Stay Bullish

Our bullish posture continued serving us well last week.

Our permanent portfolios are trouncing popular mutual funds, per their design. So far this year:

Double The Dow ….. +27.5%
Maximum Midcap ….. +12.6%

By comparison, here’s how some popular mutual funds are doing so far this year:

Davis NY Venture (NYVTX) ….. +10.4%
Dodge & Cox Balanced (DODBX) ….. +10.9%
Fidelity Contrafund (FCNTX) ….. +8.6%
Fidelity Magellan (FMAGX) ….. +5.0%
Janus Fund (JANSX) ….. +7.4%
T. Rowe Price Growth (PRGFX) ….. +9.8%

That’s just this year. Over the longer term, we’re even farther ahead. For instance, here’s overall performance since 12/31/2002:

Double The Dow ….. +95%
Maximum Midcap ….. +175%

Here’s how the funds did in the same time period:

Davis NY Venture ….. +85%
Dodge & Cox Balanced ….. +68%
Fidelity Contrafund ….. +90%
Fidelity Magellan ….. +53%
Janus Fund ….. +58%
T. Rowe Price Growth ….. +73%

The simplicity of our permanent portfolios fools some investors. Anything so straightforward can’t work, they reason. However, they’re wrong. These portfolios are world class, yet do not require the expensive advice of a broker. Plus, they are exclusive to The Kelly Letter. Why nobody else has caught on to these great long-term approaches to beating the market is a mystery.

Of course, the good times won’t always roll. Long time subscribers have seen me take my share of lumps over the years. At times, these portfolios take sickening dives. It’s all part of the business. For now, though, it’s another great time for us and we should take a moment to be thankful. Seems fitting, given the holiday scheduled for this Thursday.

Not everybody is as sanguine. Alan Abelson wrote in this weekend’s Barron’s:

The surest sign that the speculative sap is rising strongly is the decided turn in investment sentiment to bullish. The Investors Intelligence soundings are a case very much in point. The latest survey of the advisers polled by the service show the number of bulls surging to 56.4%, from 52.1% the previous week, and the third highest level of 2006. The proportion of bears, by contrast, shriveled to 22.3%, the smallest since the first week in January.

As the folks at Investors Intelligence caution: “The sentiment readings are now bearish.” And while they don’t necessarily signal an imminent decline, the increasingly bubbling optimism they convey suggests “it’s a good idea to start planning an exit strategy.”

We’d add to this word to the wise that exiting early could be costly, but exiting late could be disastrous.

Much as I love Mr. Abelson’s columns, I beg to differ.

I’ve been bullish for two months now. I wrote two weeks ago and repeated last week that we’re in an upward trend. We may get some short-term downside, but it should be used to add money to the market, not to bail out.

As yourself, “Where’s evidence of the recession I keep hearing about?” Then, “Where’s the inflation people are afraid of?” Last week, we received indications that neither should be a worry, and the markets rejoiced:

Dow ……………. 12,343 +1.9%
Nasdaq …………. 2,446 +2.3%
Nasdaq 100 ……… 1,801 +2.9%
S&P; 500 ………… 1,401 +1.5%
S&P; Midcap 400 ….. 806 +1.8%
S&P; Smallcap 600 … 400 +2.0%

There have been recent concerns over consumer spending. Will it hold up during the crucial holiday season? Dallas Fed President Richard Fisher thinks so. He said on Monday that the U.S. is a country with “enormous economic production” that is “growing forcefully” at this time.

The PPI fell 1.6% in October, on the heels of September’s 1.3% decline. The core rate fell 0.9% in October, on the heels of September’s 0.6% increase. Both of October’s numbers were well below expectations of -0.6% and +0.2% respectively. This is good news in keeping inflationary pressures at bay and supporting the Fed’s soft landing scenario. As you’ve read here repeatedly, a recession looks unlikely.

The retail sales report was also good. The main measure came in at -0.2% for October. In September, it fell 0.8%. Expectations were for a decline of 0.4%. The core rate, which is the main minus automobile sales, declined 0.4% against expectations of a decline of 0.3%. Gas prices have gone down recently, so the October weakness wasn’t much of a surprise.

The NY Empire State Index came in with a surprisingly healthy read on manufacturing. The Wall Street Journal mentioned on its front page that Boeing (BA) is set to book some $10 billion worth of orders from General Electric (GE). US Air (LCC) offered an $8 billion merger to Delta. All of this painted a pretty economic picture.

Then, the October 24-25 FOMC meeting minutes came out with no negative surprises. The Fed is still waiting to see economic and inflation data. They are less concerned about a weak economy than they are about high inflation. The soft landing is playing out as planned and core inflation should subside, but the latter bears watching:

Participants were concerned that inflation expectations could begin to drift upwards if core inflation remained elevated for a protracted period. Any such rise in inflation expectations and associated upward pressure on inflation itself would likely prove costly to reverse. Although some participants noted that the recent slowing in core inflation had helped to allay their fears of a further sustained increase in inflation, all participants emphasized that the risks around the desired downward path to inflation remained to the upside. Although substantial uncertainty continued to attend that outlook, most members judged that the downside risks to economic activity had diminished a little, and likewise, some members felt that the upside risks to inflation had declined, albeit only slightly. All members agreed that the risks to achieving the anticipated reduction in inflation remained of greatest concern.

On Thursday, core CPI rose only 0.1% against expectations of 0.2%. It’s the smallest increase we’ve seen in eight months and shows that the rising trend is moderating. The year-over-year core rate is still 2.7% and higher than the Fed wants, hence their cautious language the day before. The lower CPI must have provided a bit of comfort to them, as it shows abating inflationary pressure.

Oil provided another point against inflation. It fell 4.3% to $56.26, its lowest price this year and its biggest one-day drop since August 2005. If forced to provide a reason, I would point to the December contract expiring on Friday and disagreement about whether OPEC will stick to its production cuts.

With the Fed having just mentioned on Wednesday housing’s negative impact on the economy, investors watched Friday’s housing report closely. Well, housing starts fell 14.6% to 1.5 million units in October. That’s the lowest since July 2000. Oddly, what looked like bad news on the surface generated little more than a yawn. September housing came in stronger than expected, so a decline in October’s data was widely anticipated. Also, the housing slowdown has been a headline for so long and with so few economic consequences that most investors aren’t particularly afraid of it anymore.

We’ve come a long way since mid-summer and spending a little time going sideways or slightly down would not be a surprise. Any such short-term weakness means BUY.

Have a very happy Thanksgiving!

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