Oh, to Be a Bull Again

• ByTim Melvin, RealMoney.com Contributor
• On 10:10 am EDT, Wednesday June 10, 2009

I stopped in Red Eyed Dock bar last evening to enjoy a summer sunset and a crab cake with some friends. Once we had talked boats, baseball and the usual subjects, the talk came around to the stock market and economy. One of my friends, a pretty sharp-eyed observer of the world, opined that he was sick of being bearish on the economy and wanted to have a positive outlook on the market again. I agreed with him -- I would love to have a bright, sunny outlook, be upbeat and buy stocks to the limits of my bankroll. I am a miserable bear. I hate it.

I am happiest in times like the early to mid-1990s, when the S&L crisis caused most regional and community banks to trade below tangible book value. It was pretty easy to see that the economy was going to recover, and with the loosening of interstate banking regulations, a merger wave was inevitable. In the aftermath of the Internet boom I was delighted to be snapping up tech stocks for less than cash. Post-Enron it was evident that the lights were not going to go out all over the world. Buying debt and equity in power providers for pennies on the dollar was the smart thing to do. I am a natural optimist on the economy and life in general. I love buying stocks and bonds when no one else wants them.

I bought stock back in October and November. I did not go all in (as I usually might) because of the unpredictable and uncertain structure of the financial market going forward. I bought unloved tech names like Motorola and Seagate that no one else would touch. With oil prices declining, it made sense to buy drillers like Rowan and Nabors for half of the value of their assets. I was careful and bought small positions. As we plunged in January and February, I added a bit more when stocks got just too cheap not to own. I stayed small and moved slow. I never even came close to being fully invested. Yes, I could have made a lot more money if I had plunged in, but I have no regrets. The focus on safe and cheap has caused those dirt-cheap stocks to explode in multiples of the purchase price in many cases, and I never felt so exposed to risk that I was nervous.

Now I am starting to take some stock off the books again. Not all of it, as I have some stocks like Disney that I intend to hold for years. (Should it go lower, I would be delighted to own more of Mickey and his pals.) But I am trimming my equity position. This has been a tremendous rally. The move from the March lows has been stunning. I think, however, that the rally is entirely sentiment- and liquidity-driven. I cannot find any strong evidence that the two chief factors of the economic decline are getting better: Unemployment and real estate may be getting bad a little slower, but it is still getting worse.

A friend reminded me again recently that job losses begin long after the recession has ended and the market has turned up, but a chart from Northern Trust on last week's jobs report seems to dispute this old Wall Street saw. The commentary has a long-term chart of civilian unemployment rates, and they appear to have peaked right about the time the market bottomed out in past recessions. The last time we had a lost decade in the stock market, unemployment peaked in the early 1980s just as the market began a historic 20-year run.

Real estate is the other key to a real recovery. The Mortgage Bankers Association reported recently that more than 9% of all homes are now delinquent. The first quarter saw the largest year-over-year increase in foreclosures since 1972; this trend is expected to continue all year as even prime mortgages are starting to see delinquencies and foreclosures. Real estate has to stabilize, especially in the hard-hit areas, before the economy and most importantly the consumer can begin to rebound.

I want to be bullish. I want to sit here at my desk and just buy everything in sight. I would love to jump into great companies like Wal-Mart . I happen to think Urban Outfitters is one of the best-run retailers I have ever seen, and I would love to own shares. Being bearish is boring. Once you trim your stock holdings and put on a few long-term bearish put spreads, there's not much to do. I want to be a full-on raging bull so enthusiastic about stock prices it annoys my friends. I have long lists of "I want to buy, but not yet" stocks. But the basics of economics, corporate outlooks and common sense tell me I have to wait for better prices.

Wanting and wishing for better setups do not make it so. In the stock market, hope can be the most dangerous emotion of all.

Buzz up!