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JakilaTheHun (99.93)

Am I Turning Bullish Again?

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48

September 06, 2010 – Comments (11)

For those who have not noticed, I have not been around TMF much these days.  You could say I am extremely busy with life, with school, with investments, with travelling, with exploring my relationship with my girlfriend, and with a host of other things, as well. Life is good - but free time is scarce.  And these trends seem to continue as I age.  But I enjoy writing about investing and discussing investment ideas, so I wish I had more time to be around.

 

2010

2010 has been an odd year for me investing.  My best stock picks thus far:

(1) Glimcher Realty Trust (GRT) - Nov'09/Jan '10

(2) Hersha Hospitality Trust (HT) - Dec '09/Jan '10

(3) Green Bankshares (GRNB) - Oct '09/Jan '10

(4) Banco Santander (STD) - May '10

(5) Savannah Bancorp (SAVB) - Mar '10

I have done pretty well with this list, but don't let it fool you.  2010 has been nothing like 2009 for me.  I'm not doing bad.  In fact, I am beating the S&P by about 7-12 points on the year (don't have an exact figure right now); but I'm not making any otherworldly return either. So even if I'm doing well relatively speaking, it still seems rather frustrating down here in the trenches.  My philsophy, however, is that you 'take what the market gives you' and there's only so much I can do about the market not giving investors much right now. 

 

Is it Time to Get Bullish?

With this latest bear market dip, I am finding myself getting increasingly bullish.  Whether this is rational or not is debatable; however, I can't help but to notice that the world has turned uber-bearish in the past few months and valuations still make not one lick of sense, especially when you consider the fact that interest rates are in the gutter right now.  

My bank keeps bugging me to get an interest-bearing checking account.  The tellers will talk about all the money I'm 'losing' by collecting zero interest.  I am not sure in what world where a small fraction of a percentage point is considered a worthwhile yield. It's worth more for me to have account flexibility than to receive some dismally low interest yield. 

Likewise, why on Earth would you take a 2.5% yield on treasuries when you could invest in stocks at relatively attractive valuations?  Sure, stocks are pricier now than in late '08, but the vast majority of companies here in America are in better financial shape than in late '08.  Cash positions are large, margins are going up, balance sheets are stronger --- this isn't to say you are guaranteed some great return, but it definitely seems like it's worth taking some risks right now in order to generate a potentially greater return. 

So the question becomes, would you rather earn 2.5% or 10% for the next 5-10 years?

How about 2.5% or 7%?

Or maybe 2.5% or 5%?  

Almost any way you stack it, you're probably going to make more in equities right now.  The risk-reward balance is screaming out "BUY EQUITIES, DUMP BONDS!", yet bond prices keep going up.

So the way I'm looking at this --- who cares what happens over the next 12 months?  Over the next 3-10 years, I view it as unlikely that equities will not beat fixed-income investments by a significant margin.  

 

The Death of Equities

There's another familar trend going on right now.  Admittedly, I don't subscribe to any of the news magazines and I don't even pay much attention to 'general market sentiment' investment articles on the 'net.  However, I keep seeing headlines talking about 'the death of equities'.  That we are now in an era where Americans stay out of the stock market and equity investing will suffer for years to come. 

For anyone familar with American history through the lens of the media, this should not be a total shock.  For you see, this exact same thing happened in the early '80s, at the end of the worst bear market (at that point) since the Great Depression.  While news magazines were declaring the end of equity investing, the biggest bull market of most of our lifetimes was just getting started. 

If the mainstream media is a contrarian indicator, you should be bullish as f@#! right now!  

 

What to Get Bullish On

The great thing about right now is that there's a little something for everybody.  You might even say that it's a bit like 1982.  There are attractive blue chips stocks with good dividend yields that surpass those of a lot of bonds, and have the added benefit of upside potential.  There are innovative growth companies in emerging sectors.  There are stocks with deeply discounted valuations for value investors.  There's so much out there right now.

I tend to get excited about particular sectors at various points in time.  In late '08, I got excited about gold, metal, and commodity producers (PAL, SWC, TIE, SLW, ABX, FCX, MOS, AGU, etc).  In Mar '09, it was REITs (FUR, CLP, BDN, PEI, etc).  In late '09, it was small commercial banks.  Now, here in Sep '10, I'm finally starting to get excited about homebuilders.  

