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Weighing The Week Ahead: A Time Of Tension

 March 28, 2011 12:23 AM

World tensions continue to mount.  Economic data were soft, yet the market rallied.  How can this be?

There are many skeptics of the most hated rally in history.  Conspiracy theories abound.  Anyone who is not a regular, loyal, and convinced reader has missed this rally.  If they remained on board (judging from emails and calls) they bailed out at the wrong time last week.

Why have so many been so wrong for so long?  How can the market rally in the face of so many worries?

My own answer is a simple one:  Stocks are attractively priced relative to other assets.  On a risk/reward basis the value is better than it was at the market bottom.  The general pressure from the really big money is to the upside.  In the last few months I published two articles showing this -- one from a big-time private wealth fund manager and another from the most successful hedge fund manager.

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Some newbie hedge fund types are in denial, looking for political or economic conspiracies to explain their poor analysis.  This pop econ approach has grown like Facebook, but it does not mean that the information and analysis is reliable.  Last week I demonstrated that the bond pundits were dangerous for investors.  The list of misinformation and disinformation is so long that it is hard to fight.  The widely cited Bill Gross commentary about funding the US debt did not even mention the daily trading ($550 billion) in Treasury securities.  And this does not include the deep and liquid futures market.  It is a big and self-serving scare, as I pointed out.

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How does this relate to stocks?

Here is the explanation from Bill Miller of Legg Mason (same name as my dad, but no relation):


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Regular readers of "A Dash" may remember that I offered the same analysis early last December.  You could have made 7% in a few months from that article, pointing out that the risk/reward was better than the market bottom.  The analysis is still correct.  While the market has rallied, so have earnings.

Most observers foolishly focus on absolute prices instead of a dynamic system of earnings, interest rates, economic prospects, and risk.

The Bespoke Investment Group analyzed Bill Miller's performance.  Check out their chart.

Let's turn to our regular weekly review, but I shall return to the investment prospects in my conclusion.

Background on "Weighing the Week Ahead"

There are many good services that do a complete list of every event for the upcoming week, so that is not my mission.  Instead, I try to single out what will be most important in the coming week.  If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

In most of my articles I build a careful case for each point.  My purpose here is different.  This weekly piece emphasizes my opinions about what is really important and how to put the news in context.  I have had great success with my approach, but some will disagree.  That is what makes a market!

Last Week's Data

I wrote last week that the upcoming data were less important than world events.  The economic news was rather poor overall, but let's look at the full picture.

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