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TRANSPARENCY Special Issue - Eric Hodges

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  • TRANSPARENCY Special Issue - Eric Hodges

    TRANSPARENCY Special Issue

    Eric Hodges - October 31, 2006

    On The Current Rally
    I mentioned in my October 2006 monthly issue of Transparency that if the Dow closed above the year 2000 high that we would probably be in for a rally. I didn't want to be too overt in calling for a rally because it could turn around at any time and the risk, in my opinion, is on the downside.

    So where is this rally going? Well, if you look at the charts it looks like it can go on for a while, but the market is very overbought and overdue for a correction. Fear is very low and the underlying risk is very high. Here's a chart from Tim Knight of the VIX.

    These are very low numbers for the "fear gage of the market."

    Now I want to make it clear that I'm not a trading type. I feel that a well constructed portfolio should be fine over a long enough time horizon. One to four years is probably not enough. Five or more years with rebalancing is the way to go. I am not talking about a typical stock and bond portfolio, as those will, in my opinion, have significant trouble in the current environment.

    I feel that this is a trader's market. Go to Brian Shannon's website. and watch one of his videos. Do you think you can beat a guy like that over the short term? You might also look at Tim Knight's site. Tim seems to hold positions for days to weeks vs Brian's typical intraday trading. I'm reading Tim's site on a regular basis as his technical analysis is excellent.

    If the public gets excited enough they might start piling onto this rally. This is why a good portfolio is such a nice strategy. Some parts should go up while other parts go down and you don't have to worry as much about what to pick. I am concerned that if we see a real downturn, most or all parts of even really good portfolios might go down. Because of that, I like to have some extra cash on hand these days.

    On The Macroeconomic Picture

    China and India are huge deflationary forces. Many refer to them as exporters of deflation. I would think that this trend could continue for decades and could be reinforced by other asian countries as well as parts of the former Soviet Union and Africa. Labor is super cheap, and if China gets too expensive then India might pick up the slack. This trend has taken a real bite out of wages of americans as well as having eliminated many jobs and I would think that the trend will only continue.

    There's a large amount of public and private debt in the U.S. Housing is slowing, at best in my opinion, and we would be in a very bad position if we experienced outright deflation. Because of this, the Fed and the U.S. government should error on the side of inflation. This could have several ramifications for your investments. For example, inflation could run much higher than people expect. If you have bonds that are of long duration (more than 3 - 5 years) the price of those bonds may fall. Stock market averages tend to not do very well in inflationary environments.

    Along with interest rates, a big concern is a potential decline in the value of the Dollar. If the Dollar falls enough, there could be some real problems. A lot of traders have bet against the Dollar because of this and they have not been doing very well. In the short-term the markets can do anything.

    There is a lot of hopeful talk about a soft landing for the economy in the media. But what is the risk? Well, the risk is that we don't have a soft landing, so you might want to do a little planning for the risk and not hope that the CNN people are right.

    One of the soft landing concepts of the bulls is that oil falls in price and consumers will keep spending and everything will be fine. The risk is that as the U.S. slows, oil stays high. Of course, when you match that up with those who are saying that housing will cave in, the stock market will fall, bonds will fall along with the Dollar, and the picture gets quite ugly indeed.

    There are so many people in India and China, as their economies grow they will be consuming oil at ever greater levels. In addition, the world may be seeing peek oil production levels. So, as I have been saying for some time, oil stays high unless the global economy slows down a lot. If that happens we will have many other problems to replace the problem of high oil prices.

    Life did go on in the 1970s even if inflation did quite a number on the market averages. I view the current environment as, potentially, a great opportunity if it's handled well.

    Eric Hodges
    Financial Advisor
    Stahlschmidt Financial Group

    925 906 4600

    500 Ygnacio Valley Road
    Suite 150
    Walnut Creek CA 94596

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    Last edited by FRED; 10-31-06, 07:24 AM.

  • #2
    Re: TRANSPARENCY Special Issue - Eric Hodges

    Re. your "On the Current Rally", I have had the thought that it might derive significantly/substantially from market manipulation by large market participants -- to aid incumbents in the 11/7 election. What do you think?