The problem I have with this dogmatic definition of a bear market rally is the following: Assuming (and this isn’t a forecast, since I really haven’t the foggiest idea where stock markets will be in six or 12 months’ time) the S&P 500 moved up to 1350 and then declined to 500, as an investor should you care if the move to 1350 — a 100% gain! — was a bear market rally?

My impression is that investors’ fixation on the recent rally being a bear market rally has actually kept most investors on the sidelines and hoarding cash. Now, put yourself in the shoes of a fund manager who, in the last 18 months, has lost 50% of his clients’ money and missed the recent rally (34% for the S&P 500). What is he likely to do? I would think that he would be inclined to purchase equities as they correct the sharp advance since early March, especially as the economic news in the near term becomes less negative.

Based on our conversations with numerous managers in recent weeks, we believe that most quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up since March 9th and the clear majority admitted to being notably down or stopped out on their positions. These managers were both long-only and long-short quant managers using market neutral and non-market neutral strategies, sector neutral and non-sector neutral strategies, longer term and intermediate-term holding periods. It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.

Another factor to consider is that there has been a significant improvement in the technical position of world stock markets. In the US the largest number of new 12-month lows was reached in October. At the November 21 low at 741 for the S&P 500, the number of new lows had already contracted, and even more so at the index’s March 6 low at 666. Also, market breadth and the number of stocks moving above their 200-day moving averages have taken a decisive turn for the better, indicating that the stock market advance is broadening and that the number of stocks that have bottomed out (at least in the intermediate turn) is expanding.

I have explained repeatedly in the past that if a government is really determined to try and postpone an inevitable collapse by “printing money” in order to lift or support asset prices, it can be done. However, the result of such a monetary policy is to lower the purchasing power of its paper currency, with catastrophic long-term consequences for its economic and financial volatility.

It forces individuals and institutions with cash to buy something…anything. So, this cash is channeled into gold and/or different paper currencies, commodities, equities, bonds, real estate, and consumer goods and services, but obviously with different intensities and at different times. For instance, at some times, such as in 2008, more money will be allocated to gold; while at other times, such as since early March, more money will flow into equities and industrial commodities. It is well understood that these money flows are driven largely by speculative activity (and more than a little dose of manipulation). The result in all asset markets is very high volatility and price fluctuations that don’t appear to make any sense to most market participants and observers who don’t understand the new rules of the investment game that were brought about by “money printing”.

This is where we are today, irrespective of whether or not you and I like policies of “quantitative easing, massive bailouts, and frightening fiscal deficits” and their long-term consequences! Another positive factor for stock markets is that a large number of Asian stock markets and individual stocks in the region had already bottomed out in October and November of 2008 and didn’t confirm the new low in the S&P in early March.

In Asia, the Taiwan and Shanghai indexes, and Korea’s Kospi Index, are all up by more than 50% from their late October 2008 lows. (The Shenzhen Index is up 90%.) But it is not only the Asian equity markets that have outperformed the US and Western European markets over the last few months; since late January 2009, the RTS Russian Index is up 66% and the MSCI Emerging Market ETF is up by 55% from its early November 2008 low.

This is not to say that the global economy is about to embark on a strong and sustainable growth phase. It also doesn’t mean that a new bull market in global equities à la 1982– 2000 has begun. But I think that, at least in nominal terms (inflation-adjusted), the global printing presses being run by the world’s central banks and fiscal deficits have begun to impact asset prices positively. Therefore, in the case of resource and mining stocks, as well as Asian equities (and, for that matter, most emerging and other stock markets around the globe), the lows thatwere reached between October and March of this year are likely to hold — that is, for now.

The markets that have the highest probability of having made major longer-term lows are resource-related equities, emerging markets, and Japan. Conversely, the asset market that has the highest probability of having made a secular high (such as Japan in 1989, or the Nasdaq in March 2000) is the US long-term government bond market.

Despite a still-weakening economy and massive quantitative easing, long-term bond yields appear to be on the verge of breaking out on the upside. I have listed again below all the equity recommendations I have made since December 2008. Some of these equities have already moved up substantially (resource and mining companies, in particular) and, therefore, I would only buy most of these recommendations on a correction.

