Well, it appears that the media is starting to catch up with us. For sometime now, we have been saying that the market was overvalued. This week's Economist Magazine's title reads, "Bubble Warning... Why Assets Are Overvalued." Grab a copy of this publication if you can.
Of course, most people find that headline shocking considering that asset prices are still below their peaks. Let me remind our readers that the Japanese stock market still trades at a quarter of the high it reached 20 years ago. What about the NASDAQ market that trades at half the level it reached during the dot.com bubble?
So it can happen and we are remaining in a defensive position. It is interesting to me to have analysts stating that although the layoffs have stopped, we're not yet seeing job creation. Could this be a pause for the moment... the quiet before the storm?
One has to look at the full economic picture and the challenges that we face. Usually the strongest growth at the outset of an economic recovery is rapid expansion in debt financed categories of expenditures like housing, autos and other forms of durable investment. Last time we checked, the banks were not lending. Granted, some analysts will try to emphasize the trend of recent improvement in 2010, but from our perspective, it is a reflection of government spending and stimulus.
We believe the strains in employment, businesses' concerns about higher taxes and healthcare legislation, real estate values declining, high loan balances, and mortgage rate resets hitting are just the beginning of reasons that this market could trade back.
Yes, there are high levels of bullishness, but the market has gained only a few percent beyond its September highs. This type of market usually makes marginal new highs for some period of time followed by abrupt and often steep losses that come from out of nowhere.
The next few months will likely be important and provide us clarity as for the direction of the economy and the markets. Yes, there are opportunities to invest in, but we are being very selective.
Please contact me if you have any questions. I would be happy to talk with you.
