Welcome to the Rodney Dangerfield market
The bull market gets no respect, says this U.S. advisory. But after a pause it will rise again, so buy solid stocks, like one from Canada.
It don’t get no respect.
The bull market, that is. Naysayers have been picking away at it, even as it thumbed its nose at historical trends and had an upbeat September.
But like the late Rodney Dangerfield, who built a comic career on a perpetual lack of respect, this market may find itself slighted once again.
As the calendar turns to October, one U.S. advisory wrote a short time ago, the stock market could go south with the birds. The way the month has kicked off, it would be hard to deny that forecast.
But that doesn’t mean investors should flee equities, says Mr. Barry Arnold in The Primary Trend. After a pause, the market is bound to resume its upward journey.
Mr. Arnold issues this advisory from his investment counselling offices in Milwaukee, Wisconsin. He reckons the market “has every right to take a breather after the spectacular run of the last six months.”
That in turn means investors should draw up a shopping list of good stocks that will be cheaper on a pullback.
He himself has several new buys, and we’ll start there, since the first of them is Canada’s headline gold stock.
Feed the inflation beast
Many believe that the U.S. dollar is “on the brink of losing its status as the world’s reserve currency of choice,” says Mr. Arnold. Thus gold at least temporarily replaces the greenback as the “store of value.”
And as the dollar falls, commodities priced in dollars go up — oil, copper and, of course, gold.
This analyst also believes inflation will raise its head later in 2010. The $2 trillion pumped into the system must “feed the inflation beast.”
So he has bought two gold stocks, beginning with Barrick Gold (TSX/NYSE-ABX). Mr. Arnold describes it simply as “the world’s largest gold miner with 125 million ounces of proven gold resources and a market cap of $34 billion.” Buy it under $US40, he says. It is trading on the New York Stock Exchange at close to $37.
His second buy is Newmont Mining (TSX-NMC; NYSE-NEM). Although based in Denver, it is listed as a Canadian corporation as well (Canada’s Franco-Nevada, Australia’s Normandy Mining and America’s Newmont were blended together in 2001 to form this company).
Newmont has a market cap of $23 billion and its reserves consist of 87 million ounces in gold and 8 million in copper. Buy at US$45, he says. It trades at $43.
Mr. Arnold has one more interesting buy aimed at a global economic recovery. Alcoa (NYSE –AA) is the world’s largest aluminum producer (Canada’s Alcan was the third largest when it was taken over by Rio Tinto).
Alcoa has been double-punched by the economic contraction and the fall in aluminum prices. It has cut costs, cut the dividend and raised cash. It will lose money in 2009 — but it is a cheap buy with a much better future ahead of it, Mr. Arnold insists. Buy under $14 with a target price of $20 in the next year, he says, and higher thereafter. The shares have been moving up, and are close to $13.
A market ‘melt-up’
Mr. Arnold can boast reasonably sound credentials as a forecaster. He had already predicted that the stock market would “fool the majority and actually go up in September.”
He defines this market very carefully. The rally since March is not simply a bear market rally, he insists. It may not be a long secular bull market, either. “But it sure smells like a cyclical bull market,” he says.
Yet it gets no respect on Wall Street, in the financial tabloids or on CNBC. It may justify that lack of respect in the short run, he admits — October is known for its “downside fireworks.” But that won’t last.
“This ‘Rodney Dangerfield Market,’ despite its huge six-month move already, has the potential to ‘melt up’ over the next four months.”
Money on the sidelines
How does a market “melt up” after it has already had a long run of success? It beckons investors who haven’t joined in yet.
There is still a lot of money on the sidelines, Mr. Arnold points out. “Some of that is in money market funds earning virtually nothing.” A truckload of cash also went into bond funds ... “and now those investors are sitting watching the stock market pass them by.”
That’s a very uneasy feeling for those investors — institutional or private — that chase performance.
Investors will face pressure to perform. “And high octane performance is in equities. Money managers getting nothing, bond fun investors potentially losing money (if rates go up) and stock portfolio mangers under-invested all could contribute to a melt up in the stock market.”
That’s not exactly conventional wisdom just now, the analyst concedes. But he believes the S&P 500 Index will catapult itself into the 1100-1200 zone before 2009 is done. At midday today, it was around 1025.
Yes, the market has been climbing a “wall of worry” and bears and bulls alike have been nervous. Analysts and strategists have been complaining that positive earnings were due to cost-cutting measures rather than real revenue growth.
For that, Mr. Arnold has one last rebuttal. “On the contrary, we believe getting lean now will only propel margins and earnings higher when revenues rebound.” Buy carefully, he concludes, but buy.
Rodney Dangerfield parlayed a lack of respect into a brilliant career. Perhaps this market will convert “no respect” into another brilliant rally.
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