The Wall of Worry

Bill Bonner
The Daily Reckoning
Nov 15, 2006

... When stocks begin a major bull market, the old-timers like to say, they 'climb a wall of worry.' Why is that?...

Stocks have been climbing a 'wall of worry,' the yesterday's International Herald Tribune informs us confidently.

Funny.

We don't see a wall of worry. Not even a hedge of hesitation... a dyke of doubt... or a kerb of concern.

When stocks begin a major bull market, the old-timers like to say, they 'climb a wall of worry.' Why is that? Because when investments are ready to rise in a serious way, they have to be cheap to start with. And when they're cheap, investors worry that they will get cheaper.

Going from cheap to expensive is the essential trip of a bull market. But if they're not cheap they can't go as far and you don't get as much of a run. Stocks are only a bargain after they've sold off - usually for a long time. So, investors are very aware that they can go down in price. In fact, at the beginning of the biggest bull markets - '49 and '82 - investors hadn't known anything but falling prices for the previous two decades. Naturally, they were worried.

Are they worried now? Not so as you'd notice. Volatility is again near record lows. Put options (which protect investors from the downside by allowing them to sell - to 'put' - the stocks to a buyer at a previously-agreed price) are extremely cheap. And the news in the US is almost all positive; little inflation, high earnings, record employment figures. The IHT even tells us that consumers are still spending money like water - despite the fact that the US housing bubble tap has been turned off. "Holiday sales marginally higher," adds Reuters.

Where are they getting the money? We don't know. But the papers tell us that the economy is strong, with plenty of liquidity. We'll have to wait for a detailed plumbing analysis to find out for sure. There are three possibilities; either the impact of the housing slump hasn't hit the householders yet, or it's not really as bad as we think it would be, or the economy is somehow providing consumers with new sources of spending money.

We'll see, one way or other.

Meanwhile, there hasn't been much financial news for the last few days. Gold is holding around $625. The Dow is biding its time over 12,000. Bonds are at the top of the range marked out in the rally that began in July.

The markets seem to be waiting... watching... and wondering what to do next. What are they waiting for? Our guess is that they are hanging around waiting for news from the property market. Or maybe they're just hanging around.

There is no doubt that the decline in US housing has the potential to whack the whole economy very hard. But no sign of it yet.

Of course, major tops take a lot of time - years - to fully form. And, in the meantime, the US housing market seems to be shimmying around on the peak. Prices are sliding almost everywhere - according to press reports - and are down substantially already, especially if you include the value of sellers' incentives.

And here comes a report from an economist who has studied the buying habits of baby boomers. It turns out that boomers are no more likely to buy a second house than their parents; there are just more of them. In 1998, 14% of people over 50 had a second house. Now 15% have a second house.

Do you have a second house in the US, dear reader? If not, don't despair. In a year, you'll probably be able to get one cheaper. So cheap, you might be able to afford a third...

Regards,

Bill Bonner
The Daily Reckoning

321gold Inc