For anyone who reads the Fool regularly, you've probably seen ChimpContest's blogs on the sector.  If you want insightful commentary, he has much more to say than I ever could.  However, I've come to a lot of the same conclusions about the sector myself. 

Public homebuilders are a screaming long-term buy right now.  Once again, I'm not saying that in 12 months, you'll make a 100%+ return on these things.  It's possible that you'll lose money over the next 6-12 months.  But in the long term, valuations for most of the public homebuilders are extremely attractive. 

 

Macroeconomics

One mistake many investors make is believing that the stock market moves in tandem with the economy.  It doesn't.  Rid yourself of this idea. 

It might be more accurate to say that there is a loose correleation between the stock market and the broader economy, but market sentiment is responsible for guiding the market at any given moment. 

When I became ultra-bullish on the stock market in late '08 and early '09, I was not 'bullish' on the economy.  In fact, I generally believed that an L-shaped recovery was most likely. It's just that market valuations had become so cheap, that anything short of a 10-year ultra-deflationary depression should have produced higher stock prices.   There was very little to lose at that point. 

Late '10 is a bit trickier.  The market is not absurdly undervalued right now; but it is undervalued significantly; I'd estimate by at least 20%.  Yet, the broader economy is still ugly.  

In my view, there are several causes for our economic conditions, but the biggest one is the international currency system.  It's broken --- it needs to be fixed.  It's time to abandon Bretton Woods II and replace it with a different system.  Until we do that, we will continue to have nations manipulating currencies in order to gain trade advantages; this sort of mercantalism creates market inefficiencies and lowers long-term growth significantly. 

For this reason, I would not call myself "extremely bullish."  I think the system is broken and I'm not sure how it will hold up over the next decade.  So, even though valuations are attractive, I still think we are in for sub-par future growth until the US and other nations start demanding a new currency order.  

 

Gold Majors Getting Desperate? 

While TMF's goldbug brigade probably views me as "Public Enemy #1", I have not been outright bearish on too many gold-related investments over the past year.  In fact, in late '08, I was a gold bull. So much for the criticism that I 'hate gold'.  I just like good investments.  I jumped off the gold train around Sep '09.  At that point, I saw no reason to believe that gold was fundamentally undervalued and there were much better deals out in the market. 

I was also a bit uncomfortable with the non-stop hype machine that seemed to be surrounding gold --- it was eerily reminiscent of the real estate boom from '01 - '07.  Remember --- real estate was being touted as a '100% safe, can't lose investment, that will generate massive returns', as well.  Once people become blind to risk, that's when they make poor investment decisions. 

From late '09 onwards, I've viewed gold as a poor long-term investment when compared to alternatives.  Why buy gold at $1200+/oz when you can buy REITs at very attractive valuations? Real estate is generally safer than gold, current bust aside.  I see it as very likely that the S&P will outperform gold over the next 10 years, well; long-term, the market has dramatically outperformed gold and no reason to believe that will end in the future.  That said, $1200/oz isn't so out of whack; I just don't see why anyone would pay that much for gold when fundamentals suggest it should be priced lower. 

If you ask me, the most overvalued gold related investments are gold miners.  Gold miners are priced with some huge expectations built in; expectations that they may be unable to meet.But even with gold miners, I have found myself unable to get outright bearish --- at best, I was mildly bearish before.

However, today, I read an article about Goldcorp's acquisition of Andean Resources.  I don't keep up with gold enough to challenge the author's conclusions much, but he makes a lot of great points.  It would appear, on the face of it, that Goldcorp is dramatically overpaying for this acquisition and might even be pricing this based on a $1600/oz+ pricepoint for gold. 

I would describe myself as neutral/skeptical on gold over the past year, but this is the first instance where I have seen excesses that push me more into outright bearish territory on the major gold miners.  Goldcorp was already looking relatively pricey before this acquisition.  Now, they are making a massive speculative investment.  

TMFSinchiruna praises the deal, but I would view it as an extremely risky investment to buy a company based on hypothetical 'unproven resources' that may or may not exist.  And it's very clear that GG is speculating on these resources from the premium they are paying.  

Gold is a poor investment right now in my view, one way or another, but major gold miners are starting to seem very high-risk, low-reward to me.  So what if GG is right?  Do you really gain that much in terms of the stock price?

 

 

That's all I got for now.  Thought I'd make at least one post since I have not written any here since June. :)

 

11 Comments – Post Your Own

#1) On September 06, 2010 at 9:04 PM, BearishKW (< 20) wrote:

Please elaborate more on exploring with the girlfriend.

