WASHINGTON, November 20, 2013 — It’s a gloomy Wednesday morning here in America’s income redistribution warehouse, aka our nation’s capital. Meanwhile, up in New York, stock futures are modestly down roughly two hours before the opening bell due to fears by more than a few that the current rally is running out of steam.
Evidence for that: a very wobbly, lightly traded market that was massively spooked when high frequency trading algorithms went nuts to the downside when Carl Icahn seemed to telegraph a big short position via the usual social network route.
Picking up on Wall Street’s Carter-esque malaise, world stock markets were dimmed Wednesday by a weaker outlook for global growth. All markets also braced for the release of Fed minutes that could spark a new wave of speculation about when the central bank will reduce its monetary stimulus.
The taper nonsense is getting long of tooth and boring to boot, although it doesn’t seem to have lost its power to frighten the algos and excite the shorts. Logic tells you that a “December taper” is utter nonsense.
If the Fed was scared off its game plan by the budget battles back in September, why would it want to throw a monkey wrench in what, until now, was a decent Santa Claus year end rally—particularly with another budget battle coming up early in 2014 and the ongoing, rolling disaster of the Obamacare debacle?
Chairman Ben himself tried to soothe troubled waters at a speaking engagement here Tuesday evening. CNBC reports “Bernanke said the central bank would maintain its easy monetary policy for as long as needed, and would only begin to reduce bond-buying once convinced that labor market improvements would continue.”
Alas, logic long ago abandoned our markets, so who knows what official message Bernank & Co. will clumsily telegraph this afternoon, particularly with dovish Janet Yellen set to succeed him sometime in Q1 2014? She has already expressed strong support for low interest-rate and bond buying policies aimed at stimulating U.S. growth.
In any event, the Federal Reserve releases minutes of its Oct. 29-30 policy meeting this afternoon that will be parsed for new insights into the central bank’s thinking on the economy and the longevity of its low interest rate policies.
Near-zero rates on fixed-income investments have pushed investors into riskier but potentially higher yielding assets such as stocks. That has fed gains in stocks but left investors on edge for signs the central bank will start reducing its purchases of government bonds and mortgage securities totaling $85 billion a month. Although our waiting for Godot metaphor has gotten a little long of tooth lately, it still, unfortunately, applies.
As for today, more pessimistic forecasts have reinforced current thinking that gains in stock markets, fueled by easy monetary policy, are out of step with the reality of lackluster economic growth in rich developed nations and fading momentum in many developing economies.
—AP contributed to this report
We’ll likely hold our fire today. We are probably over-invested at this point and could get caught in a big downdraft if the algos and perma-bears interpret today’s Fed announcement as anything less than utterly optimistic.
Meanwhile, as we’ve already indicated here and elsewhere, the worsening Obamacare disaster has ominous implications for large sectors of the economy looking forward, not to mention the very real possibilities for social unrest that could arise if enough people end up somehow completely uninsured on January 1 after figuring they were covered.
We may start selling a couple of our bargain basement bonds this week—the ones we picked up, holding our noses and drinking Maalox by the gallon, in March 2009 when all markets were tolling bells and crying, “Bring out your dead!”
Several of our bargain bonds have been called lately, robbing us of average 8 percent returns even though we’ve made up to 60 percent capital gains on every one of them. Most are still in premium territory and close enough to maturity that maybe it’s best not to lose that premium to a call.
If you managed to pick up any of this fire-sale merchandise in the same time frame, you may want to at least consider doing the same. But as always, that’s up to you.
Since the Maven has to be out on travel for most of the day today, he’ll likely look to protect that somewhat-too-large main portfolio.
The usual hedge: we may throw on a chunk of the ProShares 2x short S&P 500 ETF that tracks the S&P to the downside at double speed, more or less. This would add a little stability to our portfolio in the event that the Fed somehow signals it’s going to goose rates and cut bond buying yesterday.
As with any hedge, the downside would occur if the Bernank’s oracular pronouncements make the market ecstatically happy. SDS will get killed in that instance and we’ll take the loss. But that’s the nature of a hedge. It’s an insurance policy against bad news. And like life insurance, if your portfolio doesn’t die, you won’t collect.
Good luck to us all. The Maven will return this week as needed.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He currently holds a small position in FPX and is still holding a small amount of TWTR purchased on the IPO. He failed to get any of the Zulily (ZU) IPO shares that were discussed in a previous column.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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