Risk/Reward Vol. 162
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Let the world around us just fall apart
Baby we can make it if we're heart to heart."---lyrics from "Nothing's Gonna Stop Us Now" sung by Starship
"If you do want me, gimme little sugar
If you don't want me, don't lead me on, girl
Just gimme some kind of sign, girl."---lyrics from "Gimme Little Sign" sung by Brenton Wood
"Picket lines and picket signs/Don't punish me with brutality
Talk to me/ So you can see/What's going on"---lyrics from "What's Going On" by Marvin Gaye
Last weekend, the world learned that as a condition to receiving financial aid from the International Monetary Fund, the European Central Bank and the European Commission (the "Troika"), the government of Cyprus ordered its banks closed and announced that it would tax (ahem, confiscate) up to 9.9% of every depository account banked on that island. Understandably, the citizens took to the streets resulting in the Cypriot government reconsidering its intentions. In the interim, the banks remain closed. The news from Cyprus has caused huge "heart to heart" concern throughout the rest of the Eurozone. After all, if the Troika can insist upon such drastic measures from Cyprus, it can do the same from the other countries that are dependent on the Troika's financial assistance such as Italy, Spain, Greece and Portugal. Last year, such news would have sent the Dow Jones Industrial Average (DJIA) into a sustained tailspin. But, consistent with its recent "Nothing's Gonna Stop Us Now" attitude, the DJIA experienced only a mild correction on Monday (down 62 points) and rose 3 points on Tuesday. "Let the world around us fall apart", we Americans just keep investing in stocks.
Then, talk about withholding "a little sugar." Talk about "not leading you on". And talk about "some kind of sign, girl." On Wednesday, economic bellwethers Caterpillar and Fed Ex reported disappointing results and warned of challenges in the months ahead. On the same day, the purchasing managers of Europe reported a worsening of the slowdown in the Eurozone. Also that day, the two commodities most correlated with economic growth in China, copper and iron ore, fell to multi-month lows portending a possible slowing of that economy. In times past, the combination of bad news about the U.S, Europe and China on the same day would have sunk the market, Instead the DJIA rose 56 points. On Thursday, the DJIA fell 90 points on disappointing results from tech giant Oracle and continued turmoil in Cyprus, but it rebounded 91points on Friday, closing down only 2 points for the week.
One is left to wonder "What's going on?" With "picket lines and picket signs" still blocking the streets of Cyprus and no good news from the rest of the world, why isn't the market "punishing me with brutality?" The answer is---once again---Ben Bernanke and the Federal Reserve. On Wednesday, when nothing but depressing news was otherwise on the wires, Chairman Ben announced that the Fed would continue quantitative easing (QE3): to wit; would continue to keep interest rates on debt low by purchasing $45billion of Treasury securities and $40billion of mortgages each month until unemployment reached 6.5% or until inflation gets out of control. Obviously, for now, the U.S. stock market finds the continuation of cheap credit more compelling than any other factor. This, I suggest, should be a cause of concern for all of us. Ostensibly, QE3 is to serve as a catalyst for the entire economy, a function at which it is failing if the reports from Caterpillar and Fed Ex are to be believed. In the real economy (as opposed to Wall Street), the only sector benefiting from QE3 is housing to which the Fed has a single minded devotion. ( Can you imagine what the tech sector would be like if the Fed purchased $40billion dollars of software each month as opposed to home mortgages?) Indeed other than subsidizing housing, all QE3 appears to be doing is causing a bubble in progressively risky investments such as junk bonds and equities as investors seek returns that are no longer available in investment grade securities, the yields on which the Fed continues to depress.
In regard this latter point, on Friday noted investor Wilbur Ross joined the chorus (Druckenmiller, Blinder, Dalio, etc.) in warning that the bond market is inflated by at least 25% and when the current bull run on bonds ends, it will end badly. So enjoy these times, dear Readers. I am. But remain diligent and nimble. Then, if a bond market fade causes stock prices to fall, you and I, like Marvin Gaye:
"Won't be dog gone
We'll be long gone."
P.S. My speculative play of the week was buying Apple at 451.98. This is the first anniversary of the announcement of Apple's dividend. I am hoping the dividend will be increased and/or a massive stock buyback will be announced sometime soon. If not, I will sell---again.
No comments:
Post a Comment