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May 5, 2009What to Buy…or Not Buy
 By Marc FaberFrom the tidal wave of e-mails and comments I have received from numerous differentsources I am under the impression that most investors view the recent rally in the world’sstock markets as a bear market rally. I suppose we would need to define a bear marketrally as a rally that fails to make a new all-time high (for the S&P 500, above the 1576reached in October 2007) and is also followed by a new low for this cycle (below 666 forthe S&P 500 reached in early March 2009).The problem I have with this dogmatic definition of a bear market rally is the following:Assuming (and this isn’t a forecast, since I really haven’t the foggiest idea where stock markets will be in six or 12 months’ time) the S&P 500 moved up to 1350 and thendeclined to 500, as an investor should you care if the move to 1350 — a 100% gain! —was a bear market rally?My impression is that investors’ fixation on the recent rally being a bear market rally hasactually kept most investors on the sidelines and hoarding cash. Now, put yourself in theshoes of a fund manager who, in the last 18 months, has lost 50% of his clients’ moneyand missed the recent rally (34% for the S&P 500). What is he likely to do? I would think that he would be inclined to purchase equities as they correct the sharp advance sinceearly March, especially as the economic news in the near term becomes less negative.Based on our conversations with numerous managers in recent weeks, we believe thatmost quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up sinceMarch 9th and the clear majority admitted to being notably down or stopped out on theirpositions. These managers were both long-only and long- short quant managers usingmarket neutral and non-market neutral strategies, sector neutral and non-sector neutralstrategies, longer term and intermediate-term holding periods. It is fair to say that justabout everyone is bewildered and trying to understand when this rally will end.Another factor to consider is that there has been a significant improvement in thetechnical position of world stock markets. In the US the largest number of new 12-monthlows was reached in October. At the November 21 low at 741 for the S&P 500, thenumber of new lows had already contracted, and even more so at the index’s March 6low at 666. Also, market breadth and the number of stocks moving above their 200-daymoving averages have taken a decisive turn for the better, indicating that the stock marketadvance is broadening and that the number of stocks that have bottomed out (at least inthe intermediate turn) is expanding.I have explained repeatedly in the past that if a government is really determined to try andpostpone an inevitable collapse by “printing money” in order to lift or support assetprices, it can be done. However, the result of such a monetary policy is to lower thepurchasing power of its paper currency, with catastrophic long-term consequences for its
 
economic and financial volatility.It forces individuals and institutions with cash to buy something…anything. So, this cashis channeled into gold and/or different paper currencies, commodities, equities, bonds,real estate, and consumer goods and services, but obviously with different intensities andat different times. For instance, at some times, such as in 2008, more money will beallocated to gold; while at other times, such as since early March, more money will flowinto equities and industrial commodities. It is well understood that these money flows aredriven largely by speculative activity (and more than a little dose of manipulation). Theresult in all asset markets is very high volatility and price fluctuations that don’t appear tomake any sense to most market participants and observers who don’t understand the newrules of the investment game that were brought about by “money printing”.This is where we are today, irrespective of whether or not you and I like policies of “quantitative easing, massive bailouts, and frightening fiscal deficits” and their long-termconsequences! Another positive factor for stock markets is that a large number of Asianstock markets and individual stocks in the region had already bottomed out in Octoberand November of 2008 and didn’t confirm the new low in the S&P in early March.In Asia, the Taiwan and Shanghai indexes, and Korea’s Kospi Index, are all up by morethan 50% from their late October 2008 lows. (The Shenzhen Index is up 90%.) But it isnot only the Asian equity markets that have outperformed the US and Western Europeanmarkets over the last few months; since late January 2009, the RTS Russian Index is up66% and the MSCI Emerging Market ETF is up by 55% from its early November 2008low.This is not to say that the global economy is about to embark on a strong and sustainablegrowth phase. It also doesn’t mean that a new bull market in global equities à la 1982–2000 has begun. But I think that, at least in nominal terms (inflation-adjusted), the globalprinting presses being run by the world’s central banks and fiscal deficits have begun toimpact asset prices positively. Therefore, in the case of resource and mining stocks, aswell as Asian equities (and, for that matter, most emerging and other stock marketsaround the globe), the lows thatwere reached between October and March of this year arelikely to hold — that is, for now.The markets that have the highest probability of having made major longer-term lows areresource-related equities, emerging markets, and Japan. Conversely, the asset market thathas the highest probability of having made a secular high (such as Japan in 1989, or theNasdaq in March 2000) is the US long-term government bond market.Despite a still-weakening economy and massive quantitative easing, long-term bondyields appear to be on the verge of breaking out on the upside. I have listed again belowall the equity recommendations I have made since December 2008. Some of theseequities have already moved up substantially (resource and mining companies, inparticular) and, therefore, I would only buy most of these recommendations on acorrection.
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