I know that many of you are golfers and as you know I love the game myself (though it also borders on hate at times:)... I think I have a good golf analogy to summarize where we are with today's economy. In the first week after the Fed announced the beginning of QE3 or what is now being dubbed "QEternity" by some, the markets paused and took a breather for a change. There really wasn't much news to drive the market so a healthy pause is a good thing to digest all the recent gains. In what has clearly become an event-driven market, investors now seem to be waiting for the next piece of news to help it move higher or for some signs of actual improvement. The first positive sign could be that Housing news has turned the corner. (See the Economy section below). However, more validation is needed. So, for those of you that play golf, it is like validating a "skin." In playing "Skin Validation Golf," if you win a hole with a "par, birdie or better" you have to validate it on the next hole with at least a par to keep your skin. Similarly, the economy needs more than 1 piece of news to validate that things are improving and that QE3 is working. And let's face it, QE1 and QE2 didn't necessarily set the job market on fire or get the economy rolling. So until the housing "skin" is validated by a few more pars, we will put that skin back in the pot and wait for some more positive signs.
There are basically 2 opposing views on the current state of the market. One is that the market has gotten ahead of itself and the fundamentals don't support the market going higher until some real news other than monetary easing drives us higher. The economy is still stuck in neutral and corporate profit growth is slowing and the comps get more difficult. So these investors are still non-believers that mostly missed the rally, sit on a lot of cash and will wait it out for another opportunity to jump in.
The second view is that the market is being fueled by central bankers worldwide and you should stay the course. Any pause or drop will be shallow, so you should use those opportunities to buy the dips. First, investors are now afraid of missing something good rather than like the past year when all the announcements were bad news. Although many of the expected announcements have already happened, it is the unexpected that could help (or hurt) the market.
Second, Hedge Funds and other managers are underperforming so they may be forced to buy the dips to try to make up lost ground. Third, what's the alternative? The monetary easing by the Fed and other central bankers is pushing investors to "risk assets" to garner the potential for return. Fourth, we are in "window-dressing" period for managers as it is quarter-end and "year-end" for many mutual funds, so there may be some buying into the end of the quarter. Finally, since the common view still is not to believe this market, the contrarian view is to do the opposite and stay in it.
Personally I fall somewhere in the middle. I think that you should take some profits off the top and let dividends and interest accumulate into cash for a little bit while we get a read on the economy, 3rd quarter profits, the election, Europe, the fiscal cliff, China, etc. However, I think we need to stay invested with the core of the portfolio because the Central Bank actions will provide a backstop and the stage is being set for the economy to improve assuming we don't fall off said "fiscal cliff."
And remember last week I ended my newsletter with "Don't Fight the Fed - Or the ECB, or the BOE or The Bank of China"? Well, add the Bank of Japan to that list. There is free money flying all over the place! Last week the BOJ added its version to the worldwide easing bandwagon by announcing that it would ramp up its bond buying program by about $125 billion by the end of 2013. So, now we just await China to enter the free money fray in a bigger way than its announced infrastructure build.
In economic news last week: Existing home sales rose 7.8% in August to an annual rate of 4.82 million units, coming in way above the consensus expected 4.56 million. Sales are up 9.3% versus a year ago. The median price of an existing home fell slightly to $187,400 in August (not seasonally adjusted), but is up 9.5% versus a year ago. Average prices are up 4.3% versus last year. The months' supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 6.1 in August from 6.4 in July. The decline in the months' supply was all due to a faster selling pace. Inventories rose in August. Housing starts rose 2.3% in August to 750,000 units at an annual rate, coming in below the 767,000 rate the consensus expected. Starts are up 29.1% versus a year ago
Global markets finished a quiet trading week almost flat. The Dow closed down .1%, the S&P 500 down .38% and the NASDAQ dropped .13%. Riskier assets such as Small and Mid Cap stocks dropped further with the S&P Midcap falling 2% and the Russell 2000 falling 1.06%. European stocks were mixed with the Euro Stoxx 600 falling -.06%. Italy -3.81% while Spain +.93% recorded a gain on news that a bond rescue could be forthcoming this week. Asia/Pac stocks rose slightly by .05%. China fell 4.57% while India rose 1.56%.
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Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtainedfrom www.ForzaInvestment.com. You can call at 908-344-9790
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