Inflation destroys stock market fantasy
Wall Street suffers as higher energy prices nix dreams of more stimulus.
The delicate balance holding the stock market aloft has been broken. Central bankers, the providers of the cheap money that has sustained the uptrend, could no longer deny rising inflationary pressures. They also had to mention signs of economic strengthening, even if they're based on unsustainable things like unseasonably warm weather and a drop in the savings rate.
By acknowledging the troubles of higher prices, they have destroyed Wall Street's hopes of hundreds of billions' worth of new monetary policy easing later this month. The stock market's cheap-money addiction has been laid bare. And it ain't pretty.
Stocks dropped dramatically after the latest meeting minutes from the Federal Reserve threw icy cold water all over the idea of a third round of quantitative easing being unveiled at its April policy meeting. The problem is higher gas and oil prices have pushed inflation above the 2% target. The sell-off continued Wednesday as the European Central Bank joined in, too.
In this environment, with the markets dependent on central bank largess to justify their otherworldly, no-volatility, low-volume uptrend in the context of deteriorating economic fundamentals, having the Fed and the ECB talk about inflation is like someone yelling "fire" in a crowded theater. It sent the meek scattering for the exits, unleashing the wave of selling pressure.
But rest assured, QE3 is coming. And it's coming soon. Most likely at the June meeting. Which means officials will start teasing it in about a month. Between now and then, the market will likely be pulled lower on weaker and weaker economic data, as was seen by pitiful manufacturing activity data earlier this week.
The Fed meetings pretty much outlined this scenario. Members of the policymaking committee saw no need to ease further unless economic conditions worsen. Only a "couple of members" discussed the potential need for more stimulus if inflation or growth weakens -- a downgrade from the "other members" who discussed this at the January meeting. They also noted the substantial increase in oil and gas prices.
I'm not the only one with this outlook. As soon as news of the Fed minutes hit the wires, research note after research note from the big investment banks hit my inbox all saying the same thing: QE3 in June.
Societe Generale economist Aneta Markowska wrote that the minutes were "not as dovish as we expected" and were notable for their lack of discussion of further easing options "whether outright QE or some kind of sterilized version." The latter has been hinted at recently as a more inflation-neutral option for any QE3 initiative. (Essentially, the Fed would target mortgage rates while removing the excess cash it's using to do so out of the system.)
Merrill Lynch economists paid attention to the Fed's mention of warmer-than-normal winter weather and the effect it has had on seasonal adjustments to economic data -- acting as an artificial boost to the results that has made the economy look stronger than it really is. This is something I've mentioned before.
As for the ECB, bank president Mario Draghi noted Wednesday that upside risks to inflation prevail and that the annual inflation rate is likely to remain above the bank's 2% target this year. He added that all tools to address increases in inflation remain on the table.
All of this is a big disappointment for bulls looking for central bank largess to send stocks and other risky assets higher, regardless of the negative impact it would have on inflation, consumer spending and the real economy. The selling pressure that was unleashed should continue for at least a few weeks.
In response, I recommend conservative investors cash out and reduce stock market exposure for now. For nimble traders, there is a growing list of attractive short ideas. Until now, they have been relegated to energy and emerging-market issues. Now semiconductor stocks are joining the list of sectors demonstrating relative weakness against the overall market. European stocks are also turning lower in a big way after a poor Spanish debt auction early Wednesday.
I am adding a new short position in Vishay Intertech (VSH) and a long position in the Direxion Daily Semiconductor Bear 3x Shares (SOXS) to my Edge Letter Sample Portfolio. Current positions include a short in the National Bank of Greece (NBG) -- up 33% since Feb. 22 -- and a long in the Direxion 3x Daily Emerging Market Bear (EDZ) -- up 11.1% since Mar. 15.
The SOXS is a triple-leveraged inverse ETF, so it's appropriate only for the risk takers out there. Milder versions of the same idea include the ProShares UltraShort Semiconductor (SSG), which I recommended to my newsletter subscribers earlier this week, or a short position in the Market Vectors Semiconductor Holders (SMH).
I found VSH and SOXS with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
Disclosure: Anthony has recommended SSG to his newsletter subscribers.
Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at firstname.lastname@example.org and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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Inflation is far worse then deflation for the middle class. Deflation is a boom for anyone on a fixed income, savers, and those wishing to purchase goods or services. The only "good" for inflation is if you are in debt, then you can repay in inflated dollars, this is why the government is pushing inflation because they are the biggest debtor in the world, the banksters are number 2. Inflation pushes the pain onto the middle class while deflation pushes the pain on the government and banksters.
I believe Unemployment rate will tick BACK up to 8.5% or even 8.6%....
We shall find out this Friday April 6th at 8:30AM ...it ain't gonna be good this time around!!
and more lay offs coming, hope obama counts them this time when the employment numbers come out, yahoo, 2000, best buy and sears 1000's, maybe someday this idiot will understand fuel runs this country, we are not in the horse and buggy years but he sure is putting us there, i told my son, if you buy land make sure you have a good running brook or river you will need it for power.
sure wuish obama got his **** together, to late.
everyone wants stimulis, that is one reason we are where we are, nowhere. obamaboy is never going to get out of this mess with printing "F:" in money. stop the print, raise interest a point and lets see if that works, nothing he has done works, spend and spend, maybe it is true, the SOB is selling us to China.
Great job on your 2% gain after a 30% loss. Excellent work.
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