Bill Gross and his PIMCO shop started using a term for our economic future that they term “the New Normal”. I hate this term. It is the same thing as saying “this time its different”. It is never different. The same old story is played over and over. The costumes might change, but the story’s the same. It is a bit arrogant for the PIMCO shop to think they are the first to find this new thing.

Mario Gabelli and Bill Gross were on CNBC this morning at the same time. Mario made the point to Bill that the past 100 years saw a 4-5% annual appreciation in the stock market, so if we average 4-5% per year for the next 100 years, then it really is not so new, but is in fact quite an old average. Bill did not have a good rejoinder to this point. Score one for Gabelli. Gross and Gabelli also agree that a good manager can add a few points of “Alpha” to that average return. So, 7-8% is possible with good portfolio management, in a very low inflation environment.

What is really important, after all, is not the nominal return, but the real, or net of inflation, return. PIMCO is not projecting anything “New” here. In the very long run (hundreds of years), “Real Return” averages 2 to 3 percent. Gross is not saying that will change. What he says will change is nominal return which average 8-10 percent from 1929 to 2005. But this was also a period of higher than historical average inflation due to loose dollar policies in the 1930s and again in the 1970s. If inflation returns to its long run average of 2%, than the “New Normal” of 4 to 5 percent has an embedded 2 to 3% Real Return, which is the old normal. I am not sure why Bill Gross is making such a big deal about it.

“The new normal basically recognizes that we’re in an economy that’s de-levering and that we’ll move to an average level that’s lower than before,” Gross said. “We’re de-levering, loans are going to be less available…homeowners are going to have to put 20 percent down now, as opposed to zero.”

The Federal Reserve is likely to keep rates at the same level for a while, because the economy would need to grow by nominal rates of 4 percent or 5 percent to prevent debt from destroying growth, Gross said. “They (the Fed) have to stay low because the embedded cost of debt (interest payments) in the economy is 6 to 7 percent,” of GNP, said Gross.

This brings up an interesting quandary for many of the Bears who frequent the investing world today. Bill Gross, who many consider to be the world’s leading private sector expert on the future of interest rates and bond prices, says they are staying low and must be kept low in order to achieve his “New Normal”, Excess productive capacity and an emerging market with excess and cheap labor also suggest this future reality. Gross implies a long period of low inflation and low return.

This really undermines the Bear argument for high inflation and / or continued crashing of the markets (which is inherently deflationary; never really understood how the Bears expect high inflation and high deflation simultaneously, which underscores how weak is the Bear argument).

As a member of the “baby boom” generation (like Gross) fast approaching retirement, a low inflation environment, with historical 2 to 3 percent Real Return sounds almost ideal to me. I think I will like Bill Gross’ “New (Old) Normal”.

Great Earnings this morning (Tuesday, October 20) from CAT, UTX, PFE and KO. CAT guidance was the economy is improving much faster than expected and the risk of a double dip recession is now ”very low” in 2010. CAT (a proxy for the export driven, industrial equipment market) beat earnings estimates by 85% and had higher revenues than forecast (which is supposedly what the market is begging for). So, what happened to its stock price? Sold off.

This earnings season has become the typical denial event by the Bears. The hardcore bear traders try and sell down every rally and discount any good news as either lies or misinterpretation. They first criticize the weakness of economic growth and unemployment levels, and then turn around and criticize the Fed for using accomodative policy to ramp back up the economy.  (Earth to Bears: you can’t have it both ways, unless Armageddon is your objective, in which case, tight policy will deliver the economic disaster you are awaiting)

This market is still climbing a huge “wall of worry” and so it will continue climbing higher (until all the Bears throw in the towel). When I stop seeing Michael Pento, David Rosenberg , Peter Schiff, Joe Battapaglia, etc on CNBC blasting the Fed and the market, that is when I will Sell.  There is no Euphoria.  There are no “rose-colored glasses.  There are only Bears (likely still short since SP500 of 666) begging for their wishes to be fulfilled.  Please keep ripping the market and economy.  It is making me wealthy.

Today, I was able to roll my October FLRs that were exercised on Friday to November sold puts, and picked up another 0.50 per contract in the process. I also flipped my BHP for a 2.47 gain the past 12 days (closed my Nov 70 puts at 1.75 and opened same number of Nov 75 puts at 4.50 a few minutes later) during the morning sell off. I am now waiting to get back into EWZ as Brazil sold off big today (down to 70 from 76). I will wait for $67 to get back in with some DITM calls on Mar 2010.

I also doubled down on my GE Mar 2010 Calls ($10s) at $5.80. They had been almost $7 a few days ago. Now I have 10 contracts (1000 shares) plus another 500 shares of GE.

Microsoft today at long last got a deal done with Yahoo! to partner on Search. This is the piece that has been most needed by Microsoft in its ongoing war with Google. Yahoo! has lost relevance on the Internet and needed a partner to take on the Google goliath (which as detailed earlier on Wealth-Ed is arrogant and deserves to be knocked down).  Microsoft will benefit and now becomes a more formidable opponent with almost 30% share in Search.

Bing, the new Internet Browser, was announced a few months ago and Windows OS7 is on the horizon for Microsoft, so don’t write this computing pioneer off. The details of the partnership are not yet fully understood, but here is an early report from CNBC:

Microsoft  is not expected to pay an upfront fee to Yahoo , and the focus of the deal is on sharing revenue between the two companies.

Under the expected deal, Microsoft’s new Bing search engine will power Yahoo’s searches, according to Advertising Age, while Yahoo will handle the advertising sales, using Microsoft technology.

The deal should give Bing a giant boost in competing with Google’s search engine. Google’s search engine dominates the marketplace with 65 percent of U.S. Internet searches, according to figures provided by research firm ComScore. Last month, Microsoft had only 8.4 percent of the market and Yahoo 19.6 percent.

There is a chance a deal combining the powers of the second and third-ranked search engine companies would be blocked by antitrust regulators. Google and Yahoo dropped plans for an advertising partnership last year under opposition from the U.S. Department of Justice.

All of this should hurt Google and help Microsoft as will be seen in the stock value. I am a buyer of MSFT at this level and have recently doubled down by stake. $30 a share is possible by year end based on new growth prospects, existing market dominance in Office software suite and its tremendous cash hoard of $30B (which not so incidentally, is untouched by this deal, which at one time to purchase Yahoo! would have cost MSFT $47B).

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The battle between Bulls and Bears continued on Monday, July 27.

CNBC’s Art Cashin and other market analysts myself among them, sees a near term correction based on an “over-bought” market. What does the term “over-bought” mean to a trader? Investopedia says: “In technical analysis, this term describes a situation in which the price of a security has risen to such a degree – usually on high volume – that an oscillator has reached its upper bound. This is generally interpreted as a sign that the price of the asset is becoming overvalued and may experience a pullback.”

The preferred oscillators (cyclical indicators) are typically based on volume and relative price. The price can be relative to other stocks or indexes (Relative Strength Index) or to their own historical price (various Moving Averages). By all of this information, traders can get “a feel” for the future near term direction of the market, which is decided on emotion and momentum. Longer term, it is fundamentals that matter most. By the measurement of “fair value” based on moving price averages, most stocks are now in an over-bought condition and so are ripe for correction.

But in the medium term, later this fall and into 2010, the markets may again have to weaken to reflect an economy that is taking longer than some expect to get back on track. So, any rally following the near term correction (this week) will be cut short by economic reality in September and October.