“Back In the Bull Ring” (Job)

Interview with Don Hays

Ø Introduction
o Don’t expect conventional wisdom from longtime market → but Count on his contrarians bent and uncommon skill in determining the direction of the stock market to make you money
o Hays helping investors get the best read on important trends and subtle shifts in the economy and the market → through a variety of technical gauges he monitors

Ø Prediction
o Twice a week → provides colorful commentary and his own special take on the state of the markets
o Developed a matrix → based on investor psychology, monetary conditions and stock valuations → determining allocations
o For long-term growth → 100% equities, zero cash and zero bonds

Ø Green Light
o Investor psychology had turned too negative → the market got very oversold

Ø Psychology Measurement
o See the nervousness and fear Friday
o Smart Money Index → examines the last hour of cumulative trading in the Dow Jones Industrial Average
o "Smart" money → there is no real news reported and it gives a clearer view of how investors are thinking
o Smart Money Index a good indicator → but NOT primary indicator
o The American Association of Individual Investors' Bullish and Bearish Survey is much better

Ø Sentiment Indicators
o Raised Cash → the bullish sentiment had gotten very high
o Bullish sentiment had come down and bearish sentiment had moved up → entered a zone that historically has been a good time to do some buying
o Insider-trading data collected by Scott Gambill of Emergent Financial → tracks the five-day moving average of insider buys and sales on the Russell 3000 index
o Average has moved above 25% it has suggested some great buying opportunities
o SEC started requiring timely disclosure of insider buys and sales
o OEX → options on the S&P 100 → open-interest put/call ratio
o OEX options are highly liquid → tracking the level of fear in the market

Ø Monetary Conditions
o The most important indicator is the yield curve
o The yield curve → 10-year yield divided by the Treasury-bill yield
o The perfect yield curve is 1.25 to 1.5
o Today we have the T-bill yielding 3% and the 10-year note at 4%, → a healthy yield curve
o But remember → monetary conditions have about a one-year lead time on the economy → so what happened a year ago is affecting the economy now
o It will start coming out of the funk → not because of the Fed → but because of the huge amount of money that is coming into money–market funds.
o The money will eventually but won't initially end up in stocks → but right now, it is going into Treasuries → everyone is afraid and playing it ultra safe

Ø The Strong Dollar vs. Fed
o Fed is still tied → an inflation mentality → in fact US in the new era → that inflation will not be a problem for 15 more years
o Even though the commodity prices → gold, oil, and silver → are shooting through the roof
o Because US interest rates are too low → The dollar is not weak
o Dollar is weak → because people think the United States is fighting their economy with one leg tied to a branch
o Why would you want to invest in the U.S. under restrictive policies and a dumb Federal Reserve, when you have China and other places flooding the system with money
o The two-year Treasury has a very good record of predicting inflation → fed-funds rate should be about a half percent under that
o Oil is the decoy → distorting the picture for the Fed right now
o productivity → keeps inflation down
o Correlation between the 10-year Treasury yield and the S&P 500 12-month forward earnings yield → shows that money goes where it is treated best
o Compared with the yield of the 10-year Treasury note, stocks are about 42% to 43% undervalued
o When you get too much pessimism → expected earnings will come down → people will not pay much for earnings → they'll buy the bonds
o When you get too much optimism like in 1987 and 2000 → expected earnings grow to the sky → buy more for stocks

Ø Stock Pick
o growth investors → pick stocks quantitatively based on our own system of earnings momentum, relative valuation, and relative strength
o The only reason the stock came down → CEO mentioned the company would feel some effects from the sub-prime mess through its financial customers