It’s Time To Hold ‘Em

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“Davidson” submits:

The basis of my investment advice is the perspective of past business cycles, how the data develops “data point by data point” to form economic trends and finally how these trends become reflected in market prices. The fundamental concept is simple, but compiling the data and doing the analysis is the bulk of the work. The perspective is an investment history of hundreds of years, but the up-cycle can vary from a few years to longer than 10yrs. The goal is to capture a significant part of the investment up-cycles as long term capital gains and avoid the down-cycles. Importantly: Economic data develops over years. It creeps along! One cannot trade it, but I believe it to be very investible if one has patience and a comparable timeframe.

Overall, it is a fairly simple relationship. News better than that expected is ‘good news’ and the market rises with ‘good news’, but falls on ‘bad news’ which is worse news than expected. To understand whether what is ahead is ‘good news’ or ‘bad news’ one then follows the economic trends. The most important trend is the Employment Trend. This is because rising employment means rising cash and credit spending in the economy which drives corporate earnings and this in turn drives stock prices. This is a fairly simple relationship. Due to Market Psychology the relationship does not operate in lock-step. One can have many ebbs and flows which act as investor ‘head fakes’ causing investors to panic and trade their portfolios. Investors need a steady hand on the till. Investors need to know 1) when they are holding a Big Hand 2) how to hold‘em and finally 3) when to fold’em.

What one needs to do then is to track those economic indicators which are most helpful in predicting the Employment Trend. The Light Weight Vehicle Sales Trend is very helpful at doing this. The Light Weight Vehicle Sales Trend forecasts the Employment Trend by roughly 9mos or so at employment bottoms and up to 18mos at the peaks. As long as the Employment Trend is rising, the ‘good news’ will continue!

The relationship to the stock market is a little less simple. We have roughly 2 types of investors, 1) Value Investors and 2) Trend Followers. Value Investors comprise roughly 1% of the investor population and know how to value the future earnings stream of stocks and bonds. They have a long term perspective. Warren Buffett is a Value Investor and says his time perspective is ‘forever’. Value Investors cause markets to bottom when they begin to buy securities. The rest of the investment population either follows the behavior of the Value Investors or simply follows the changing trends. There are many who would disagree with my point of view. I have simplified it, but I do not believe it to be very far from the way things are.

Precisely because markets are human systems which are measured by the beliefs of what is valuable and what is not, and rules which we change form time to time designed to foster ‘fairness’ to all investors, there is nothing precise about lows and highs even though many would like it to be, as they tell us as they their services in the media. There are so many Trend Followers that we will almost always have some securities highly over priced as we do today in Twitter Inc (NYSE:TWTR), Facebook, Tesla Motors Inc (NASDAQ:TSLA) and etc. Oil, gold, copper and homes were over priced in 2007., Inc. (NASDAQ:AMZN) and the Internet stocks were over priced in 1999. To be successful investing across the investment cycle, one needs knowledge of value, knowledge of market psychology and knowledge of how they intertwine. Sometimes the markets appear to be a very messy playground, but in fact if you step back a little and look for the simple relationships you will be able to see them at work.

Most are focused on the stock market today. Few are talking about 10yr Treasuries at 2.8% being in a ‘Bond Bubble’. Bonds are in a huge ‘Bond Bubble’ which are characterized by very low historical rates compared to the ‘Prevailing Rate’. The 10yr Treasury should be priced about the rate of the Prevailing Rate or 4.3%. Historically the 10yr Treasury as provided a return roughly equal to Real GDP + Inflation. Rates will rise as the economy improves and Market Psychology becomes more positive.

My expectation is that as much as bonds are in a ‘Bond Bubble’ today, this is likely to reverse to a ‘Stock Market Bubble’ at some point in the next 5yrs (SPDR S&P 500 ETF Trust (NYSEARCA:SPY)). The current investment is quite favorable for equity investors in my opinion. The current market is a Big Hand.

It is time to hold’em!

Via: valueplays

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