Four Reasons I'm Still Bullish On Stocks

Bob Froehlich Hartford Investor June 3, 2011

Sometimes, when trying to make a decision about investing in the stock market, we have to look at the facts and simply try to remove all of the emotions. I'll be the first to admit that this is actually easier said than done. This strategy brings to mind a few of the lyrics from Billy Joel's hit single, "Don't Ask Me Why." The lyrics I'm referring to go like this: "Don't wait for answers. Just take your chances. Don't ask me why." That's exactly the way I feel about our stock market right now.

I feel this way because of four facts: technology is heading to the next level, money is almost free, some soft agricultural commodities will be double winners and, finally, earnings. Don't ask me why-here's fact number one.

For any of you not familiar with it, Moore's Law describes a long-term trend in the history of technology hardware. Simply stated, the Law says that the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years. This trend has been going on for more than a half a century, and many believe it can continue for another decade. Moore's Law is named after Gordon E. Moore, Intel co-founder who unveiled his thesis in a 1965 white paper. The paper showed that the number of components in integrated circuits had doubled every year from the year the integrated circuit was invented in 1958 until 1965. Moore predicted it would continue for at least 10 years. The great debate is about when the trend will end. The answer is not now. This is not my opinion-it's simply a fact. In what many technology insiders are calling the biggest change in 50 years, the very same company that Gordon Moore co-founded, Intel, announced it will produce a 3D chip that's 37% faster and will cut power consumption by an almost unheard-of 50%. And that, ladies and gentleman, boys and girls is what the theory of Moore's Law looks like in practical terms-just one more reason why I continue to like my top-10 theme number nine for 2011, which was to overweight technology. To me, this technology "revolution" feels more like an "evolution" that just might be with us a lot longer than anyone thought, something which I believe may be bullish for technology and for our stock market.

Let's move on to fact number two: money is basically free. I can explain this one pretty quickly as it's very simple and subjective. I call it Dr. Bob's law of free money. Here's the way my overly simplistic law works: In my opinion, the best way to prove that money is cheap and almost free is to see if anyone is issuing a rare 100-year bond-to me, that's simply the best fact that money is practically free. Bond issuers want to take advantage of today's low rates and lock them in for 100 years. While Dr. Bob's law of free money is my opinion, here's an undisputed fact: The Massachusetts Institute of Technology (MIT) just issued a rare 100-year bond! I understand that the people at MIT are pretty smart so you just might want to pay close attention to this trend. Oh, in case you've forgotten, I think free money could be a very bullish sign for our stock market.

The number one investment theme of my top-10 investment themes for 2011 is commodities. With the recent pullback in commodities, I've been fielding numerous questions from advisors and shareholders as to whether I've changed my mind about commodities. The answer is, in a word, "NO."

Even though commodities are my number one theme, there's a hierarchy to my commodity views. When looking at commodities, it's always helpful to segregate them into four logical baskets. I love two of these four baskets, I like one, and I hate one. One of the baskets of commodities that I love is soft agricultural commodities like corn, wheat, sugar, soybean, cattle, livestock and the like. The other basket I love is energy-based commodities-think anything old and dirty, not the clean and green stuff, but rather the traditional sources like coal, oil, and natural gas. The third basket of commodities, which I like, not love, is industrial-based metals like copper, steel, tin, and iron ore. The final basket of commodities, which I hate, is precious metals like gold and silver. Precious metals' value is derived from intrinsic value-in other words, what someone is willing to pay for this commodity. I prefer commodities that actually do something like "feed the world," such as soft agricultural commodities, or "fuel the world" like energy-based commodities.

This "feed/fuel the world" concept really got me thinking-are there any commodities that can do both? The answer is "YES." That's the basis for this fact number three: some soft agricultural commodities will be a double winner. Why will some be double winners? Because they "feed the world" and "fuel the world." Here's fact number three: both sugar and corn are not only used to feed people, but can be turned into fuel as well-talk about a double doozie! I still like commodities-especially the ones that can "feed the world" and "fuel the world" like sugar and corn. Commodities are still my number one theme, and that's a fact!

I'm a big believer that the most important thing for our stock market is earnings, earnings, and earnings. Well, here's where first quarter earnings stood as of May 16. Of the 500 companies that comprise the Standard & Poor's 500 Index,1 92% reported earnings. Here's the good part: 69% of these companies actually beat expectations for earnings per share. Anything north of 60% is bullish, and when that number approaches 70% it's extremely bullish.

When you dig deeper into these earnings reports, you find some interesting trends. Of the companies within the technology sector, 85.1% reported earnings, and 70% had earnings that beat expectations-that may be bullish for the technology sector and the overall stock market. Technology is theme number nine from my top-10 themes for 2011. Of the companies within the industrial sector, 94.9% reported earnings, and 75% of them had earnings that beat expectations-that may be bullish for the industrial sector and the overall stock market. Industrials is theme number eight from my top-10 themes for 2011. Within the energy sector, 100% of the companies reported earnings, and 61% of them had earnings that beat expectations-that may be bullish for the energy sector and the overall stock market. Energy is theme number six from my top-10 themes for 2011. Finally, 100% of the companies in the materials sector reported earnings, and 83% of them had earnings that beat expectations-that may be bullish for the material sector and the overall stock market. Materials is theme number five from my top-10 themes for 2011.

Earnings are solid, and that's a fact-especially in my recommended sectors: technology, industrials, energy, and materials.

What does all this mean to you as an investor? It means you should carefully consider the pros and cons of investing in the stock market. Here are my reasons in favor of investing in the stock market. Money is practically free, which may be bullish for stocks. Commodities are still booming-despite the recent pullback-which may be bullish for stocks. Finally, earnings are strong-especially in the technology, industrial, energy, and material sectors. Next, I'd like to point out why you may not want to invest in the stock market. First, there are risks to consider. Also, does investing in the stock market make sense given your investment time horizon and goals? Sit down with your investment advisor to discuss the risks and to determine whether investing in the stock market is appropriate for you.

Let me bring this commentary to a close with my traditional pearls-of-wisdom quote. This quote is from one of the world's greatest investors: Warren Buffett. Here's what he said: "I am a huge bull on this country. We will not have a double-dip recession at all. I see our businesses coming back almost across the board." Me too! See ya' at 14000! When the Dow2 crosses 14000, I think I just might sing that Billy Joel song, "Don't Ask Me Why." You better start practicing the end of that hit song. It goes like this: "Don't look for answers. You took your chances. Don't ask me why. Don't ask me why."

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