July 7, 2011
WHO KNEW?
Certainly not dour Bill Gross or perennial bear Nourial Roubini, who until ten days ago were featured in gloomy headlines and media interviews. As usual, the media choose to tell yesterday’s story. They were in love with tech stocks before they tanked in 2002, with silver before it tanked six weeks ago and with real estate before it tanked 4 years ago. To me, yesterday’s strong rally, coming as it did after Moody’s downgraded Portugal’s sovereign debt to “junk” status, threatening yet another European financial crisis, was pretty strong evidence that we are in a new Bull upleg for equities.
This all seems incomprehensible, even to one who has marvelled at the orneriness of financial market behavior for over 30 years. Think of all the Bad: insolvent banks hiding behind accounting legerdermain. Failing European states, a US government that is effectively bankrupt yet the US market has been up in 6 of the last 7 sessions, with many shares breaking out to multi-year highs!
I suspect the answer lies in two areas. First, there is evidence that the Spring slowdown is easing, and that hiring is picking up. ADP reported a better -than-expected rise in jobs created of 157,000. Second, I suspect a deal will be worked out between President & Congress to do something meaningful about our out–of-control deficit. Were this to happen, confidence in US Treasury instruments may be marginally restored thus delaying the inevitable rise for US interest rates. Low interest rates are good for the economy and good for stocks. Despite my discomfort with the negative seasonal pattern in which we find ourselves, I’ve seen enough evidence to embolden me to re-purchase some positions that we sold as the market appeared ready for a deep summertime slump. fortunately, going into the May sell-off, we did not make any big changes to our holding of defensive high quality equities, but simply raised some cash to be cautious. that cash is now going back to work for our clients. Investing means being ready to alter one’s opinion, and this won’t be the first time for me.
