Reflation Time

By Duru

July 8, 2003


Quick addendum to my last missive...


I have been observing the market reaction to poor earnings news, and, by and large, the market has been taking large gulps and moving right along. In fact, in many cases, the optimists and speculators are snatching up shares that take big dips on bad news. This is the same kind of action I saw early in this rally and is what made me brave enough to start sounding bullish. This time around, I WANT to sound bullish again, but I simply cannot do it until we are clear of earnings over the next two weeks. Adding fuel to the fire is that all the mergers and take-overs that are starting to develop across the landscape is communicating to the market that those with money to spend think that share prices are STILL CHEAP in certain sectors. Think of this as an excellent counter-balance to all the hand-wringing about insiders selling shares - for now anyway. (In fact, insiders have simply been doing the smart thing here - after recognizing gains they did not even dream possible just a few months ago, they are locking in some profits. They are not getting greedy - quite admirable actually).


Take these words as you like. Regardless, just know that we are now full swing into a "reflation" period. This is where cash floods the economy and forces certain parts of it upward. Because end demand is so weak and imports are so strong (versus exports and domestic production), we are not yet seeing wholesale price increases of hard consumer goods (inflation CAN be seen in certain services like healthcare and education). Instead, we are mainly seeing inflation in assets - homes and stocks mainly. Ignore almost every other day-to-day explanation you see about the market's ups and downs. Strong dollar today? Weak job number tomorrow? Encouraging inventory numbers? Disappointing gobbledy-gook index reading? Forget about it. MORE CASH = HIGHER ASSET PRICES. Simple! This equation will ONLY get broken once these asset prices get far enough ahead of real value to encourage people to take their cash elsewhere. Again, real simple. I think I have said enough already on guessing when this painful moment will occur (feel free to call me to task on it though!).


Finally, the missive I had expected to write in anticipation of this week was to dish out unsolicited advice on where to look once a correction begins. I was going to strongly recommend getting into high-dividend paying stocks, especially for you investors out there (as opposed to speculators). There are probably still some good deals out there, so start looking. But the great thing about today's dynamics is that these stocks now have a proven and real cushion under them. I am not saying the dividend alone will save you from a major correction, but the mind of the market is to reach for these stocks because they offer better yield than cash AND the prospect (hope really) of capital gains. Cash is truly trash right now - you only get poorer holding onto it these days. But don't get carried away and let the market take your cash away either!

Be careful out there!


Ó DrDuru, 2003