One of the phenomenons that we frequently encounter is the propensity to hide from what the marketing is doing when it is down. We tend not to want to watch the market when it is going down and we call this ‘The Ostrich Effect’. Even when we use the market as a place to ‘play’ a little with our money, we get flustered and not think of it as play money anymore when the market is going down.
So we spent our morning trying to climb out of this purple funk. We started by taking stock of what the market and risk factors are telling us. So what do we know?
Over the past year the Dow ranged from 15372 - 17265 and the opening today was at 17005.
The S&P ranged from 1755 - 2010 and the opening today was 1985. (www.yahoo.finance)
Not too far off from the highs we thought. So lets look at some of the risk factors.
Currency - How is the US dollar doing? According to pundits, not so bad when making comparisons with the ‘basket’. http://www.fxcm.com/products/mirror-trader/currency-baskets/. We need to understand what these ‘baskets’ mean. The banking system is a fractional system but its not backed by gold, adequate cash reserves or anything solid. We believe that we are in the throes of a currency war. Most progressive countries are debasing their currency except maybe the British pound. What does this mean in terms of investing? The low dollar helps the import business. But if everyone is doing it, its a race to the bottom. This is the effect of currency wars.
Interest Rates - They are low. The current infusion of money to the banking industry over the next 7 days is $216B at .26%. The highest infusion of money we have ever seen. The market was down 14 days ago, 8% for the year, so the Feds intervened. Interestingly enough the Swedish government set their interest rates to 0%. They are debasing their currency also. Should we be buying retail stocks and then dump them before Christmas?
Relationship between currency and interest rates - Interest rates control the monetary spicket that banks use. The lower the rates, the assumption is that the more money they push money into the economy. But if the demand is not there, they won’t be lending anytime soon. THey may inverst in the stock market or use the money to make their bottom lines look better. There definitely needs to be a market correction of at least 10%.
Bonds - The spread between government bonds and corporate bonds is growing. Bond prices and interest rates are inverse. The treasury interest curve is flat. Bond curve interest rates are increasing. Corporate bond prices are falling. Higher risk premiums and rates of return are lower. Investors think the risk in these bonds is higher. In addition, the Fed announced that they are not going to buy bonds anymore on Monday; only continuing to own what they already have. The good news is that the Feds are not dumping bonds on the market yet, as this is one of the ways to keep interest rates low.
Earnings - There is a lot of good news for companies but perhaps that all this means is that they have cash reserves. We need to look at their 'top line' (earnings) and their 'bottom line' and the trend seems to be that companies are not doing product expansion in the US. They may be buying back shareholder stock and not doing product development or investing in research. In sumary, the top line is not going up and the bottom line is being preserved with cuts.
Natural Resources - Oil prices are low and will stay low for a while. http://www.csmonitor.com/Environment/Energy-Voices/2014/1028/Oil-prices-have-hit-their-floor.-Here-s-why.-video
US fracking entry into the natural gas arena is going to keep the Saudi’s from raising oil prices as they will want to keep their customer base. Low oil prices are good for the economy. Europe is looking for better alternatives to buying from Russia. Can we meet this demand given that this winter is going to be bad? We need to do the research to need find out who builds gas lines to move gas for export. Halliburton? The Navy and Railway are the biggest consumers of oil in the country. We also need to look at who is shipping gas and oil. Maybe they are are good bet?
Weather - Weather this winter is going to hugely impact the economy. For example, the drought in Brazil, dropped energy company prices there. We need to do more research on this risk factor.
Gov’t Policy - We need to research government business policies that affect the economy. An interesting fact is companies in Australia, companies spend more money on their own red tape and not activities because of government policy. Wonder what it is in the US and where we would find this information?
It is safe to say that we are still experienceing the Ostrich Effect. We definitely feel that the Federal Reserve Board not only in the US but also in other countries. It seems like puts and gets are the only way to maintain our portfolios while we continue to do more research on what sectors to best invest in.
Our last thought was to look at the US debt reports and find out what it can tell us. Whoa! Not numbers we were expecting. For this week we will continue to research and our focus will be on the Global Economic news. Stay tuned....
Notes to research:
Carry Trade: Borrowing in one currency and investing in another currency at a higher rate.
Zero Hedge: Perhaps there is a third mandate for the Fed which is to 'Maintain the Stock Market'?