Alcoa officially opened earnings season by beating expectations but with a warning that a global economic slowdown could depress earnings in the coming quarters. All I can say is “same old story”. For four years we have had warning after warning on how bad the future can/should/will be, but with earnings coming in better than expectations. Sure there are a gazillion reasons why the economy should tank, but as long as corporate earnings are still rising and coming in above expectations, growth we will see. It may be sluggish, inconsistent, or not feel much like it, but the trend will be there and the first rule is “Don’t fight the tape”. Do not be swayed by the sizzle of the daily headlines, the meat is in the earnings and the bottom line is what counts.
The biggest thing the market has going for it is that the people in charge of printing the money are telling you to get your money out of the bank and buy risk assets. I am not saying I agree with this. Clearly, the long term outlook can only end badly. Actually “bad” is an understatement because we all know what happens when bubbles burst. However for the immediate future, and by that we mean months not years, QE Buzz Lightyear will certainly ease the pain and keep the economy growing by creating another bubble. In normal times, monetary injections lead to inflation in consumer prices. Today, with little lending and falling monetary velocity, this easy money cannot keep up with the massive deleveraging going on which is destroying assets at a faster rate than the Fed can inject. Eventually this will lead to inflation but not yet.
As we have come to learn, bubbles are fun while they are growing, but the price is that it prevents the deleveraging and rebalancing that is necessary for the economy to restore its health and long term growth. If we are not careful, we could become just like Japan as I discuss in Facing Goliath – How to Triumph in the Dangerous Market Ahead. However, for investment purposes, as long as free money has a positive effect on the economy, you do not want to break rule #2: “Don’t fight the Fed”.
Naturally, stimulus doesn’t last forever, as each time one is implemented we get the law of diminishing returns. This basically means it is less effective every time. We are already seeing this, as the market rallied slightly after the announcement of QE3, but nowhere near the exuberant reaction we got from QE1&2. This, when taken into account that we are in the 44th month of this bull market with bull market’s lasting an average of 39 months, and that we are in the 4th year of the presidential cycle where stocks usually peak, clearly shows the risks are rising. After all, even trees don’t grow to the sky.
What does this mean to you? That the world is changing and so do your plans along with it. As if monetary policy isn’t enough, we’ve got a presidential election in a few weeks and the so-called “fiscal cliff” fast approaching, so investors need to be prepared. In fact that is what my radio show Smart Money with Keith Springer is all about this week, understanding what the effect the presidential election will have on your investments and how to prepare for the fiscal cliff. This is a show that you will not want to miss! As an investor, it is imperative that you focus on getting the returns that you need with the least risk possible.
And that’s where we can help.Our “Invest for need, not for greed™” approach combined with our hands-on proprietary Top-Down Tactical™ investment management strategy can help you manage risk and deliver returns. If you would like to learn more and/or get a free second opinion on your portfolio, simply reply to this email, click our Appointment Request Form or call for a no-cost no-obligation consultation today at (916) 925-8900.