Posted At : April 1, 2010 12:15 PM
Stock Market Update
In the short term, stocks seem much overbought on a technical basis and in dire need of a correction. The problem with this is that an overbought condition can stick around for a while. On the longer term, however, the underlying technical strength is very real and does not look like it’s going to let up in the near term. We all know the tides change quickly and bliss can turn to pain in a heartbeat, so it is ever so critical here to truly be the expert or make sure you are working with someone who knows what they are doing.
The best thing the market has going for it is the continued pessimism among individual investors as we still are not seeing the typical euphoria and buying frenzy that occurs near market peaks. According to a recent Bloomberg poll, barely one in three Americans say the country is on the right track. Fewer than one in 10 say they believe the economy will be strong again within a year. Just four percent of Americans who cut back on spending during the recession now say they are confident enough to open their wallets. All this while the stock market screamed forward and GDP grew by 5.9%. I love it!
The market will likely to continue to slowly climb higher as we still have the three critical elements for a rising stock market: liquidity, low interest rates and investor pessimism. Once the public begins to embrace the bull market, the rally could feed on itself for a short while. With over $3 trillion in money market funds that are yielding virtually 0%, the potential fuel is certainly there. However, when the public finally does get on board, you will want to be out so have an exit strategy.
Interest Rate Update
The rise of interest rates of late is likely a warning shot that should not go unheeded. If the economy is stronger, rates will have to rise. If weaker, rates will rise due to the weakening of the dollar led by government spending rivaling that of the finest of the banana Republics. Did you ever think we had so much in common with Zimbabwe?
As I mention above, rampant skepticism is thriving, and investors continue to pump money into bond funds. Last month, close to $369 billion into bond funds and less than $24 billion into equities. That’s a ratio of over 15 to one in favor of bonds. With this in mind, we could very well be seeing the end of the easy money in bonds, as the majority of investors are never right for a sustained period. Individual short-term bonds should continue to fare well.
We are still able to find yields in excess of 7% in bonds maturing in two to four years. I would not want to own long bonds here as rates have no place to go but up. Bond fund investors beware: bond funds will be hurt the most. (Call me for details if you like).
You can’t borrow your way out of a debt crisis, period. The same holds true for a family or a nation. And as too many families are finding out today, if you lose your job you can lose your home. What were once very creditworthy people are now filing for bankruptcy and/or walking away from homes, as all those subprime loans going bad put homes back onto the market. This caused prices to fall, which caused the entire home construction industry to collapse, which hurt all sorts of associated businesses, which caused more people to lose their jobs and give up their homes….and the vicious cycle continues until you have more younger people in the economy in their peak spending modes of life. With the aging baby boomer, that is not for years to come.