The Long Term Bear and Nearing the Previous High too soon

[ringledman]

Stockmarket followers on here, please discuss-

So the stockmarket moves in long term bull and bear markets commonly called the SECULAR cycle with shorter and smaller counter rallies called CYCLICAL trends. The former refer to powerful, long-term directional moves, while the latter represent shorter-term swings around the primary trend.

The typical secular bull is 15-25 years long and the typical secular bear 12-18 years long.

So with the current Secular bear having started in 2000 (i.e. we still havent broken through the 2000 highs) and as we are nearing these highs again (approx 15-20% below or so) my thinking is that this is way too soon to break through the highs based on history.

i.e. history shows that the secular bear last much longer than the current 11 years since the last peak.

So could we have a very short secular bear, say we rise 10-20 percent from here in the next year and then break through the previous highs of 2000 and then go onto the next huge multi year secular bull market?

Or, we go higher this year, up to the previous peak but dont manage to break through and a new cyclical bear commences and stocks fall considerably before resuming an uptrend and we then eventually break trough the previous 2000 high, some 4-5 years from now?

Personally I go with the second view. In general the markets (i.e. the indexes as a whole) still have further regression to the mean of P/Es that mark the end of a secular bear market. This may not happen through a massive crash (sorry deflationists) but through a sideways trending market with earnings growth of 15%+ pulling the P/Es lower.

So dependent on what is most likely to happen (option 2 IMO) how do you invest for the next 5 years?

I would like to buy cheap tracker but can't see myself doing so with the secular bear still probably not over.

My view is probably to maintain a value approach in more stable high yield, defensive meagacaps that bottomed in 2009 on low enough P/Es to form a secular low for this asset class. Likewise I think Japan is a good buy from a value perspective and with their index on multi decade lows.

I also subscribe to the Jeremy Grantham view of having enough cash on hand to invest in any future crash/correction. Perhaps 10% cash and accept that it will lose real value per annum.

Investment strategies welcome.

Cheers.

P.S. I made this post with the USA and UK markets in mind as these are the ones I know the best. I would be interested to hear how the European markets are fairing in relation to their secular market. I assume they are in the main all in secular bear markets and still below their early decade peak? I assume they all pretty much peaked in 2000?

Likewise the emerging market indexes are probably mid way through a secular bull market (definately not in a secular bear) and so possibly the place to remain for another 10 years or so?

Thoughts welcome.

 

[Chris]

I think one thing that you have to keep in mind is that all the indices could well continue on a nominal uptrend above 2000 or 2008 highs. This, however, does not mean that you are seeing gains in real terms or that a secular bear has ended. And don't trust government calculated inflation figures. The best way to demonstrate secular bull and bear markets is to calculate using gold, which is a much better measure of inflation.

Example: Dow peaked in late 2007 at around 14000, while gold was at about $700 giving a ratio of 20/1. Today the Dow is at about 12000 and gold just under $1400 giving a ration of about 8.5/1. Thus, the Dow is still way down from its highs.

Many people will argue that it makes no sense to use gold as a base for such calculations, but they need to remember that gold is not just some commodity; it is money, and has been money for far longer than paper has been. Central banks claim that they work to ensure price stability, but they have all miserably failed at this. There was a very good chart in Money Week magazine last week or the week before, which showed how oil priced in gold over the past 100 years has been very stable, while priced in sterling and US$ it was almost exponential.

I have not yet invested in Japan, but I am considering it. As you say they have very attractive price/book ratios for a value investor, but their ROE is not so good. I would probably favour Japanese resource companies, but I haven't found one that meets my requirements.

Germany could well be a candidate to break out of a secular bear market. For 20 year it suffered with "rebuilding" costs for East Germany, but they are finally waking up to the errors they made. Simple fact is that they make stuff that lots of people want, but not all can afford. But as the population of China and India become wealthier, they will look at luxury goods from abroad; and German cars and electrical goods fit in nicely. The DAX itself is above its 2000 level, but hasn't gone above the 2008 high. I invested heavily in Germany towards the end of '08 in large cap industrial companies in Germany, and I have done extremely well with them. At the moment I don't see attractive buys, but that doesn't mean they don't exist.

At present I am looking for more small cap mining companies and also for gas producers. Gas has taken a big hit and has not rallied along with oil and other natural resources. There is almost a consensus that gas will remain an investment dog, which is precisely why I think it will do well.

My current investment research focuses on natural resource producers in general. In this regard I agree with Jim Rogers: if a recovery does miraculously materialise then natural resources will go up; if there is no recovery then more money will be printed and natural resources will go up.