In addition, a number of BRIC and other (mostly emerging market) closed-end country funds and ETS were recommended, such as Brazil ETF (EWZ), the Templeton Russia Fund (TRF), the Greater China Fund (GCH), the Asia Pacific Fund (APB), Taiwan iShares (EWT), the Japanese ETF (EWJ), the Japan Smaller Capitalization Fund (JOF), the Morgan Stanley India Fund (IIF), the Turkish Fund (TKF), and the MSCI Emerging Market ETF (EEM).

In the US, late last year we recommended buying the iShares iBox Investment Grade Corporate Bond (LQD) and Nicholas Applegate Convertible & Income Fund (NCV), while earlier this year we recommended the accumulation of stocks of high-tech companies such as Cisco (CSCO), Intel (INTL), Oracle (ORCL), and Yahoo (YHOO). More recently, we recommended beaten-down insurance companies and financials as rebound candidates, including Leucadia National (LUK) and CNA Financial (CNA), Citigroup (C), the BKX, the Financial Bull 3x Shares (FAS), and the Financials Select Sector SPDR.

The market’s advance had been broadening and that more and more groups such as airlines (AMR), homebuilders (TOL, CTX, HOV), and cyclicals such as Dow Chemical (DOW), International Paper (IP), and Alcoa (AA) are showing signs of having bottomed out. Among commodities, I am particularly intrigued by natural gas. There are natural gas ETFs (UNG, GAZ), but costs are high. A better way is probably just to buy future contracts, or Pioneer Natural Resources (PXD) or the First Trust ISE Revere Natural Gas Index Fund (FCG).

Source: What to Buy…or Not Buy

I’m trying to forget Laura Cadden’s last foray into the paper market. Her Nine Dragons Paper Holdings (Hong Kong: 2689) ended badly, to say the least.

It was a thriving company in a growing sector (paper recycling). The company was, and is, an ambitious, fast-growing paper recycler that bought America’s trash just to sell it back to us again as new packaging.

The only problem with the stock pick was a little thing called slave labor. A few months after buying into Nine Dragons, some college students in Hong Kong published an article accusing the paper recycler and five other companies of unfair labor practices and human rights violations.

The government, instead of repeating what it says to Amnesty International every time it executes a journalist (which would be something like: “What? They have the right to die silently or with wails and screams. That’s way more than we used to give them.”), actually investigated the claims against Nine Dragons (the Chinese government equivalent of telling companies to stop horning in on its exclusive rights to ignore human rights).

But now, we’ve found an American company (you know, the kind with a union to prevent pesky things like slave labor) that could triple its profits in the next year.

Smurfit-Stone Container Corp.is up 23% today on news that its competitor International Paper (NYSE:IP) pushed through a hike in containerboard prices as of October 1.

The new prices, which aren’t specified, could triple Smurfit’s earnings if they hold through 2009. That would mean earnings as high as $1.50 per share versus the estimated 45 cents per share right now.

And even after Smurfit’s 23% run up today, the share price would only be about four times earnings.As of the end of July, containerboard inventories (measured in tons) were at their lowest since the 1980s. And Hurricane Gustav is expected to cut production by another 30,000 tons.Perhaps now is the time to jump into the paper market.

Buy Smurfit-Stone Container Corp. when it falls below $6 and hold for gains of at least 30% in the next six months.

Source: Buy Smurfit-Stone When It Falls Below $6

As you might expect, the U.S housing slump is reducing demand for finished lumber. Meanwhile, timber, pulpwood, and paper prices are rising worldwide – but curiously, profit margins are eroding.

What’s up with that?

The global commodity boom has created a supply/demand price imbalance between the four distinct industry sectors that rely on timber as a raw material. In fact, that imbalance is a huge mismatch. And savvy investors may be able to wring substantial returns from the winner.

You see, timber companies have shrewdly maintained monopoly-like control of raw materials to hold the line on prices, despite the economic downturn. They are doling out enough – and only enough – supply to maintain sufficient revenue streams to pay the bills. Meanwhile, their downstream relatives are suffering.

In a sense, timber owners are weathering the storm. And when the storm is over, their profits should explode.

