The bulls are running today, being chased by hot mergers and acquisitions news.
As I write this, the S&P 500 is at an all-time high and the Nasdaq Composite is at a 14-year high. The Dow still has a few steps to climb, but there’s a good chance it too will reach for new highs in the next few sessions.
According to Matthew Keator, the namesake at Keator Group, a wealth management firm in Lenox, Mass., “People are recognizing that while some economic data has been muted, there is still a lot of value in the market based on corporate cash positions and multiples. From a perspective of overall fundamentals, things look pretty good, especially relative to other asset classes.”
He’s right about investors recognizing value in the market, and that corporations are sitting on fat cash positions.
It’s the big hoards of cash that’s pushing mergers and acquisitions. And there’s value in the U.S. market. But that’s all relative.
As Keator points out, things look good relative to other asset classes. And he might have added that values look good here because the U.S. is the cleanest dirty shirt in the laundry.
Elsewhere around the globe, things aren’t so rosy.
The U.K. just saw a bump up in their unemployment rate, the emerging markets are struggling, China is grasping for laundry detergent to clean up its shadow banking mess, and gold — which has been rising furiously — is indicating that not everything is hunky-dory.
Economic data has been mixed, which is putting it nicely. What’s nice right now is that investors are looking past a host of soft numbers in the U.S. and figuring the Fed will roll over its “put” positions that traders and investors have come to rely on as a floor for the market.
After all, it is their articulated policy to create a “wealth effect” by keeping rates low to pump up equity markets. For that, they deserve a gold star.
But — and it’s a big but — what’s underneath the Fed’s stimulus efforts remains to be seen. If the Fed continues to taper, as they say they will, and if rates rise (by that I mean if the 10-year gets back above 3%), will emerging markets freak out? Will the flight out of emerging markets accelerate? Will their attempts to stabilize their currencies by raising rates (some by huge amounts) slow their growth to the point that they actually falter?
Make no mistake, the U.S. is the place to be for investors. That is if you’re all in and have been all in, and have a plan to take profits here and there, and see the taper for what it really is, the beginning of the end of easy gains for the markets.
I see that. I’m taking profits and raising my stops. I’m starting to buy some puts. I’m finding shorting opportunities that on a risk reward basis are positively ripe.
There are asset classes that are vulnerable here.
Where is “here?” Here is making new highs in the U.S. as the rest of the world looks to be slowing down. Yep, I said it, slowing down.
I’m not the only one saying it. Christine Lagarde, who heads up the IMF, just came out with a warning that they are seeing a dangerous propensity towards disinflation in Europe and elsewhere. What the IMF is worried about isn’t disinflation. They’re worried about deflation.
The macro of all macro worries (besides a credit crisis in China that creates a “Lehman moment”) is that the more than $14 trillion in global stimulus since the last credit crisis hasn’t created enough “escape velocity” for global economies (we’re all in this together now) to grow on their own without Mama’s milk.
Bad weather in the U.S. will distort GDP numbers and almost all economic data measures we all watch to see which way is up, or if there even is an “up.” That means we’ll have to wait until the end of the first quarter and probably well into Q2 before we get any clarity on growth momentum.
Meantime, the market isn’t waiting. The new highs are a sign of optimism that the weather is just the weather and that when we thaw out, spring will arrive with all its green shoots and the economy will flower.
I can only hope that spring will see us “spring” ahead.
But I don’t hope when it comes to trading and investing. I take well-calculated, measured risk and reward positions. And right here, I’m starting to put on positions that will scream higher for me if the weather isn’t just a blinking yellow light, if global growth slips, if China has a Lehman moment, if the Fed continues to taper, if the rally is a head-fake.
Sure, I’ve got on my core positions and they’re rising with the bulls. But I’m also selling calls on them here. I’ve had a nice run and now want to garner more income. And if those calls mean my positions get called away, so what? I make more money. I can always get back in. And in this market, I’d do that by selling puts.
All this was to be expected as record amounts of money came out of equity mutual funds the week ending February 5, 2014. Any move higher was bound to see a lot of that money come back in… and it has!
That’s what I’m doing right now. But I want to know what you’re doing.
Your view and your feelings are representative of investors in general. You are the market when it comes to “retail” investors, when it comes to the “public.”
What are you seeing out there? What are you feeling?