be a huge step and could create significantly more value over time. That noted, a pause here should not be feared.
Meanwhile, back in the dirt and grime of growth, CAT blew away numbers and already has 2012 sold out worldwide. They are already booking for 2013 and beyond, with less than a wisp of fear about the "unknown" coming out of Europe. This bolsters the ideas we have covered here in these notes recently:
Too many are focusing on what we may not be selling into Europe during their current bout of weakness. What is not being weighed too heavily is what we are picking up in orders throughout other growth areas of the world, while doubt weighs heavily on the capacity to perform in Europe. We continue to stand behind the theory that orders are being routed to the US while the European region goes through the required meat-grinder.
This more easily explains the earnings beats--and the solid durable goods numbers from this morning as well.
Jobs
The news here will only improve in a stair-step fashion. Jobless claims are a building block. As they fall on a moving average basis, jobs improve and we have seen same. The pace will not likely be quick enough for short-term traders and too much fear will be induced on perceived misses. It will remain a lumpy recovery -- but a recovery nonetheless.
What's Next?
Always a risk, the guesses can only remain educated and bent toward a contrary nature. Odds have increased for a pause in the market's rally but the surprise will be that the pause is a shallow chop and not the feared selling that so many have trained themselves for in the last few years.
We stated repeatedly that there will be a time in this bull market recovery when the rallies will be met with overbought indicators only to over-power same, with only mild and short setbacks resetting to oversold levels. This will be a surprise to almost everyone and will drive a real concern that something got missed.
The avalanche of cash sitting in accounts, on the sidelines and earning no money will be faced with dire consequences. The sad part of this reality is that the best values for a long-term investor consistently have proven themselves to be found in one place.
That place is almost always dark, frightful and lacking hope. Fertile ground indeed in the dark recesses of our mind.
Patience my friends.....embrace the fear and red ink when it comes. Lessons are tough but worthwhile.