 

Just kidding, good post.  I share your view on commodities, especially copper.  And yes, the market as a whole isn't insanely undervalued but if you have a long term outlook you can still be picking stocks up at the bottom.

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#2) On September 06, 2010 at 9:21 PM, JakilaTheHun (99.93) wrote:

BearishKW,

I did not say all that much about commodities.  I was bullish in late '08 on most commodities.  I'd say it's a mixed bag now. 

I like natural gas producers.  I dislike gold miners.  Everything else is somewhere in between.

I would say that I am more skeptical about commodities now than any time in the past several years.  Commodities are long-term losers.  However, they yield phenomenonal returns during boom periods --- which tend to last about 10-20 years.  We're around Year #11 or so in the current commodity boom cycle.

The main reason commodities tend to be long-term losers is that as technology advances, the market finds cheaper ways to create goods.  Either commodity prices have to fall, or people move to different (less expensive) commodities.  Conversely, commodities become more scarce with time.  Given this, it makes sense that commodities would be long-term losers, but would make major returns in certain bullish periods. 

We seem to be in a stage where people are expending a lot of time and energy to finding new ways to manufacture and create goods with the use of lesser and/or different resources.  This creates higher risks for commodity ownership.

Even with natural gas, I would tend to stick to the producers, rather than natural gas itself.  The cheaper natural gas becomes, the more attractive it becomes as an energy source.  However, the cheaper it becomes, the less attractive it becomes to own.

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#3) On September 06, 2010 at 9:52 PM, BearishKW (< 20) wrote:

Oh I see, my bad for misinterpreting.

 

What I should've said too, and what I mean't was that I'm bullish on commodities in emerging markets.  I've been buying a Indian copper, zinc, and alluminum miner.

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#4) On September 06, 2010 at 10:02 PM, tomlongrpv (71.19) wrote:

Thanks.  I too am thinking now is a time to buy.  My view is also long term.  I am just continuing to ponder where to put additional funds.

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#5) On September 06, 2010 at 11:35 PM, Option1307 (29.66) wrote:

Glad to see things are going well for ya, best of luck with school etc.

Another nice post btw, +1.

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#6) On September 07, 2010 at 12:30 AM, walt373 (99.79) wrote:

Great post, thanks for your thoughts.

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#7) On September 07, 2010 at 10:27 AM, lemoneater (81.74) wrote:

Glad that things are going well for you. I've found your articles on REITS particularly useful.

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#8) On September 07, 2010 at 11:13 AM, EnigmaDude (93.36) wrote:

Another great post.  I agree with most of your conclusions.  I'm curious though - are there particular home-builders that look especially interesting right now, or do you defer to floridabuilder/chimpdude for those recommendations?

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#9) On September 07, 2010 at 11:26 AM, JakilaTheHun (99.93) wrote:

EnigmaDude,

I'll probably write a bit more about this soon. I tend not to say much about my top picks until I have a chance to write about them more thoroughly. 

FB's top picks in the sector appear to be MHO, MDC, and MTH.  And he knows the sector much better than I do.  I like his picks, but my picks have a slightly different emphasis, based on my own beliefs on societal trends and macroeconomic factors. 

Hedge fund manager John Paulson (who predicted the mortgage market collapse) seems to be betting on a homebuilder recovery via one of the most volatile stocks in the sector - BZH ---- that's an option, too.  I'd prefer to go with some of the better companies, however. 

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#10) On September 08, 2010 at 8:52 PM, floridabuilder2 (99.24) wrote:

Jakila,

I too am bullish on equities.  Unfortunately I am putting my money almost only into hard assets related to homebuilding, so there is zero point of me doubling down and buying builder equities. 

I am amazed at the p/e ratio's of many small cap tech firms that are showing earnings beats and growth rates far in excess of their p/e ratio.  Especially when every business has done such a massive overhaul on their fixed overhead costs.

As I make money  in homebuilding, I will be pulling profits off the table and putting them into small cap growth stocks because I believe 10 years from now people will be kicking themselves for not investing in 2009 and 2010.  Volatility and short term downside doesn't scare me.

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#11) On September 09, 2010 at 12:34 AM, HP2006 (78.64) wrote:

Floridabuilder,

What small cap tech firms are you referring too?  Also, could you recommend some REITs to invest right now?  Thanks

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