Don't stand there moaning, talking trash
If you wanna have some fun,
You'd better go out and spend some cash
And let the good times roll
Let the good times roll
I don't care if you young or old,
Get together and let the good times roll
— B.B. King, Bobby Bland
It appears Monday's low in the stock market averages concluded this last little sell off. The decline occurred, courtesy of Standard and Poor's credit agency. It reduced its outlook for U.S. Treasury bonds from neutral to negative. Since then the markets have climbed back and are now preparing to test the next level of resistance.
We can credit some stellar earnings announcements, especially in the technology sector, for the turnaround in investor sentiment. Most investors were worried that the Japanese earthquake disruptions — especially in semiconductors — would hurt high-tech companies this quarter. But the strength in demand from around the world, especially in the manufacturing sector, has more than made up for any Japanese-generated short falls.
None of this should come as a surprise to readers since I have been expecting (and writing) that global economic growth would gain momentum this year. It is one fundamental reason why I think equity markets will experience upward momentum into the summer.
"But what about the deficit, the declining dollar, inflation, oil prices?" wrote an exasperated reader, who has disagreed with my bullish calls of late.
"How can the market keep going up and up when all these negatives are out there?" he moaned, while still sitting in cash.
All of those concerns are quite real and I am not discounting any of them. See, for example, my recent column "A Shot Across Our Bow" on Standard & Poor's debt warning. It is obvious that the market is choosing to ignore these negatives for now. I'm sure investors will re-visit these worries when the time is right, but remember Maynard Keynes once said that markets can stay irrational about certain things far longer than you or I can stay solvent.
I contend that as long as the Federal Reserve continues to supply cheap money to the markets in the form of its quantitative easing operations, the markets will go up. The historical low short term interest rates that are now a fact of life are forcing more and more investors to take on riskier assets in order to get a decent return for their money.
I'm looking for a quite sizable "melt-up" in global stock markets over the next few weeks or months. I'm also expecting some new moves by China to allow their currency to strengthen in an effort to combat their soaring inflation rate. That would add further impetus to a declining dollar, which would boost our exports and add more growth to the U.S. economy. It might also turn investor's focus back on China, which has lagged world markets for some time. Stay tuned.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at firstname.lastname@example.org. Visit www.afewdollarsmore.com for more of Bill's insights.
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My wife just read where gas could go to $6 a gallon by summer. That would surprise me. But it made me wonder if there was a particular investment one could make that could be used as a hedge against that particular rising cost? Do institutions or small investors ever play that game?
Right now, Iím thinking most of my money is making good returns that give me that hedge. Iíve been pleased to see my IRAís going up as you predicted they would in your columns, and Iím hoping by yearís end, my funds will be back around where they were when they took the big hit in 2008. Iíve also taken a large part of my cash and put in a Putnam Absolute Fund as a safe way of getting more out of it than bank interest (like the guy in Saturdayís column is apparently doing).
And hereís what Iím wondering now: for the rest of my cash, is there a good alternative to a bank money market account that provides liquidity, easy access, and yet can actually make me a decent return? I think a lot of people out there are like the reader you quoted Saturday and are sitting on cash that, if there was a safe alternative, would redeploy that money.
Good call on the global markets and you're right China is about to get very interesting again. It looks like they have got inflation somewhat tamed. A lot of transitioning going on here: with Emerging Markets becoming more of a growth engine from a demand rather than supply perspective, and the big one in my opinion will be if the US can transition from public sector credit growth (QE1, QE2, etc.) to private sector credit growth, I think the pump is primed, and when we start to see it happen, watch out! What will individuals borrow against? Depressed real estate, of course.