I felt for a moment that the whole Wilcox family was a fraud,
just a wall of newspapers and motor-cars and golf-clubs,
and that if it fell I should find nothing behind it but panic and emptiness
—Howard's End
E.M. Forster
By the end of Thursday's session, there was plenty of panic and emptiness. Although I never sensed wholesale panic, volume was high and the damage was wide as few stocks finished the session in the plus column. Actually, a few asset classes, save for maybe marbles and pop art, went unscathed. It was a real meltdown, but one that was anticipated for a long time, which doesn't make it less impactful, but easier to rationalize.
The question we're all left with is have the walls of newspapers, motor-cars, and golf-clubs fallen? Has it all been a fraud?
On Wednesday, Ben Bernanke took a shot. Feeling there'd been sufficient warning through media leaks, testimony, and interviews of Fed officials and the last FOMC gathering. You would think this history buff would have known there was no way to butter up Wall Street sufficiently. They would scream in agony of fear, but not like that of a hungry baby but more like that of a spoiled brat.
Bernanke said the economy is getting better, Wall Street heard:
Release the Kraken!
Sea creatures have been part of mythical lore long before man even learned how to navigate the seas. One such tale, "The Kraken" by Alfred Tennyson established a new creature that slept at the bottom of the ocean for eternity only to emerge in the apocalyptic age. For many without the Fed's easy money and other gimmicks this is such an age.
While I think Ben Bernanke is overestimating just how great the US economy is and how limited upside potential there is with the current administration the harsh reaction from investors reflects a time when people don't do hard work anymore. Just think of all the hedge fund managers caught cheating during a four year rally that saw the Dow climb 9,000 points—in that environment you had to cheat? Confidence shouldn't come from polices that placate near term angst while seeding longer term cancer.
The wailing began at the open and continued into the close. There was no doubt the market would close at the low of the session, and it could have been worse as I only saw a couple feeble buy programs in the face of the onslaught. The market was more than ready to pullback. It finally has put in two ugly back to back sessions and the worst since the day after the election. In many ways that sell off was more justified. For all the damage Bernanke has done with its multi-billion dollar balance sheet, the White House has done more with its anti-success agenda.
For me it doesn't absolve the Fed, but I know where Bernanke has been coming from—he feels he is doing all the heavy lifting - alone.
This is what investors need to know. The sooner the Fed gets out of the way the better, even if it means a short term pullback and more days of monsters rising out of the ocean to wreak havoc on the masses. I feel all the reaction to Ben's hints is overdone for the wrong reasons. Tapering probably comes next year unless the second half of 2013 is a barnburner, and even then we'll have to wait for late evidence posted in 2014.
China's Dilemma
The runaway train that has been China's economy is remarkable. Last year its growth was enviable for most of the world, yet it was the slowest in 13 years. Now there's a new premier, Li Keqiang looking to make his bones with discipline and long term thinking. Right now he has a short term dilemma, which is allowing the economy to drift even at the risk of it slipping into a hard landing of sorts. The PMI reading on manufacturing points to accelerated contraction. In many ways, yesterday's meltdown happened just as much from concerns about China and missteps or miscommunication from the Fed.
It's been a couple years now since the speculation of another round of massive stimulus out of China, and yet they've played it close to the vest. The world needs China's growth to reaccelerate ... even if they are lying.
With slowing China, other emerging nations experiencing growing pangs and the Fed looking to pullback there are some adjustments to investing.
Charles' Notes:
Don't overreact ... the most important thing is to own companies based on solid fundamentals... that would mean weathering the storm and buying on weakness. My subscribers are in 25% cash at the moment largely because I recognize they're fearful and because I like to bank profits.
People should be balanced ... I do portfolio reviews each day and the "loading up" factor is huge ... they'll have too much gold or utilities, etc.
That said, you have to be honest about your holdings - no stock is ordained to rebound - cut loose losers based on companies losing market share, inconsistent execution, and industry-specific macro issues.
Be careful with companies with huge debt levels - servicing cost and refinancing costs will go higher.
Be careful with bond substitutes like utilities and MLPs.
Look for companies growing in the United States - for the past four years global growth has been at the center of my investment thesis, and while I still love American companies with giant global tentacles, if the US economy is improving companies with market share gains and pricing power are worth watching.
Then there are sectors hit on knee-jerk reactions like homebuilders. Mortgages may become more expensive, but cheap mortgages weren't bringing in Main Street anyway. If wages edge up, and there's greater confidence in the economy, people will look to own homes which is much cheaper than renting in almost every corner of the country.
Remember pullbacks are part of investing and this market is long overdue. It would be an amazing mistake to panic. The last three years saw swoons triggered in the spring of 9% to 16%, only to rebound and rally into the New Year.
I'm excited about great stocks going on sale ... not sure where exactly to pull the trigger because of emotions of investors, which means selling begets selling. But we have a large cash position and are ready to pounce.
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