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Are you ready for Ben Bernanke's press conference on Wednesday?
Or put another way: are you ready for the stock market correction that everybody's been anticipating since the start of the year?
By now, you should be. The “risk on/risk off” weirdness in the markets has been going on for too long. The “easy trades” in precious metals, oil, currencies, bonds and equities, have gotten just too easy, too one-way.
Silver, anyone?
You can of course thank the Fed for this unnatural state. Not that anyone over there is 'fessing up. Here was Vice Chairman Janet Yellen defending the Fed a couple of weeks ago: “The surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply.”
Please. No one outside of the Federal Reserve System actually believes this. If Yellen went down to the pits at the CME, the traders would laugh in her face before throwing a party to thank her for this year's commissions.
But here's what you should keep in mind for tomorrow: Bernanke knows things are getting out of hand. Half of Europe is almost bankrupt but it now takes $1.46 to buy one euro. Once upon a time, it only took a buck. Gas is now at over $4 a gallon.
How can Bernanke not “get it?”
So I'm guessing he will use the press conference to put an end to the speculative “easy trades” even if this creates temporary unpleasantness in the markets.
The markets don't expect this. The dollar is down again today. For months Bernanke has said little that could be interpreted as “hawkish.” But does he really have a choice at this point?
Can he stand by and watch gas run to $5 a gallon? Can he continue to punish America's elderly with meager returns on bank CDs?
Maybe. But you have to admit it seems an awfully convenient time for Bernanke to be hosting a press conference. And truth is I wouldn't mind a nice 10% to 15% correction in the U.S. stock market. I've been preparing for one for the past few months.
I started 2011 with 99% of my portfolio long equities, no bonds (actually, I'm shorting long-term Treasurys) and 1% in cash. I'm now up to 15% cash with the remaining 85% in equities.
As some of you may know, I'm a pretty faithful “buy-and-hold” investor. I don't believe in market-timing and I don't like to ever sell my stock funds.
But early in the year, I noticed two things: first, my portfolio had miraculously more than retraced all its post-Lehman losses; and second, the markets were still more fixated on Fed monetary policy than on the underlying economy.
The market's addiction to the Fed never struck me as particularly healthy – and now with the end of QE2 in June, the market would have to wean itself off from its bad Fed habit.
So, over the past three months, I've been raising cash by selling the big winners – which has meant selling (in stages) a good chunk of my U.S. small and midcap index fund holdings. After all, by early February, the small and midcap indices were higher than even their 2007 peaks. Why not take a little money off the table?
Does all this mean I'm expecting another crash? No, of course not. I wouldn't have 85% of my money in equities if I thought the world was blowing up.
Corporate profits remain strong — and at 12 or 13x forward earnings, U.S. large cap stocks, in particular, seem like good value.
Unfortunately, nowadays, the markets care little for valuation. It's all about what the Fed does. So tomorrow, Bernanke should declare victory and tell everyone the Fed is packing its bags and going home. The markets will hate him for that.
But surely, Bernanke knows it is far better to disappoint the markets today than deal with a disaster tomorrow.
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Why would anyone care if this journalist is “raising cash”? What’s his track record? What does he know that others don’t?
So the author has been “selling winners to raise cash”. For what? To have money to buy another “winner”? Should we expect a “correction” of Ford, Caterpillar, Apple, Exxon, etc.?
“But surely, Bernanke knows it is far better to disappoint the markets today than deal with a disaster tomorrow.”
That isn’t the way he has been acting for the last three years. Why should he change tomorrow?
I wish you were correct;but I doubt it.The Ben Bernank is a hard head and an academic-don’t pester him with the reality here on the ground,it disrupts his models…
The market has been dependent on government policy for a long time now. Between historic deficit spending and unprecedented monetary easing, a significant chunk of GDP is now debt driven. If you subtract deficit spending and monetary stimulus from GDP, we are no better off than we were in 1998. The growth in GDP this last decade was fueld by a housing/credit bubble. When that bubble burst, it was replaced by a government spending binge and the printing press. The fact that the market is rallying ahead of the expiration of QE2 in June clearly signals that it thinks Bernanke will come through with QE3. I suspect he will initially resist. The market will then throw a tantrum, as it has done since the fall of Lehman in September 2008. The policy makers have responded to each tantrum exactly the way Wall Street wanted. I call that a conditioned response. If Bernanke fails to respond to the coming tantrum with QE3, the market reaction could be quite severe.
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