A few weeks ago I moved into a more bullish position with my stocks. I share my reasons why for the interest of other investors.
10 reasons why I am bullish about the stock market. I realize that they are not your traditional points that stock analyst write about, and that I can't provide you with research to back them up, but I think you can appreciate them. Here you go in no particular order:
1. The flip side of weak housing is the best housing affordability index in decades. Heck, there are millions of home owners who aren't paying anything to live in their home because they've defaulted on their mortgages and haven't been evicted yet. If housing consumes a smaller percentage of the consumers' income they have more to spend or invest on other things.
2. Accelerated depreciation on capital investments/purchases is going to kick in three ways: 1) stimulating purchases, 2) those investments impact on business productivity and profitability, 3) as the full expense is written off in 2011 and 2012 the write-off is used up meaning the effects on EBITA are going to be more pronounced in 2013, thus compounding reported profit estimates for 2013 and adding to forward PE estimates.
3. Coming off years of low interest rates and presently more favorable debt markets for commercial lending has provided a large window for business to restructure debt at lower carrying costs. Many firms have used their cash to retire debt and/or to buy back their stock. All these moves translate into hirer EPS, and greater valuation.
4. The attitude of organized labor has shifted from combative to parterning. In addition, years of high unemployment has given the vast majority of workers a much better appreciation for their employers and higher motivation to help their firm to succeed. This win-win mentality is under estimated in terms of prodctivity, innovation, and competitiveness, especially against our European competitors! Furthermore, unemployment fuels entrepreneurship both as a catalyst and as an "agent of capitalism."
5. While the economy has been lackluster to say the least since 2008, the last five years have yielded many advances in science and technology. Developments in virtually every area of science and technology are maturing into practical use and will be applied to great value in the coming years in business, medicine, transportation, communication, defense, logistics, waste management, energy, space and sea exploration, etc. America's strong trade relations with countries like ours that excel in R & D, such as Israel and Singapore will serve us well too. Together we will have better and more innovative solutions for the world's needs and problems. The "next big thing" may not be one thing, rather I think it will be many big things!
6. Energy is coming home and so are the dollars. America is fed up with OPEC and our dependency on energy suppliers from the Middle-East. As we source more of our energy in North America we keep the energy revenues in North America too. The direct and indirect impact on the USA GDP and trade balance will be enormous!
7. Mobile computing, combined with, social networking, the cloud, and e-commerce are going to have a profound effect on everything!! All one has to do is look around to see how the smartphone and tablet have become an extension of human beings. Look around at a restaurant or in a mall and you will see them in everyone's hands! Couples and groups of friends can be sitting with one another while texting or tweeting or posting or checking something at the same time. The speed at which an idea can travel and become a transaction is unlike anything our world has ever known! As information and currency flows more easily and rapidly the velocity and multiplier of money will contribute to our GDP on a grand scale.
Furthermore, because America does "the Internet" so well we have a competitive advantage worldwide in a trend that is freeing up people, nations, and their wallets around the world. I like the idea of the "human network." Plus, a first cousin to e-commerce is shipping, and here again the USA excels in "logistics."
8. Emerging nations have developing economic classes. China, India, countries in South America, and in Africa are all joining the modern world with massive modern needs. The demands they have for transportation, telecommunications, waste management, water and food supply, consumer products and distribution, medicine, and much more is staggering! When you compound growth in these massive countries over years like we have seen and will continue to see you reach levels that will make huge contributions to world GDP and as a result our economy and the profits of USA businesses. You don't even have to be a direct supplier to benefit.
9. Nations and politicians in America and Europe realize that their fiscal spending spree is over and that Debt to GDP ratios have to be brought down. Government leaders (an oxymoron today) would rather increase the denominator (GDP) than just lower the numerator (debt). With their fiscal options limited and the need for higher employment posing a threat of social unrest, let alone to their political future, they know they have to turn to business with pro growth policies. The politicians are starting to realize that the best thing they can do to stimulate growth is to do nothing. In other words, the more government gets out of the way the better. Less regulation, faster approvals, fewer agencies, and lower taxes & fees are as stimulative as anything! Since "getting out of the way" is also less expensive for government it is a win-win for the taxpayer and business.
At the same time, central banks are doing their part with extremely accommodative practices! (E.g. Low interest rates, monetary purchases of debt, easy access, etc.)
While the Federal Reserve has been surprised thus far at the lack of traction they have gotten in translating their aggressive monetary policies into economic growth I believe that is about to take a big turn. And I think we could all be surprised at how fast the turn is. I can't help but wonder if the Federal Reserve is thinking the same way with their recent announcement about broadcasting rate changes more frequently in order to give them a means to respond in a more timely way without creating any sense of panic.
10. Last but not least, the pendulum of doubt and despair has a wide swing coming back the other way. The mood in the country and with investors is going on a long arch towards renewed optimism. Couple this the trillions of dollars in bank reserves and more trillions on business balance sheets and we can expect to see a giant wave of consumption and investment when the mood is right, and it is about to be right.
In conclusion, as these ten factors kick in they are self-reinforcing and the business cycle will gain more momentum. When this happens future EPS estimates will be raised upward. When this happens the current 12x multiplier that the market is priced with will be corrected by the market to be closer to the 14x historical average for the market. But, since estimates are being taken higher you have a double reason for a boost to stock prices. That is why I am bullish!
If you read all this, thank you! I hope you liked it.
Bob Ritter
