Friends,
As you know, we have been talking about the liquidity vs. reality story for two and a half years now. We have said repeatedly, don’t fight the Fed. As long as Dr. Bernanke and the Fed were going to provide endless amounts of liquidity, stocks and bonds were going to benefit. The fact is becoming clearer, that these endless amounts of liquidity have not had the desired effects on the economy in general. Real Estate is still struggling, to say the least, unemployment is still stubbornly high, and the litany of economic numbers over the past two months are indicating that the economy is actually slowing again. The only winner, it seems, from the Fed’s “all in” policy over the last two and a half years has been asset prices, namely stocks and bonds.
We know that at the end of June, QE2, the current asset purchase program, is scheduled to end. The question is, where does that leave us now? As Dallas Fed President Fischer explained earlier in the week on Squawk Box, the tank of the car is full of gas. The Fed would serve no purpose in continuing to pump more gas into an already full tank. What we need now is to somehow get the engine started, and that would seem to have to come from fiscal (government) policy. The warnings have been sounded, that if we don’t address our debt problems as a nation, then our credit worthiness is going to suffer. To those of you in Congress, the crisis is upon you. It is time to act and restore faith in the U. S.
Where does this leave the markets? Well, for now, it seems we are experiencing a normal pullback in what has been a determined bull market. To date, stocks are down about 6% from recent highs, which would qualify as a typically pause in an up cycle. As we have preached for years, the time to buy securities is when they are on sale. So many traders are driven by momentum strategies that adhere to buy high and sell higher-continuously playing a game of musical chairs. We have always concentrated on risk management which leads us to want to buy low, taking advantage of disruptions in the market which are typically temporary, and then sell when the momentum crowd begins their buy high and sell higher game of chicken.
With QE2 ending and the uncertainty over whether the economy’s most recent slowdown is temporary or the beginning of a “double dip”, we expect stocks to continue to struggle into the summer. 1250 on the S&P 500 seems to be the first line in the sand that we will be watching. If that holds, then a defined trading range of 1250 to 1350 may be in the cards for the rest of 2011. In the meantime, we look forward to being able to buy things at better prices as the summer progresses. We still think with short-term interest rates destined to remain low for some time, stocks will be the ultimate beneficiary as investors seek some type of return on their assets. As we have pointed out repeatedly, U. S. corporations are as healthy as they have ever been. We look forward to the “summer markdowns”.
Have a nice weekend everyone.