It’s a complicated scenario being driven by a number of economic factors including the declining U.S. dollar, classic market demand/supply ratios, emerging markets growth, and even export quotas and tariffs.

Investors who tune in may catch lightning in a bottle. The end game could send timber company profits – and your portfolio – soaring in the next 12 months to two years.

Let’s take a look.

Housing Slump Wreaks Havoc on Lumber Mills

As lumber prices have swooned to a five-year low, wood has been piling up at lumber mills. Sawmills throughout the United States and Canada have been reeling since the second quarter of 2007, when lumber prices collapsed to below the cost of production.

Here’s what’s happening now:

* In the United States, single-family-housing starts dropped 1.7% in April to a seasonally adjusted annual rate of 692,000 units, the lowest monthly production rate since January 1991, and a jaw-dropping 42% below 2007.
* U.S lumber consumption is expected to drop, from 64 billion board feet to 43 billion board feet from 2006 to 2008. A drop of 21 billion board feet in the span of three years is simply staggering, equal to the total production of the Top 20 softwood lumber producers in the U.S. market for all of 2007.
* North American lumber at the Chicago Mercantile Exchange has fallen as low as $209 per thousand board feet, down a whopping 56% from its peak of $473 in 2004 – at the apex of the housing boom.
* Lumber companies in the Billion Board Foot Club, a measurement of the largest lumber companies in the world, was reduced from 22 to 15 in 2007. Six of the victims to be cut were in North America.

Particularly hard-hit are the big lumber mills in Canada, which ship much of their production to the United States. The key factor was the unprecedented run-up in the Canadian dollar. With sales denominated in U.S. dollars and costs accrued in Canadian dollars, a wide range of Canadian producers were running in the red and simply ran out of money.

In addition, Canada mills must pay a 15% duty to ship lumber into the United States. That puts the price at those mills at about $175 per thousand board feet, said Gerry Van Leeuwen, vice president at International Wood Markets Group, a Vancouver-based lumber consulting firm. “There is just no way anyone is making any money,” he added.

In the past, sawmills only needed to wait for interest rates to decline before ramping up production. Now, however, they will have to wait until the housing glut is over before lumber demand gets back to normal.

And that’s not likely until mid-2009 at the earliest. Our advice is not to bet the farm on lumber companies right now.
Global Growth Buoys Pulpwood and Paper Mills

Meanwhile, pulpwood and paper has been in a strong bull market for almost two years. Demand for paper and pulp remains strong – from overseas markets, in particular. And that demand doesn’t appear likely to ebb anytime, soon.’

Overall, world paper demand is moving ahead, buoyed by accelerating growth in Asia. The surge in paper demand in Asia is driving a huge appetite for both virgin pulp and recycled fiber. In 2006, alone, China’s imports of wood pulp jumped 150% to 7.5 million tons.

Increased exports have also helped pulpwood prices. The weak U.S. dollar makes it cheap enough for pulp and paper companies to purchase products in the United States and ship them overseas.

On top of that, demand from European utility companies for wood pellets should keep pulpwood prices elevated. Believe it or not, European utilities have turned to wood chips to produce power in order to lower their greenhouse gas emissions in accordance with the Kyoto protocol.

So you would think paper and pulpwood mills would be humming along, bringing in record profits.

Don’t make that bet.

The Big Squeeze

There is a huge fly in the ointment for pulpwood-and-paper mills.

Paper mills, of course, rely on pulpwood as raw material. Pulp mills, in turn, operate on small logs and wood chips – a byproduct of lumber production. And, as you might expect, the weak market has lumber mills cutting back on production. This is forcing pulpwood mills to rely on buying more logs or raw timber, says Daniel Stuber, of Forest2Market.com,. The lack of available chips has produced a big demand for small, lower quality logs.

The fact is, pulp mills are using twice as many logs as they normally would to satisfy production levels. And they’re getting hit right in the wallet.

“One of the bright spots for timberland owners is the demand from the pulp-and-paper industry,” Stuber said. “Land owners have been withholding stands with larger trees until saw-timber prices rebound, but they have been able to generate revenue through thinning practices and harvesting younger stands.”