Friday, November 4, 2011

What Jim Rogers Might Say About October's Market Rally -

October was nothing short of incredible for the stock market — the S&P 500 gained almost 11% for the month and the Dow Jones Industrial Average rose about 10%. The euphoria is palpable. But will it last? Sure, the markets are thriving right now, but what are the bears thinking about as the economies of most developed nations are stagnating?

It might be interesting to delve inside the mind of a professional not sold on the market rally continuing. I’ve mixed some conjecture with some of his paraphrased comments to give you an idea of what iconic investor Jim Rogers might have to say about some facets of October’s rally, as well as what to expect looking forward:

We’ve seen this movie before. Rather than letting the banks fail, European leaders are going to bail them out. Quantitative easing like the kind used by the Federal Reserve doesn’t solve anything. If we’ve learned just one thing from what’s happened in the U.S., it’s that letting banks fail helps the system — it doesn’t hurt it. The same holds true in Europe.

Why is there a need to save bondholders? There are ways to protect shareholders to a certain extent, but at the end of the day, when all the banks are put in a room, it should be easy to choose those deserving of a second chance. Not letting banks fail only prolongs the inevitable. Let’s fix the system permanently rather than applying a Band-Aid, which is all this really is.

“Scarcity” is a word we’ll hear often in the future. As the population of the world just hit 7 billion people and will hit 8 billion within another decade, commodities are going to be the most sought-after asset anywhere. While the markets have done great in October, it’s been 12 years of going nowhere, and we should expect more of the same.

The Dow Jones Industrial Average increased just 25% between 1964 and 1982 — less than 2% a year. While stocks are bad, bonds are worse. The 30-year run on bonds is over. As we see from the Occupy Wall Street protests, social unrest is only going to get worse. Investors can protect themselves from both a sideways market and the scarcity that exists in foods, fuels and metals by investing in indices that own all three.

Of the three main commodity groups, agriculture is by far the most promising. Several factors make this so: First, nobody wants to be a farmer anymore. Everybody wants to get their MBA. Add to this the population growth alluded to earlier, and you have the perfect storm. Shortages will get worse and worse. Those who own the means of production, as well as the arable land necessary to produce food supplies, will win the battle. Everyone else will sputter along.

As mentioned in the opening paragraph, the S&P 500 is up 11.8% in October. The market has gotten quite frothy. In fact, eight out of 10 S&P 500 sectors are extremely overbought, according to Bespoke Investment group. Valuations for tech stock IPOs like LinkedIn (NYSE:LNKD), Fusion-IO (NYSE:FIO) and (NYSE:YOKU) have gone through the roof. As of Oct. 28, the three stocks average a price-to-sales ratio of 22 compared to an industry average of 5.1 and an S&P 500 average of 1.1. Shorting tech stocks and going long on agriculture stocks like Deere & Co. (NYSE:DE) makes an awful lot of sense.

Looking at the long term, China will be the winner in the 21st century. For now, stocks seem expensive — and with the possibility of stagflation on our doorstep, the best form of protection is to short tech stocks and emerging markets and invest in commodities instead.

As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

©2011 InvestorPlace Media, LLC


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