Playbook: The Great Debate-The Bull's Side.

We started talking a few weeks ago about the great debate going on right now between the Bulls & the Bears. Here is a link to the Bear's point of view: http://lumencapital.blogspot.com/2009/08/playbook-great-debate-bearish-view.html

The Bullish argument as I understand it can be stated as follows.

1. The economy has bottomed. We have been saved from a near death experience by the Government's actions. We are in the early stages of seeing at least a bottom in important areas such as housing. The banking system is not going to collapse and interest rates will remain low for the foreseeable future. Unemployment while high, will begin to bottom out in the next 12 months. The personal savings rate is now going up, meaning there will be more American capital to invest. It is likely that the recession has ended or will end before the end of the year.

2. Pent up growth demand world-wide. Business virtually stopped functioning last Autumn. Companies worked through inventories which means that now a massive inventory restocking is currently underway world-wide. Couple this along with a new growth cycle in certain sectors such as technology means that the conditions are primed for corporate growth in profits and sales over the next 12 months. Companies have slashed their budgets to the bone so any increase in profits will fall inevitably to the bottom line, therefore corporate earnings are too low. If this is the case stocks are statistically cheap on a forward looking basis.

3. The government will get out of private industry. Health care reform will be less than meets the eye. Washington will not be as harsh on the financial industry as previously feared. The money invested in the auto industry will make it competitive with Japan and Europe again.

4. Sentiment is too negative. The investment community, burned by two Bear Markets in the past decade is slow to embrace this rally. There is a huge amount of money on the sidelines which is significantly behind the averages on a performance basis. This money will cushion the downside making a "buy the dips" mentality prevalent going forward. People will start to feel better about their own financial situation and be willing to take on more investment risk. This should further add fuel to the fire and provide support for the market going forward.

I'll let Jim Cramer summarize for the Bulls.

"Stocks? The easiest of all: terrific earnings comparisons, great international stories and, most important, the highest demand and least supply of just about everything in 34 years. Stocks are cheap on 2010 numbers. We have great secular growth trends in tech. We have a confidence picking up. We have an amazingly strong consumer given the layoffs. And we have a president who has stopped hurting us."

Link: http://www.thestreet.com/b/rmoney/jimcramerblog/10597544.html {Subscription may be required}.

This is the essence of the Bulls point of view. I'll give you what I think next in this series and then talk about how I'm working that in the management of your investments.