Oct 26, 2004

Feeling bullish

Woke up this morning and caught a clip on CNBC about the IPO of shopping.com which apparently went very well. I then rode the train into work and basically got more bullish the longer I thought. Today will probably be up but that is not what I am talking about. My points are about a 6 month to 1 year move that is building.

While investors intelligence numbers are skewed bullish (Approximately 80% bulls and 20% bears) the overall news and IMHO most trades still seem bearish. More than bearish I would say they are quite skittish and unwilling to maintain conviction in the face of contrary price moves. Many people express concern that the VXO is still around 16% which it is historically low but I am not sure that anticipating 20% per annum moves in stocks makes sense here. Rates are low, there is over capacity and the economy is taking its time to work these things off. Maybe people are correctly anticipating that economic volatility (both up and down) is falling off.

Many people are balancing their views between two negatives: deflation and stagflation. I am not so convinced there is not a more positive middle road that allows theU.S. to work through its capacity overhang and eventually become less dependent on low interest rates. My thesis is mainly based on structural changes taking place in emerging economies represented in some part by what we have seen in China. If the developing world begins to shift away from being a source of cheap supply and towards a source of demand that is what will happen. That shift is really all it takes to counter the deflation argument and turn stagflation into simple inflation. Then all that remains is to see that G7 central banks stick to their guns and moderate growth.

The main reason this IPO is bullish is that Wall Street has some overcapacity issues of its own. Hot IPO's like this feed retail interest and that will lead to more money flowing through Wall Street. Right now people on Wall Street seem to be the most bearish of all. The industry has done very little hiring in the last 5 years and any uptick could do a lot to change that morale. All of this will make the trading environment a lot easier.

Lastly, I keep thinking about the interest rate cycle. People were rabidly bullish in Jan 03, and now with markets very near the same levels 6 months later everyone sees us on the brink of a sell off. The rate hikes started in March and will end in November. If you had told me that the market would struggle to go up during the hiking cycle I would have agreed. It always does. I was bearish in Mar and essentially failed to make money because the sell off turned out to only be a side ways grind. This sideways grind made it difficult for everyone to make money and that lack of profitability is translating into a lack of hope. With the interest rate cycle changing I and the market apathetic it just seems that this sideways range will make a great base for a rally.

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