Get up, Slug-a-Bed! (GS, DJIA, GLD)

Enough of your dilly-dallying, you old lie-about. Get up and make something of yourself. It’s time to get rich! Rich, I say!

What do I have to do?

Easy. Just put your money into the stock market and watch.

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That’s right. We’re now approaching the final phase of what we’re certain will be the greatest blow-off top in stock history, and if you’re in it, you win it.

If not, you have absolutely no way of generating the type of profits we’re expecting – not housing, not commodities, not even gold will give you the kind of gravy you’ll get from investments in the highest grade, most popular, indexed stocks you can find.

And we stress the word ‘popular’. Why? Because earnings are no longer an important determinant of stock prices.

Didn’t you know? We live in a new world, friends. Call it ‘post-reality’. The days of tough fundamental standards and investigative number crunching are fading. In today’s investment milieu, money-flows rule. You chase the tide, ride it awhile and jump off. And you don’t worry your pretty little mug about whether the latest quarter’s profit release is in line with analysts’ expectations.

The End of Bonds

 

“But what about rising interest rates,” you ask? “You, yourself say we’re at the end of the interest rate cycle, that rates are going to rise. Surely that’ll put the brakes on equity growth, no”.

risingrates

Such a mind…

And we say, yes. And no.

In the first place, statistically speaking, there’s generally a lag between any Fed-generated turn higher in interest rates and a top-out in the stock market. In the past, rate hikes have led to market tops anywhere between one and 42 months after the tightening cycle began, according to recent data from Goldman Sachs. The average is eighteen months. That means if the Fed begins ratcheting up rates this summer (as many believe), we’ll still enjoy bullish activity in stocks until January 2017 – if the law of averages can be trusted.

But how can that be? Can it go on that long?

 

It’s true that eventually interest rates rising fast enough or long enough will choke off an economy and send it into recession. Somewhere along the line, we reach a tipping point, after which it becomes more desirable for individuals to save money rather than to spend it. And when that threshold is finally reached, an economy starts to contract.

The big question is how long that will take in our current situation, where there’s so much cash awash in the gunwales that it could be years before folks finish bailing it into the stock market. Not only that, but momentum has a way of driving things to unknown extremes. A wild party on the floor of the NYSE could easily draw a vast flows of cash from fixed term investments (bonds, preferred shares, GICs) and send them into common stocks – even if rates have already climbed substantially and are offering investors a reasonable return for their risk. A high-flying market will make a gambler of even the most conservative widow or orphan.

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Of course, everything will be predicated on some basic measure of economic growth, however small – or at least on some perception thereof. For it’s highly unlikely we’ll dip into a recession stateside and still have markets rise on the strength of broader growth out of, say, Japan, or Europe, or China and the rest of the emerging market economies. For the most part, we all travel hand-in-hand these days.

Though at present, that’s not the case.

New Beef Injections on the Way

 

Japan, Spain and more broadly, Europe are struggling economically and are therefore prime candidates for what’s come to be known as government ‘stimulus’ efforts. The real meaning of the term, of course, is the spending of money on projects and programs with funds that will never be fully paid back. It’s all done for the sake of goosing the market and (maybe) the economy and we see it happening with increasing rapidity the world over. In fact, Europe just announced it would be doing this – in the form of a monthly 60 billion Euro placement into the bond market starting this month. The major European bourses shot ahead over 10% on the news.

Spain, which stimulated last year, and Japan, too, are expected to continue with newer, more powerful and titillating stimulus strategies in the near term.

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All of which leads us to believe that we’ll have more synchronization in world markets and a team-oriented push come springtime that will generate some rockin’ good alpha for stockholders.

So how do we play it?

 

We look at it like this –

The financials will be the goose ever laying the golden egg while stocks are in favor. By definition, banks and (especially) brokerages will profit from the increased lending and financing that drives any bull market. And as the following chart will show, when there’s worry that the jig is up, it will be the financials that are hit hardest.

Below, we’ve included a chart of Goldman Sachs (NYSE:GS), the world’s most powerful investment bank/brokerage, and the corporate entity with the most influence on the fiscal and monetary policies of our nation. Whether we like it or not, whither Goldman, so too America – financially speaking. And we’ve overlain the performance of the Dow to highlight the stock’s relative performance. The chart includes action from the market’s all-time high back on December 8th.

Have a look –

gs

As you can see, Goldman hit an iceberg, underperforming the broad index by over 8% in a two-month period. And not just Goldman. The rest of the financials were lower, as well. Utilities and Health Care bested the bunch, but in the latest dip, the financials were worst.

That, we believe, will shortly change, and we’re playing it with a deep-in-the-money CALL on… you guessed it – Goldman Sachs.

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Wall Street Elite recommends you purchase the January (2016) GS 125 CALL, now trading for $52.15.

 

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Wall Street Elite recommends you purchase the January (2016) GS 125 CALL, now trading for $52.15.

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With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

See what people are saying...

  1. Jesper Markenstam

    Jan 2015? You might want to revisit that.

    • Hugh L. O'Haynew

      Jesper — sonofagun, you got us. And we thank you. Hope it’s still early enough for everyone to catch it. The January 2016 CALL is what we’re after.
      Not sure how that happened.
      Hats off to ya, Mr. Markenstam! Glad you’re with us.
      Huey

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