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> >Unless I'm mistaken (a frequent occurrence lately), I believe Chris
> Carolan
> >also gives July 28 as the date for a major top in the Dow in his book
> The
> >Spiral Calendar.
>
> Dennis,
>
> You have a good memory. Make that July 27th, and a BOTTOM and
> you're right on. That is the date Carolan mentions on page 141. I think
> that since the prediction was made (1992 publishing date of book) that
> the market has inverted an odd number of times, so yes, I'm looking at
> it as a top too. Some of the better Delta practioners I know are
> forecasting the July 28 area as a top as well. I guess the magnitude
> remains to be seen.
>
>
To put it bluntly, the US stock market is going to continue going up for at
least the next ten years. There will obviously be some noticable dips along
the way, such as last October, but the bull market will continue. Do I have
a crystal ball, or "ultimate knowledge"? No, but I do understand the forces
of supply and demand. The laws of supply and demand ALWAYS work in the long
run. Always have, always will.
Below is a copy of three messages I posted to the Omega List a few months
ago about why the market will continue to rise. The first was a response to
three gentlemen who had posted very bearish messages about the market. The
second and third posts were responses to messages I received from two list
members about my opinion. This is a fairly long thread, so if you're not
interested, hit your delete key now...
>>
Jim, Gerrit, and Tom, I think you better take a look at the other side of
the coin. If you want to know why the market has kept going up and will
continue to do so, you can start with the most basic principle of economics-
supply and demand.
The supply in this case is the amount of shares of stock available to the
public to be purchased. Despite all the IPOs you hear about on a daily
basis, the amount of shares available in US stock markets has only
marginally increased over the past ten years. Why? Because while some
companies have been selling shares, many others have been buying their own
shares back (or eliminating shares because of mergers). GM recently
announced it was buying back 5 billion dollars worth of shares. That's 5
billion dollars that will now go chasing other shares of stock that are
still available. That one buyback alone will more than offset all the Yahoo
and Excite IPOs of this world.
The demand side of the equation is a little more interesting. Many people
like to compare this market to the one just before the 1929 crash, but
they're overlooking one very important point. Back then, investors were
only required to put down as little as 10% of the face value of the stock in
order to buy it. I don't know what the exact figure was, but I do know that
just before the crash an enormous amount of that market value was built on
"paper" profits that investors just kept "pyramiding" back into the market.
People truly were speculating with money they didn't have. That simply
isn't the case today.
The vast majority of stock now owned in this country was purchased with
"real" money, not paper profits. I again don't know what the exact figures
are, but I do know that the dollar value of outstanding shares that were
bought on margin as a percentage of the whole market is not only low, but
has actually DECREASED over the past few years. Who was it that panicked
last October and sold during the Asian crisis? It was primarily hedge
funds, who did have highly leveraged positions. Individual investors
actually BOUGHT during the sell-off.
This raises an interesting question- where exactly is all this "real" money
coming from? The answer: the baby boom generation. The BB generation has
just begun to enter the phase of their professional careers where their
earnings are greatest. These earnings, combined with the fact that their
children are now out on their own and their parents are covered by
government programs, means these boomers have LARGE amounts of disposable
income. In other words, they are not only in their peak earning years,
they're also in their peak SPENDING and SAVINGS years. Their savings
directly fuel the market by increasing demand and therefore the price of
stocks, and their spending indirectly fuels the market by keeping the
economy humming (just look at the sales of RVs!).
Anyone who doubts the effect the BB generation is having on the stock market
should draw a line chart of the number of births per year in this country
starting in 1940, and shift those numbers forward about 46 years. Thus, the
number of people born in 1950 would appear on the chart above the year 1996.
On top of this draw a line of what the inflation-adjusted S&P 500 has done
over the last 50 years and guess what you find? That's right, they're
absolutely identical.
There are plenty of bumps along the way, but they both slowly inch their way
upward and then begin to take off almost exponentially in lockstep. A
picture of this chart appeared in TASC about a year ago.
Of course, a cynic will say "this huge pool of savings may exist and
continue to grow, but who says people will continue to buy US stocks with
it?" My answer would simply be "where else are they going to put the
money?" People could suddenly decide to buy a lot more bonds, but we all
know there's a direct relationship between stock prices and bond yields. If
bond yields get cut in half because of a massive influx of money, what do
you think will happen to housing and auto sales? What will then happen to
the stocks in the auto, housing, steel, rubber, lumber, plastic, glass, and
copper industries. You get the picture. I guess a lot of people could
suddenly decide to invest overseas, but I think the recent Asian meltdown
has removed that temptation for the next ten years or so. When you invest
overseas, you're not only betting on a foreign market, you're betting on a
foreign currency.
This is why all the talk about the stock market being "overvalued" is, with
all due respect, meaningless. Overvalued compared to what? The past? That
kind of thinking doesn't take into account the massive growth in the pool of
savings over the past 15 years. You're comparing apples to oranges. As
long as large amounts of savings continue to be generated, people need to
put the money somewhere. It doesn't matter if the average dividend falls to
.001% (that's still a better return than what you get if you stick the money
under a mattress), people are still going pump their savings into the stock
market.
Just out of curiosity, how many of you out there that think the market is
overvalued are currently writing OEX call options long term? Not too many,
I bet.
