Time to Start Getting Aggressive in the Stock Market

The closest I have seen anyone reach conclusions about the short term economy and stock market, that are similar to my thinking, is Thomas Kee. Kee is president and chief executive of Stock Traders Daily, and Founder of the Investment Rate.

He is now recommending GE and Microsoft as buys. He writes:

I am not going to debate the credit rating of GE, nor will I discuss the layoffs at Microsoft. These are happening to every other company too, and the risk already is built into share prices of these companies.

More importantly, these are the leaders of both the general economy and the technology sector specifically. These are two of the best companies in the world, and if the market recovers, they will perform well along with it. In that, I can be sure. I am not looking for a home run here, but we might get one. Rather, I am looking for a secure investment for the next 6 to 12 months. However, this is not a buy and hold recommendation by any means.

I like Kee's thinking here. A recovery in the stock market is going to be led by the capital goods sector, as a result of Fed money printing. Microsoft and GE sre perfect stocks to own under this scenario.

Further, he recognizes this is only a short-term play and not a buy and hold situation:

I am not the best stock picker, but I am a great prognosticator of economic and market cycles, and that is the first step to being on the right side of any trade.

Objective reason goes a long way, and if we can rid ourselves of the emotional frenzy that has grimed the scales of reflexivity lately, everyone might see the same opportunities I do. Unfortunately, many investors are now scared to death, and many more have been blinded by risk. Confidently, that is part of the opportunity I recognize.

My conclusion suggests the market is going to weed through the 2008 mess soon, and will begin to react positively again in no time.

How does he reach his conclusions? By something he calls Parity Analysis, whereby he attempts to measure demand for different asset classes. Kee writes:

Although my original analysis was based on the premise of keeping it simple, the return to parity analysis I am offering here is a little more complicated. Reasonably, this also satisfies the interest of modern-day economists. Most econometric models include dozens of added variables which, on a broad scale, create more harm than good. We have already discounted the majority of these and in doing so we have also weeded out the noise which might otherwise cloud our understanding of the clear progression of our economy over time.

Yes!! Kee is not going to force variables into his equations. It is the mortal sin that most econometricians commit.

Kee, again:

That brings us to the root of this analysis, and the added variables which will be included in this equation. In order to further our evaluation we must correlate demand ratios from all asset classes. We need to know what the current level of demand is within the real estate market, for example. We also need to know what the current demand ratios are for stocks. And the same study needs to be conducted for every asset class which requires a steady inflow of money to grow. Without question, this also includes bonds. Reasonably though, as I will concede later, treasury bonds could be considered a detriment to the demand for other equity investments over time.

After carefully evaluating the demand trends which exist within each of these specific equity classes we are then able to combine that analysis. Over time I have learned that a combined analysis is much more efficient than unique observations as well. Therefore, a combined analysis paints a more accurate picture of immediate demand ratios.

His final piece of advice clearly demonstrates that he understands the severe dangers in the economy long-term:

...instead of engaging prudent fiscal policy our government spent trillions of dollars trying to support the economy. This indebtedness will come back to haunt everyone. As time goes by we will need to repay all of the monies we are borrowing today. Therefore, one of two things is going to happen. Either our government is going to tighten the reins and engage prudent fiscal policy from this point forward. Or, treasury will decide to print money and the value of our dollar will plummet...

Early in 2009 I recommended that all of my clients strongly consider shorting US treasuries. Yields were effectively zero, and there was little risk in taking this position in my opinion. In addition though, if demand ratios do improve and if economic conditions stabilize accordingly, I also expect the flight to safety to dry up at the same time. Based on Adam Smith’s resounding theory, if demand subsides and supply remains the same prices will decline. Therein lies the circular trap I expect in US treasuries.

If prices of US treasuries begin to decline and the yields start to increase from near zero, those monies which have been invested in US treasuries will have lost value. In turn, the expected safe haven that big money coupled with U.S. Treasury bonds may indeed turn out to be one of the worst investments imaginable...

Expect economic stability after the first quarter, expect the stock market to begin to improve, and expect real estate prices to react accordingly. But don’t expect a prolonged recovery, because it is not going to happen this time.

Do not engage in any long term investments.

There is no indication that Kee understands Austrian Business Cycle Theory. However, his demand tracking "parity analysis" accuracy clearly signals that his demand tracking is giving him a very accurate picture of the economy and trends.

I have often wondered why econometricians haven't designed more demand tracking models, rather than the faulty correlation models they do build. Demand tracking models are clearly more accurate and valuable. Kee's analytical work is a big step in proving this and demonstrating how it works. His advice should not be taken lightly.