-Next Fed meeting will bring back the 60’s

Buzz Lightyear Bernanke and the Federal Reserve meet again next week to try to figure out exactly what the hell to do. I throw in the “H” word very simply because they don’t have a clue and are just throwing what monkeys do at the wall to see what sticks.

The good news is that the Fed has announced the continuation of QE Mini-Me, which I believe will keep us out of another recession. In fact, I’m mildly optimistic from recent consumer spending #’s, which makes me believe that the 4th quarter will look better than expected. This admittedly has put me at odds with many other experts, who overwhelmingly think that a double dip is a given. However, with expectations so low right now, it won’t be hard to beat them. It’s not that I think we will boom from here, it’s just that QE Mini-Me will keep us from falling into the abyss, or as I’ve coined, a continued slog through the mud.

The bad news is that all the kings’ horses, blood and treasure have proven ineffective in bringing down unemployment or stimulating any true longstanding demand for our economy. Of course, we all know from reading Facing Goliath that there is little the Fed can do in the face of 98 million aging Baby Boomers shifting from their peak spending years between age 46 and 50 (see chart put chart to the right if possible), to their more saving and declining spending phase for many years to come, starting in early 2012 forward.

Everybody knows that the Fed must do something soon and that will likely be “Operation Twist”. This new Quantitative Easing type program will center on buying longer dated bonds to bring down yields on consumer borrowing such as mortgages, car loans and credit cards. QE1 and QE2 focused on shorter term bonds and rates to try to spur bank lending.

The name comes from the time the government tried this move back in 1961. The nation was in a recession and President Kennedy announced his own plan to fight unemployment, which was a sordid 6.8% vs. 9.1% today, “Operation Nudge” because it would nudge longer term from shorter rates. That name never caught on, but thanks to a new dance craze from Chubby Checker at the time, Wall Street called it “Operation Twist”. Of course this won’t solve the long term problems, but it should push stocks higher as the other QE programs did as well as putting a little confidence back in consumers.

Investor Strategy:
Investors must approach this market tactically. Over the past 40 years, the US has gone through six recessions according to the National Bureau of Economic Research, and every recession has been accompanied or preceded by a bear market.

• The average fall in the S&P 500 has been -34.8% and an even harder fall for the NASDAQ of -46.5%.

• In addition to the damage, the bear market ate up a lot of valuable investment time, again on an average of 548 days, or 1 and a half years.

• Without the right strategy, it takes ridiculous gains to make up for the losses. For example, a +53% gain to recover from a -34% loss in the S&P 500, and a +87% gain for a full recovery in the NASDAQ losses. Plus the next time around the Fed will not have the same resources available so there will be no bounce back.

Are we in or about to be in a recession? It may not make a difference. First, we will not get the official news until after the fact. Most likely however, the economy will continue to slog through the mud and struggle along at a stall speed. Second, over the past 40 years the S&P 500 and the NASDAQ have gone through a total of ten bear markets (four without a recession). We do not need a recession for a bear market to take place.

That does not mean there are not places to make money in this market. To the contrary, there are plenty, but investors must take advantage of where the “sweet spot” is while standing ready with a well thought out exit strategy. That’s what “tactical” investing is all about and what we specialize in. Buy-and-hold (buy-and-HOPE) in this market is nothing more than rearranging the deck chairs on the Titanic. Most people have never heard of active management or active allocation and its benefits. The average investor is looking at a 401k statement that has gone nowhere for the past decade or longer. Interestingly, last Tuesday, the S&P 500 was trading at the same level it first hit in July of 1998!

And that’s where we can help… Our active, hands-on Top-Down Tactical™ investment management strategy for managing portfolios can help you manage risk and deliver returns. If you would like to discuss the market, economy or simply get a free second opinion on your portfolio, call me for a free consultation today at (916) 925-8900.

Regards – Keith Springer