“People have called me a “perma-bull” forever. Mish Shedlock called me a “wacko”. Zerohedge has called me insane. Nouriel Roubini has laughed in my face. My daughters still quote Don Luskin when he was on CNBC shaking his head and saying, “James, James, James…” while laughing after I said the market was going to hit new highs.
Well, the market has hit new highs. That’s ok for those guys. I’m sure they all do well on their newsletters. I have no newsletter. I only invest with my own money. I live and die in the markets and I don’t depend on anyone else.
Is there a reason to change my mind? Not really. Eventually, the market will be higher than it is now.
But for the first time in a long time, I’m not a super bull on the overall market (although I like certain smaller stocks, see below).
The overall market (let’s say, the S&P 500) price is a function of supply and demand. I know people know this from Economics 101 and they view this as a micro-economic principle but it’s also macro-economic. it’s not only the price of Oranges determined by supply and demand, the aggregated price of every company in the world is also determined by this.
So what is “Supply” in terms of the stock market? Answer: it’s the total number of shares outstanding.
What is “Demand”? It’s the appetite to buy shares.
Supply is going down. This is both a good thing and a bad thing.
The good: Companies have enormous profit margins and are using their excess cash to buy back shares. This, of course, reduces shares outstanding. When companies with $100 billion in cash like Apple buy back shares, this reduces supply for the big mutual funds, etc.
Also good: When supply goes down, price goes up. This is why the stock market right now is at all time highs.
But then there is the BAD: I am seeing first hand within the private companies that I am invested in: nobody wants to go public. How come? Private markets are valuing companies higher than the public is.
Thats really funny: the PUBLIC is actually smarter than the supposed smart money. Look at Facebook (FB), Groupon, and Zynga (ZNGA) for examples.
And even the companies that want to go public: it’s pretty damn hard. I can’t quote you statistics. I only see this because I’m getting all the calls from brokers. If a broker is calling me to dump their little shitty IPO it means they can’t get institutions in.
How come?
Demand: Everyone is still pretty nervous.
Someone asked me the other day: when will this recession be over?
Guess what? It’s been over for four years.
But people don’t seem to know that?
How come? Because they feel like shit. Because people are getting jobs less than what their skillset suggests they should get. Because people are taking jobs for pay that doesn’t match what they would’ve gotten ten years ago. Underemployment, as this is called, is supposedly around 20% but my guess is it’s more like 30-40%.
Things feel like they suck.
Nobody feels like the stock market is back. Or that housing is starting to creep up. Or that America is starting to insource manufacturing again because globalization has crept up prices worldwide.
People look at their crappy jobs and salaries and say, “I don’t feel so good”. And so they get a scarcity mentality and don’t want to buy shares.
I don’t blame them.
Meanwhile, supply is going to flatten out. There’s only so much stock that people can buy.
So Demand will probably remain the same, but now Supply will stop going down.
What happens then? Stocks go down. Or struggle to stay afloat.
My solution: I am buying smaller stocks where I am not competing for information against massive hedge funds and mutual funds that do everything they can to cheat the system (insider trading, manipulative trading, high frequency trading, special access to secondaries, etc).
I also invest in long-term demographic trends that I believe in. These companies will do well regardless of the overall stock market. It’s why microcaps always outperform large caps in the long run.
So I’m invested in…”
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