By the way, in case you're wondering where the baby boomer / S&P chart says
the stock market will end its hyper-up move and begin to fall... around the
year 2007.
<<
>>
>a very nice piece of work. I like to see the big picture instead of
>trying to determine tomorrows move.
>IŽld really like to see this chart, so if someone could post it please.
>Thanks.
>
>Since I missed my chance from Ž82 till today, whats the chart telling
>you about 2007 - 2017?
>
>Ulrich
>
Ulrich, its been a long time since I saw the chart, so the numbers I'm
giving you are off the top of my head, so don't hold me to them (but you do
have ten years to get the right ones!). Around 2007-2010, the graphs says
the stock market should turn downward fairly steeply, but not as steep as
the current up move. It should go down for about ten years, and drop about
30-40%. Again, check the chart to get the accurate figures.
The reason for this is pretty simple. Retirees are selling stocks everyday
to pay their costs of living, it's just that we have a lot more people
pouring money into the market right now for retirement than are taking it
out. Around 2007, the ratio begins to change. A significantly larger
number of people will be taking money out rather than putting it in.
I should point out two things. First of all, I have heard some so-called
experts say that the positive baby boom effect will continue until about
2015. I never heard why they had a further date, but I would assume it has
something to do with the fact that the historically uniform retirement age
of 65 is rapidly disappearing. If enough boomers put off retirement and
continue to work, that obviously delays the negative impact they will
eventually have on the market.
Second, as an eternal optimist, I'd like to think any number of things could
happen between now and then to offset the boomer's drain on the market. The
one I'm most hopeful for is the privatization of the social security system.
If this were to happen, the additional money poured into stocks through
investor's SS accounts would more than offset the selling of stocks by
seniors in the next millenium, and keep the bull run going.
I know this isn't a public policy email list, but every reader of this list
should heavily, heavily encourage their congressmen to support privatizing
the SS system. Just remind them this will not only help us young people now
saving for retirement, but will help the boomers by providing buyers for
those very stocks they will be selling. If more buyers aren't created, the
boomers aren't going to get nearly as much for their stock portfolios as
they were counting on for their retirement, and they won't be too happy with
their elected officials... (it never hurts to scare politicians a little
bit).
>>
<<
Gerrit wrote:
Bruce,
...There have always been times when some things were very scarce and
plenty of potential buyers were around. There was even a time when
there was a major shortage of tulips.
...And why should baby-boomers invest in a falling market if the market
should ever fall ? They can happily keep their money in tripple AAA
investments. Inflation is low - they even make money. They don't need to
invest in stocks - it is just fashionable
to do so.
Gerrit,
The problem I have with you bears is that none of you can give me a
satisfactory answer to a simple question: What exactly are investors
supposed to do with the enormous amounts of savings they are currently
generating through their employment? The money in the stock market is not
"paper" money. It's real, hard earned money that has to go somewhere. The
Tulip panic in Holland in the 1500's was another speculative bubble built on
pyramided paper profits, not real money. Even if people did start selling
stocks en masse and prices fell substantially, they would still have a lot
of cash on their hands at the end of the day. What are they supposed to do
with it? Buy art? Gerrit, you and I both know there isn't enough
investment-grade art in the entire world to absorb a fraction of a fraction
of the amount of money currently in the stock market, and it isn't exactly a
liquid investment.
I threw at you the economic concept of supply and demand as the reason for
the bull market, let me try another one- opportunity cost. In terms of
investing, the opportunity cost of any investment decision is what you could
have earned had you invested in something else. Even though I would agree
that most stock buyers have never even heard of the term opportunity cost, I
honestly believe more and more of them are catching on to the effect this
principle has on their investment returns. That is, they are accepting the
fact that more people have LOST money by being OUT of the stock market than
by being IN it.
Gerrit, if you had your money in a bank CD last year because you thought the
stock market was overvalued, you didn't earn 3%, you actually lost 27%
because you could have earned 30% in the stock market. I obviously realize
you can take the opportunity cost argument to extremes. Somebody could say
I lost 70% last year because I had my money in the market as a whole and not
in DELL exclusively (I'm using ballpark figures here).
However, if you just look at the generally accepted benchmarks of investing-
the S&P 500, 30yr Treasury Bonds, cash and CD's, and maybe gold, I honestly
believe that the average investor is catching on to the fact that being out
of the stock market and in other investments is, over the long run, costing
them money.
Bears love to talk about the market crash of '87, but just how bad was it
really? Investors who bought stocks on Jan 1, 1997 and didn't panic and
sell, actually FINISHED UP for the year! Even the poor souls who invested
every penny they had the day before the crash got all their money back
within a couple of years, and within about four years they were well ahead
of their cash and bond holder counterparts. Was investing all their money
in the stock market the day before the crash really that bad of a decision?
People aren't buying stocks because it's "fashionable," they're buying them
because it's the rational, intelligent decision when the long term track
records of all their possible investment vehicles are looked at. They have
accepted the fact that trying to "time" the market in the long run ends up
"costing" them more money than it saves them. That's why they didn't sell
last October, they BOUGHT. And of course, the baby boomer effect will
continue to give them the money to do so.
<<
Bruce
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