Is This A Healthy Bull Market?

Whether it be IBM, Dell, Microsoft, EMC, GE, Intel or a host of other large capitalization technology stocks, they are dying a slow death in the stock market. These empires of American industrial prowess are still recovering from their massive bubble run ups into 2000. In fact, the majority of large cap technology companies had a bull run of exactly nine months this cycle. That was when they bounced from bear market lows in early 2003 and generally peaked at the end of 2003. Since then, they have done next to nothing or even collapsed to near 2003 lows. A nine month bull market? What say you? Indeed. So, while the pundits banter about the strength of the U.S. economy, there is something missing. That something is participation by the economic giants of our country. To top it off, they are extremely risky investments regardless of their PE because they pay a paltry dividend for those who wish to buy. There is little visibility into valuation using discounted cash flow analysis if you aren't banking on a 3, 4 or 5% dividend in the calculation.

On the other hand are charts of two leaders in this bull market. Valero Energy and Phelps Dodge. One is an energy company and the other a mining company with an emphasis on copper. So, the major outperforming asset class this cycle has been weak dollar-inflationary commodities, oil and related sectors. These market leaders, when rising, diminish wealth. Are you wealthier when you have to buy a house for 5% more because copper wiring prices are through the roof? Are you wealthier when your heating or cooling bill is double last year's? The answer is clearly no. This type of cycle is usually abbreviated because input costs, ie, commodities and sometimes labor are rising at an unsustainable pace. Thus, the normal flow of cyclical earnings is choked off and we tend to have deeper and longer recessions historically. I am very confident, regardless of what is reported in the press, this is not a healthy stock market nor is it a healthy economic expansion.

Now, that said, it has been a rewarding stock market for those invested in the right sectors but they are not indicative of a healthy economic climate. So, should stocks go higher here, we will likely be led by the same inflationary sectors. I look at that as a time to lighten up on what I consider is a very risky stock market. Somehow, I don't believe this cycle is going to end kindly either on the economic front or for those who believe in "buy and hold" investing.