Fundamental Trading Diary

Fundamental analysis of the capital markets

This Market Is Headed Higher

I’ve been quiet because I’ve been waiting to be right.  Let’s see how my predictions stack up:

Asset Price at Prediction Price Now Difference
Gold $806 $911 +13%
Silver $12.75 $13.65 +7%
EUR/USD $1.4119 $1.4849 +5%

I only recommended the gold and silver. I thought that the EUR/USD trade might not work as well because the bail-out does have some positive ramifications for the very large USD debt market. Apparently traders don’t think so. I think the EUR/USD is a little too strong now…

Anyway – it’s time to get out with our huge gains.  It might go up higher, but the money supply increase necessary to execute the bailout was fairly quckly valued – somewhere around a 5% increase is needed. On the longer term perspective (years to decades), this is actually a much more significant cost as the cost to borrow will double every 4-5 years it takes to pay – but we’re not looking this long term.

The Dow 30 is fairly averagely priced (trailing P/E of 14.77, forward of 12.73 – and analysts are fairly conservative one earnings estimates).  At the same time, the Japanese have started using their massive cash supply to start buying companies – having not suffered from overleveraging.  They avoided it this time around (this has already bit them – remember?).  The Chinese aren’t far off.  Now, Microsoft is beginning a $40 billion buy-back.  HP is buying back $8 billion.  Nike is buying back $5 billion.

This is combined with the banks new ability to deleverage by selling their OTC options to the government for what will inevitably prove to be very attractive rates (obviously it will seem to steep to the taxpayers, but not nearly enough to the bankers – something about crocodile tears comes to mind).

I don’t see a massive run-up and a new bull market.  A sector by sector analysis make a hard case for much of a run-up.  I’m looking for another 10% from this point.

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September 22, 2008 - Posted by | Uncategorized

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