The past week has been a fairly busy one around Chez Melvin. The phone has been ringing off the hook, and my Skype chat and IM have been buzzing as well. Much of the conversation has been on two household staples -- books and baseball. With two weeks left in the regular season and fascinating plot lines still remaining to be played out, a favorite subject has been the Orioles. However, as with all conversations among a group of friends and acquaintances who trade or invest for a living, the talk eventually returns to all things market and economy.
This week, I found myself trapped in two conversations I just hate to have. The first was on the broad market and what I thought might happen in the months ahead. I touched on my thoughts in my macroeconomic-focused piece a few weeks ago, but some of my Chicago friends wanted a deeper look. I live and die on individual companies, so the accuracy of my market forecast won't change my daily activities -- but when you're in front of the screen all day, you'll naturally form an opinion on the market.
I do think the market is either too cheap or too dear at current levels. The path of least resistance is higher at this point. Cash is being forced into stocks by near-zero interest rates, which have made equities pretty much the only place to find a combination of return and liquidity today. This is the single biggest reason the stock market has been able to shrug off any bad news and to continue moving higher. I think the short-term traders and black boxes are well aware of the semi-forced asset allocation and have adopted a bullish bias for now. Since they make for the bulk of the volume from day to day, the bullish trend remains firmly in place.
I know some talented short-sellers who have just thrown in the towel, as individual company fundamentals just do not matter in the short run. Money needs to earn a return, and the only game in town right now is stocks. I first read the phrase "Do Not Fight the Fed" in one of Mary Zweig's books back in the 1980s, and it is truer today than it ever was.
If I pull back and take a wider view, I see there is a lot to worry about when it comes to the future of the stock market. The most pressing concern is the lack of cheap stocks. I run dozens of screens each week, and I'm finding fewer and fewer stocks that are safe and cheap, potential turnarounds or undiscovered cheap-growth issues. This is not a precise timing indicator, by any means. But, in the past, as my list has shrunk, overall market risk has increased.
Although several of my associates disagree, I do not think the fiscal cliff or capital-gains tax increases are priced in to the stock market. I just haven't seen the type of selling in winning stocks that would indicate traders or investors are rushing to sell at lower tax rates. In spite of some very weak economic reports this past week, I also don't yet see concerns about falling off the cliff in the early part of 2013. Everyone seems to be holding their breath to see which way the political winds will blow. As we move into earnings season and closer to the election, this could change. If I were a trader, I would be long and scared. As an investor, I am cautious and keeping some dry powder around.
The other hated conversation was about gold. Some folks are moving heavily into the metal in anticipation of economic upheaval and turmoil. Some predict runaway inflation as a result of the money-printing. Others think we could see global deflation. Somehow, all sides think economic events will favor gold prices. That discussion is above my pay grade. I have no idea how this will play out, and I don't think anyone else does, either. From an economic perspective, we have simply never been here before, and there is no historical model to determine the outcome of current fiscal policy or how it might impact gold.
As I said a few weeks ago, what I do know is this: As long as there are gold bugs and silver bulls, there will be a demand for these metals. If the economy picks up, jewelry and industrial demand will increase. It should be fairly profitable to dig the stuff up and sell it to processors and end users. I noticed last month that many of the gold-mining stocks were cheap and being snapped up by many traditional asset-based value investors. These have rallied since I mentioned that, but stocks like Kinross Gold (KGC) and Au Rico Gold (AUQ) are worth watching for an entry point, in my opinion. Both stocks look like excellent candidates for put-selling to back into the position, as well.
But, as I said, I hate talking about the broad market and macro stuff like gold. So I hope, over the course of the weekend, we can get back to discussing individual companies, the Orioles, the Gators and the NFL.