Seven Reasons to be Bullish

By on October 24, 2008

As the market appears to be in mini-meltdown mode again, a little comfort is provided when someone comes up with a justification for a trend reversal. James Altucher in FT.com writes that there are reasons to be bullish right now:

Source:

http://www.ft.com/cms/s/0/4081043a-9f09-11dd-98bd-000077b07658.html?nclick_check=1

The Reasons:

* Oil prices have halved. People will now be able to pay back their subprime loans. Banks will have to start writing up the subprime debt that caused this whole mess.

* Stock prices have dropped to 2002 levels. The big difference between now and 2002: China, one of our biggest customers, is three times the size.

* People are comparing this time to the Great Depression. This could not be further from the truth. In the Great Depression, the government, in its infinite wisdom, raised taxes and increased interest rates. In other words, it continued to deflate the economy during the downturn. It took money out of the economy. Without money, people could not start businesses, banks failed, people lost jobs, people went hungry. Why did the government do this? It was afraid of putting too much stimulus in the system as people would then get into a speculative frenzy like 1929. This time the government is doing the opposite. Rather than deflating it is reflating and we’ll all have to worry about any speculative excesses that occur only after the economy is back on track.

* It is estimated the government is not just putting $700bn into the system as per the bail-out package passed by Congress but $2,250bn once you add in the AIG bail-out, Bear Stearns and the commercial paper facility. Additionally, the government has already cut rates once and will probably do so again. This $2,250bn does not equal $2,250bn in benefits to the economy. It equals $10,000bn-$20,000bn. Every dollar that goes into the banking system will then get lent out to someone, who will then use that dollar to buy goods from someone, who will then use that dollar to hire people. It is estimated that there is a 10x multiplier for every dollar the government puts into the banking system. I am discounting that a little to be conservative. $20,000bn is so much stimulus that is coming into the economy I’m not even sure we can handle it without breaking into another pattern of hyper-speculation. But one thing is for sure, with so much stimulus it will be pretty much impossible to sink into a depression.

* “Don’t Fight The Fed” is a saying that is used to justify buying the stock market once the Fed started stimulating. Well, why is the economic news still bad and stocks still tumbling? Any stimulus takes six to 18 months to have its effect on the economy. In January 2001 the Fed started decreasing rates and we probably did not have a full recovery until 2002 and people did not fully see it (as exemplified in good economic reports) until 2003. Whenever a recovery will occur, the market will anticipate it about three to six months in advance. The one thing that makes this situation different is the amount of stimulus being put into the system. Every central banker in the world wants the US stock market to go up. Don’t Fight The World Fed.

* Do not underestimate the effect hedge fund liquidations are having. The world’s 100 top hedge funds, representing several trillion in equity buying when you take into account their leverage, are in some form of liquidation. These guys are crushing the market, leaving solid companies trading for one to three times earnings in some cases. Once banks open their lending coffers again, private equity firms will swoop for these companies, creating a private equity (and hence, stock market) boom.

* There is $11,000bn in cash sitting in money market funds and T-bills. Throw in the extra $20,000bn that is going to stimulate the economy. This money needs to grow and in a zero interest rate environment there is only one place: the stock market. So there are plenty of ways to make money. Perhaps the way that offers the greatest margin of safety now is closed-end funds trading at discounts to their net asset value that hedge funds have been crushing in their liquidations. Alpine Total Dynamic Dividend Fund; Morgan Stanly EDD; Nuveen Dividend Advantage Municipal Fund; Nuveen Municipal Market Opportunity Fund; BlackRock MuniYield Insured Investment Fund are examples.

I also like the commodity related stocks that Tontine, one of the best hedge funds ever (until this year) has been selling: Freeport-McMoRan Copper & Gold; Cliffs Natural Resources; KBR Inc. All trade for two to three times cash flows, with solid balance sheets. KBR has $10 a share in cash, is about a $16 stock and will earn $1.6 a share next year. The goal, regardless of how you feel about government intervention, is to get some of those trillions of dollars in your pocket.
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