Thank goodness we all just woke up from that bad dream we were having.
You know, that recurring nightmare that kept us all up in 2011.
What? You don’t remember those restless nights? Waking up in a cold sweat and clicking on Bloomberg TV to see whether European markets were going to drag us into a global depression?
Oh, all of a sudden you’ve forgotten last year’s unprecedented volatility? Now, you’re excited by early “green shoots” in 2012 and are embracing risk-on with both hands?
Wait a minute, are you loading up on financials, commodities, and emerging markets again?
Look, it’s okay to follow the market’s path of least resistance – which sure looks like upward – in order to put a nightmarish 2011 behind you. It’s fine to embrace the hope that the New Year will be a sweet dream.
Really, it’s okay, you’re not dreaming, good stuff does happen.
Not that everything that’s happening is good… but that’s not the point.
The point is that markets follow the path of least resistance. And if you fight that path and go off the reservation, chances are you’ll get left behind, looking for water while the “madness of crowds” tramples its way to the nearest watering hole oasis.
I’m following the crowds this time. For how long, I’m not sure. But, frankly, I’m tired of being mostly on the sidelines for the past few months (for some of you, a lot longer) and don’t want to “fight the tape.”
My “Insight” Here Is Simple
I see tons of problems ahead, but I also see that investors are now beginning to look past their immediate fears on account of some large Band-Aids being applied to macro-global issues.
It’s not for me to say whether recent actions are enough to actually fix seemingly intractable problems, or whether they will be enough of an analgesic to give time a chance to heal serious wounds. I don’t know. Actually, I do know…
But mostly what I know is that if global investors want to believe, I’m not going to stand in the way of literally trillions of dollars of capital that could flow into equities, commodities, and lots of cheap value plays that now litter the global investing horizon.
Be afraid; that’s okay.
Just don’t be stupid; that’s not okay.
It’s time to get back on the dance floor and start dancing. But listen to the music. If the beat slows down, take notice. If the dance hall starts thinning out, don’t be the last one out the door.
When the bumps come – and they will – don’t hang on to your highly volatile and speculative plays. Play the more aggressive and volatile stocks that can skyrocket (and also crash and burn) very gingerly.
Instead, it’s a reasonable time to start building a longer-term core portfolio. That means buying a few, maybe five to seven, solid stocks that have a dividend yield of 4% and up, and adding to those positions on market dips.
For Now, the World is Holding Together
The biggest Band-Aid on the biggest gushing wound (European sovereign debt and bleeding banks) seems to be working.
It just proved itself this morning.
When the ECB offered Europe’s hemorrhaging banks three-year term loans at about half a percent interest, they grabbed the cash. Some $489 billion worth was vacuumed up.
The banks weren’t lending to each other, and they’re still not. They parked the money back at the ECB for safekeeping. But because they aren’t making any money on their money – just watching it sleep – they’re amping up the interest rate spread they make by buying (guess what) sovereign debt.
This morning saw two successful debt auctions by both Spain and Italy.
Who was clamoring for last year’s deadbeat debtors’ dirty paper? Why, that would be the very same banks who already own tons of it (most bearing much lower interest rates) – the same banks who borrowed massive amounts from the ECB.
That’s the Band-Aid. The ECB’s back-door plan is working beautifully. (It’s a back door because the front-door rescue of these struggling borrowers would entail the ECB buying massive amounts of their debt on the open market to lower their borrowing costs.)
So far, so good.
But Europe’s not exactly out of the woods. The fact that wobbly banks are leveraging themselves with more sovereign debt amounts to the “extend and pretend” game – that everything will be better over time – being played out on an unprecedented scale.
Only growth will fix Europe’s problems. Austerity alone won’t cut it.
So watch Europe’s growth rates to get the “big picture” view.
If Europe plunges into a deep recession and bond rates start rising precipitously again, after banks have gorged themselves over the first and second quarters of 2012, that will be a good time to take whatever profits you have and tread lightly.
China is applying the other big Band-Aid – to itself.
Its economy is slowing as exports to Europe have been hurt and prices of commodities, which they massively stockpiled, have come down. They are now loosening monetary policy somewhat. The question is whether or not the centrally planned government can guide the Chinese economy to a “soft” landing.
Over here in the U.S., everyone seems to be in a good mood. Individual investor sentiment is dangerously optimistic, approaching 80% bullishness and only 17% bearishness. That gives me some cause for concern.
Earnings season is upon us. Let’s see how companies that fall short of consensus estimates get treated. Earnings are everything (unless they’re trumped by macro events), and this season will be the most important one to watch in the past three years.
Because at this hopeful moment of “are we decoupling,” for the U.S. it’s about earnings, earnings, and earnings.
I’ll be breaking down what’s happening under the radar, as major earnings reports unfold.
The JPMorgan Chase Question
I wasn’t joking up top when I asked if you were buying the financials. They have led the market higher in 2012. (Granted we’re so far into the year that, of course, we know how this is all going to end – NOT.)
But if you’re a bottom-fisher and you believe that the worst is behind us, the financials are worth a throw with some of your speculative capital.
Just don’t be suckered into believing that all their problems are behind them…
Yesterday morning I came across a very interesting and well-below-the-radar piece about JPMorgan Chase in The American Banker – an American Banker Association publication, and an excellent one at that.
I had first read in The Wall Street Journal, back in June, that Chase was abandoning its debt-collecting efforts by in-house legal teams, who were being disbanded. Back then there were questions about Chase’s debt-collection lawsuit efforts and to what extent they had been “robo-signing” unimportant little pieces of paper like affidavits, debt amount ledgers, and the like.
Chase was dropping thousands of cases they had been pursuing against defaulted credit card borrowers – even those where they had presumably already gotten judgments against borrowers. An Illinois state-court judge was quoted in the Journal article saying that lawyers for JPMorgan asked to withdraw all pending collection cases in his court.
Since industry data reveals that 94% of cases filed end in a judgment in favor of the lender, you have to ask yourself, why would Chase simply stop its efforts to go after so many defaulted borrowers?
The American Banker article picks up where the Journal left off, reiterating what the article supposed and adding fuel to the fire with the burning question… Why?
According to the article, “The bank has not explained its apparent moratorium and declined comment.”
But it sure looks like it has something to do with allegations that Chase has been falsely overstating the balance of thousands of delinquent accounts… Or maybe it’s the accusations that Chase has been selling outside debt collectors pools of debts they claimed were backed by court judgments they had won…
If the judgments were attained under questionable circumstances, meaning sworn-to documents and affidavits were robo-signed and proper legal work was short-sheeted, that would bring all past judgment and collections into question. Can you imagine?
Are there ongoing investigations by regulators over these allegations? The Office of the Comptroller of the Currency, for one, isn’t commenting.
Whatever is going on, I’m more than just a little curious. (I contacted JPMorgan Chase yesterday and am awaiting a reply from them.) And you should be, too.
No one just stops collecting on judgments they are owed for no reason.
Is JPMorgan Chase – and possibly a host of other big banks – about to be embroiled in yet another mega legal nightmare?
This could make Foreclosuregate look like a day at the beach.
Oh, and about your investment in those financials… you might just want to tighten up your stops.