THE INVESTMENT STRATEGY LETTER
In my opinion the market continues to look as though it is topping.

The election seems to have a positive effect on the stock markets worldwide as the industrialS and the S and P 500 made new all time highs. In the foreign markets, the DAX was up 1.63% and the Nikkei up three quarters of percent. However it still appears that there will be gridlock in the U.S. Congress. In my opinion. the biggest factor still bolstering the market is that oil prices are below $80 a barrel. This will help the US economy and manufacturing companies that use energy.
 
INVESTMENT STRATEGY: Lighten up during rallies
The markets have steadily risen since 2009 and investors have been trained like Pavlov’s dog to not worry about setbacks. Stock markets tops and the beginning of a Bear Market happen when it is least expected. I tend to be suspicious when euphoria and hubris reach high levels ( I just got back from NY City and the euphoria is unbelievably high.) That happened in 2000 and 2008 after which the market corrected 50% of its gains in a very short period of time.

So what could go wrong? There are two bubbles that I am concerned about. 1) All economic growth in last 20 years has gone to the top 1% in the US and to the top 80 people who control 50% of the wealth in the world. There is nothing wrong with accumulating wealth; however its effect on the general economy could make future economic growth unsustainable. How many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions have taken the breath out of the economy for consumers and sooner or later will affect the entire economy negatively.  2) The FED has stopped its stimulus package of buying bonds.  Investors who have high-yielding bond mutual funds have immediate liquidity. However, the managers that hold these funds in high-yield bonds, have much less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the Bank of China, 40% of the State Bank of India and close to 30% of some Spanish banks. This is not a problem during the good times like now and when the stock market shows higher highs. However if the Fed starts raising interest rates and the stock market starts to fall, this could cause a problem with high-yielding bonds that are not very liquid, which could cause a precipitous drop in in high yield bond prices. ‘Junk bonds’ can suddenly become a new name for these high yielding bonds. Markets hate lack of liquidity!

As always, I will let the market tell me what to do, using my technical methodology outlined in Investment Strategy Handbook for Volatile Markets.(My book). If we start seeing new highs, the Dow could go up to about 18,000 by year end. To me,the market looks like it is running out of breath for 2015. If the market starts making new lows, there isn’t any intermediate down side support until around the 15,000 area. Stay tuned!

Carl M. Birkelbach

Advertisements