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Friday, March 16, 2012

Global Market Forecast: Introduction

Global Market Forecast: Introduction
Global Market Forecast: Sovereign Debt Review
Global Market Forecast: United States Economy & Stock Market
Global Market Forecast: Conclusion

Earlier in the year, I wrote a detailed outlook on the global financial markets and the United States residential and commercial real estate market.  The purpose of this forecast is to update the 2012 outlook with real time data on where the markets stand today.

The reason for this broad discussion on where find ourselves almost three months into the year is due to the explosive rise in the stock markets and all asset classes around the world.  The markets are telling us that not only is the worst is over for the global economy, but they have now priced in a tremendous global boom years ahead into the future. 

When this site was created, I recommended an array of investments and pushed hard for investors to fill their portfolio with these assets.  The general palette included precious metals, precious metals mining shares, energy stocks, agriculture stocks, and investments in foreign currencies and stocks inside Australia, Canada, Hong Kong, Singapore, and China.

For almost two full years, those investments performed incredibly well. In April of 2010, I felt that the market had risen too far based on the fundamentals in the global economy. I recommended that investors hold their current positions and start to build a cash position for future buying opportunities.

Since that point, the United States stock market, bond market, and commodity markets have been on a tear upward.  The S&P has risen from close to 1100 to 1400, where it stands today.  Treasury bonds rose by 30% last year, the best performing asset class.  The original assets the I recommended purchasing and holding through this most recent period have performed excellent.  However, those that have been accumulating cash, instead of following the herd rushing back into stocks and high yielding bonds, have missed this most recent rise in the market.

What I'm saying is so far over this two year period of recommending cash accumulation, I have been wrong.  Your portfolio would have performed better had you run with the herd.

The reason why I'm writing this now is because many people that have been patient during this run up are now ready to throw in the towel.  Some of these people have an excellent understanding of the global economy, but understandably cannot bear watching the markets rise day in and day out.

A rising stock market has an eerie effect on one's psyche.  Investors, companies, and every day people see a rising stock market and they look for reasons why it is rising to justify the move. When stocks go up 200 points in an afternoon, CNBC provides five headlines that created the move. When stocks fall by 100 points the next day, they provide another five headlines that created the move downward.  Of course, common sense will tell you the market does not work this way, but it makes for excellent television.

In the investment world, unlike anything else you purchase during everyday life, when an investment rises in price it makes people want to buy it more.  No one wants to buy gasoline for their car more because the price has risen.  No one wants to buy diapers for their kids, dinner at a restaurant, or a plane ticket home for Christmas because the price has gone up.  They like to buy these items when they go on sale.  The stock market is the exact opposite. This one of the most fascinating parts of the financial markets for me and something I love to watch and study taking place.  Three months ago Apple stock was close to 400 and today it is touching 600.  This 50% move higher, making the stock 50% more expensive, makes investors want it far more today than they did back in December.

A friend of mine emailed me this week and said he can't believe he missed out on this most recent Apple move.  I sent him the following graph of the price of Apple against the NASDAQ back in 2000.  This is a graph that they don't show on CNBC during their three hour conversation on the new iPad 3.


My friend is extremely intelligent and understands that Apple is way overpriced, but the lure of the price move has an intoxicating effect on the mind.

The same goes for the stock market in general.  Back in October when the market was touching 1075 and the European crisis was at its most recent point of intensity, people were running full speed away from stocks.  Today at 1400, with the European crisis far, far, worse than it was back in October, they are salivating to get back in and become a part of this new bull market.

Sentiment in the market today is at multi-year highs. The VIX, the fear index for the stock market, has just touched multi-year lows (meaning investors see absolutely no danger ahead).  The short position in stocks (meaning those that are betting against prices going lower), is now at a four year low.  Insiders, those that actually work for the companies, are currently selling at an 8 to 1 rate.  They are seeing something that the rest of the world is not.


Investors see the higher stock prices and look around to find reasons to justify its price being there. This is like driving a car looking through your rear view mirror.

I want to take a moment and have a broad discussion on what the world may not be seeing while they watch Apple shares soar higher every hour.  I want to start first with what is taking place outside the United States by providing an update on the sovereign debt crisis, and then take a long look at the United States itself.

I believe that the stock market is more dangerous today than it was back in December of 2007 when it was touching the all-time record high.  Let's talk about why.

Next: Global Market Forecast: Sovereign Debt Review

h/t Zero Hedge, Charles Smith