Bull On.

I am long the stock market. I’ve been accumulating stock in businesses I understand for the last month or two. Why? I’m predicting a bull market starting in the next 12 months.

My reason for writing this is purely selfish. I want to be able to say I told you so. I’ve also been predicting armageddon for the last 10 years in the USA and it’s getting boring.

Here’s why a bull market is imminent:

  • We’ve so far dealt with a crisis in housing, money markets, mortgage backed securities, credit default swaps, commercial real-estate, municipal bonds, hedge funds collapsing due to over-exposure, the collapse of many small banks and collapse or almost-collapse of many larger ones, the risk of the FDIC running out of cash, our own country’s budget crises, legislative deadlock and sovereign debt crises both in the USA and Europe.
  • We’ve shone sunlight on all financial crises and there appears to be nothing coming down the pipeline except the latest report that China isn’t going to grow as fast as it was. Oh poo. Hell, the municipal bond crisis in the USA turned out to be the best performing fixed income investment in 2011 returning over 10%. Turns out local governments managed to cut costs, increase revenue and actually pay their debts.
  • American consumers have been paying down debt since 2008 and are flush with cash.
  • The DOW has been flat for 10 years. If you invested in the DOW 10 years ago your money is now worth 20% to 30% less in inflation adjusted terms.
  • Housing has flattened out and even Schiller is beginning to sound mildly optimistic that house values will start heading up within 12 months.
  • In real terms (inflation adjusted terms) housing isn’t down 30%, it’s down more like 45%. There isn’t anywhere else to go.
  • US corporations are more profitable than they’ve ever been and are priced attractively by any measure: P/E, P/S, Price/Book, etc. Companies like Intel are getting so frustrated at the crappy valuations they’re getting that they’re borrowing money to buy back their own stock and are paying 3% on debt rather than a 4%  to 5% dividend yield.
  • Europe doesn’t really matter and isn’t that bad. To use a recent example from James Altucher, Greece to the European economy is like Rhode Island to the USA. It just doesn’t matter.
  • Unemployment is 8.5%. During the great depression it was 25% so enough with this “things are so bad” bull. Even if you assume 16% real unemployment if you factor in those that have stopped looking for work, it’s still nowhere near great depression levels.
  • Besides reducing our debt, everyone I know has been living frugally and actually accumulating cash.

When I say I’m long the market, I’m long specific stocks that are awesome businesses, have growth potential, have a monopolistic like advantage that makes them very hard to compete against. Two examples:

  • Intel (INTC): Basically they have a monopoly on server CPU’s world wide. I’m betting that the massive growth in data centers world-wide is going to continue to drive record revenue at Intel. The machine you’re reading this on has a 90% chance of having an Intel CPU inside. More importantly, the data center that served this page is full of Intel CPU’s and it keeps growing.
  • Amazon (AMZN): I love Jeff Bezos. There, I said it. He almost literally gives investors the finger and just puts his head down and keeps growing. Amazon’s revenue growth in the last 10 years has been stellar and consistent. Bezos is investing heavily for the future, including building his own platform and app store to compete with Apple and Google and continuing to expand warehouse capacity. The business is also wonderfully diversified into retail, cloud services and digital media. AMZN is valued using Price/Sales since it doesn’t have net income to speak of or dividend yield, and in historical terms the P/S is low right now.
  • Apple (AAPL): So I was avoiding this stock just because there’s way too much hype around it, but turns out it’s undervalued in historical terms. Check out AAPL’s P/E for example. Also check out Apples market cap relative to Microsoft’s peak market cap in late 99 early 2000’s. If Apple is truly the next big platform, it’s cheap when you adjust MSFT’s peak market cap for inflation.

Other businesses I’m interested in: WalMart, Costco, Visa (although I don’t understand financial stocks so will probably avoid).

Keep in mind I’m taking a 18+ month view on these companies and to me a 10% annual return would be spectacular considering a 2 year CD will give you 1.2% if you’re lucky. I’m also comfortable losing the principle – I have a strong stomach for risk.

Disclosure: I’m currently long Intel and Amazon and will probably go long on Apple as soon as the current rally dies.