The recent fiscal cliff hanger was a high wire act – – it only looks dangerous. Both sides of the aisle in Congress must behave as if they had done the most for their constituents by not yielding a single inch to their adversaries until the very last minute. Republicans and Democrats alike were keenly aware of the disastrous results of falling off the fiscal cliff had they not been able to come to an agreement. While many people are still concerned about the upcoming debate on the debt ceiling, I am not. For sure there is going to be lots of thunder, but no rain. The same old political theatrics will go on stage, yet the ending of the play is totally predictable – – – the debt ceiling will be lifted in the nick of time. Assuming that is the case, what is going to happen next?
As far as the stock market is concerned, a bull run is close at hand, especially in the period between March and July this year. The prices of equities should rise beyond expectation of many. In my humble opinion the Dow Jones industrial index will likely reach 14,500 within this time-frame. The following rationale is the basis for my predictions, bolstered by my I Ching calculations, which I shall reveal in future writings.
1. The housing market is on the mend with great impetus. In the recent past when home prices kept on dropping, relatively few people were interested in home buying despite extremely low mortgage rates, because they figured they could wait. But soon after home prices began to rise, lots of people will jump onto the bandwagon, for fear that they would lose out on this once-in-a-lifetime opportunity to buy a home on the cheap. In conjunction with the dwindling number of foreclosures, this renewed demand will create a positive feedback loop, further escalating the home value. International real estate investors, large hedge funds, as well as sovereign funds have already shown their footprints all over the country.
2. Housing is one of life’s most essential necessities and therefore constitutes a major segment of any economy. With housing still in the doldrums, it is difficult for the overall economy to gather real momentum, impeding on the growth of GDP and jobs. But when housing recovers, the drop in unemployment rates will accelerate, fueling the economic engine further.
3. As the housing sector improves, banks will be more willing to lend because they will be less fearful of the security of their loans being impaired due to dropping home values. Small businesses should have a greater ability to obtain loans because their businesses are less likely to fail with an improving economy. Since small businesses employ the greatest number of people, the unemployment rates will soon abate.
4. Unlike the United States, China is capable of responding to any economic headwinds with great agility, thanks to its one-party system, ironically. China is currently on the path of recovery and in all likelihood will continue with its boom with its current policy of urbanization and infrastructure building. With the world’s top two economies of the United States and China surging forward, the global economic outlook will markedly improve, despite some foot dragging in Europe. But Europe’s problem, being man-made, resulting from the dissension among nations, is curable. When Germany begins to feel the economic pain of a weak European economy, it will get its act together to form a united front with other European countries to implement appropriate financial measures to stabilize the continent’s economy.
I mentioned in my previous blogs that I was only interested in double dipping in investments profits, instead of being concerned with the double dip (twin recessions) in the US economy. I am now looking forward to triple dipping, namely, by taking advantage of the great recession’s three separate opportunities for economic gain. Making money by investing close to the bottom of the stock market in the beginning of 2009 is the first dip. At present the stock prices of some cyclical industries are still lagging because most people are still worried about the economic prospects going forward at this juncture. I believe 2013 to going to be a banner year and such equities will substantially outperform. This will be the opportunity for the second dip. After that, in the next several years when everyone becomes convinced that stocks are good investments, money on the sidelines will be infused into the market and drive the prices of equities much higher. Investors would accept a significantly higher P/E ratio as the norm, pushing stocks even higher. That will be the opportunity for the third dip.
According to Warren Buffet, when others are greedy, he is fearful and when others are fearful, he is greedy. I want to now tweak this quote somewhat. When others are convinced, I am hesitant and when others are hesitant I am convinced. In other words, when many people are still doubtful about the prospects of investing in stocks now, I shall take advantage of this window opportunity to secure new positions.
I don’t know about others, but I’m ready to hang glide off the financial cliff to catch the updraft through the debt ceiling to reach cloud nine, and soon.