If You Are Bearish On The Stock Market, Watch Out

bearbullTony Sagami: Are you sitting on the sidelines? If the answer is yes … you have lots of company.

I talk to a lot of investors, both professional and individual, and most of them are very worried about the direction our country is going, the state of the economy, our massive mountain of rapidly growing national debt, and the return of a big, bad bear market.

As a result, a lot of investors — and I mean an awful lot — are largely in cash and have only a small portion of their portfolio invested in the stock market.

That is a mistake because the stock market is headed higher. Here’s why it’s also about to get much-lonelier on the sidelines …

Even Government-Sanctioned Theft In Cyprus Hasn’t Deterred Traders

One of the puzzling characteristics of a bull market is that investors completely ignore negative news and just keep plowing money into the stock market.

For example, we’ve been treated to a full week of negative news about the heavy tax on Cyprus savers. After all, this sets a very dangerous precedent for other cash-strapped governments to raid their citizens’ cookie jars.

Equally worse was the news that Cypress banks would stay closed for an entire week to prevent, or at least delay, a run on the banks. Anybody with money in a Cypress bank could not directly access his or her own money for more than a week.

The implications for other parts of Europe as well as the global banking systems are just as dire.

If you have money in an Italian, Spanish, Portuguese, Greek or French bank … how comfortable would you be, knowing that government-sanctioned theft is perfectly permissible when your government needs to secure a bailout?

Yet, the stock market didn’t seem to mind. The day after the Cypress news came out, the Dow Industrials dropped by a painless 62 points, or 4/10 of 1%. That is hardly more than just some daily noise.

Since the Cyprus news broke last week, the Dow Industrials are down just 0.45%.

And then when the Cypress politicians gave final approval to the European Central Bank demands, the Dow Jones Industrial Average (INDEXDJX:.DJI) rallied by 91 points.

So not only did Wall Street pretty much ignore Cypress’ bad news, but it got excited when there was some (questionable) good news.

If you are bearish on the stock market, I believe you are grossly underestimating the power of liquidity.

You might have heard the term “currency wars,” and that battle is raging. It just means that central banks all over the world are rushing to push their currencies lower and flood their economies with zillions of dollars of paper money.

And that means the world is awash in liquidity.

Just to make sure that everybody knows it, Ben Bernanke testified before Congress last week that he plans to keep printing near-unlimited amounts of money for several years.

In his words:

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

“Considerable time” will mean different things to different people. But the Wall Street bunch interpreted it as a green flag for higher stock prices.

I really do see a big disconnect between the economy and the stock market but it is a mistake to ignore the powerful force that liquidity has on the stock market.

As long as the Fed — as well as central banks all around the world — keep printing money and increasing the money supply, all those dollars have to go somewhere.

This isn’t a new song that I just started singing. Here is what I said on Feb. 5:

“Of course, nothing is guaranteed in the investment world, but a profitable January has been a pretty darn accurate predictor for the rest of the year and strongly suggests that the rest of the year is going to be even better. If you’ve been sitting on the sidelines or burdened with a cash-heavy portfolio, I suggest you consider increasing your stock market allocation.”

However, that doesn’t mean you need to keep your money invested in the U.S. stock market.

In fact, I believe that your portfolio should be substantially invested in non-dollar-denominated assets, like foreign stocks and foreign bonds.

One Way to Win the Currency Wars

I favor Asian markets because of their growing economies, huge trade surpluses, high savings rates and strong currencies.

In particular, Japan has suddenly become very attractive to me. Japan held its elections in November and the Liberal Democrat Party won in a landslide. Now Shinzo Abe, the prime minister from 2006 to 2007, is back in charge.

Abe has introduced a new $117 billion stimulus package that is designed to grow Japan’s GDP by 2% and create 600,000 new jobs.

Even more amazing is Abe’s intention to force the Bank of Japan, Japan’s central bank, to embark on a quantitative-easing program that would turn Bernanke green with envy.

Abe wants the Bank of Japan to buy, in unlimited quantities, whatever new debt the politicians create from increased deficit spending. The objective is to create money in quantities sufficient enough to pull Japan out of its deflationary spiral and push the yen lower.

In effect, Abe wants to strip the Bank of Japan of its independence and force it to become the printing machine for UNLIMITED government spending.

That may sound nuts on the surface. But the result is that the Japanese yen is falling … and that is VERY good news for an export-dependent country like Japan.

A recent article in the main Japanese newspaper, The Nikkei, reported that a one-yen change in the dollar/yen rate would translate into a $2.7 BILLION increase in profits for the 30 largest Japanese exporters.

Suddenly, Japanese stocks, exporters in particular, are looking extremely attractive. And the Japanese market now looks attractive to a lot of investors.

The market is going higher but make sure you are in the “right” market(s) … Asia.

Best wishes,

Tony SagamiWritten By Tony Sagami From Uncommon Wisdom Daily

Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended inUWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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