6/18/2013 3:30 PM ET|
3 ways to save the rally
The market doesn’t have to correct. It doesn’t have to skid hundreds of points just to get back at a more reasonable level.
I'll give it to you straight. The market rally is in deep trouble.
Japan is stumbling. Inflation is looming. Europe is austere and jobless. The Federal Reserve? The summer swoon is stifling. It has about as much of a chance of tapering as a banker on bonus day.
The wolves are at the door. The end is nigh. The cliches are sounding.
This column usually isn't about predicting where markets will go or what stocks to buy or sell. But today I'll make an exception, because what we're seeing is so nakedly obvious. The markets have risen too far, too fast.
Through Monday, the S&P 500 Index ($INX) is up 22.4% for the last 12 months.
There's no point in going into how silly that is. Even if you considered the markets undervalued a year ago, they were not that undervalued. The market generally is a predictor of the economy. Based on this rally, we're about to enter a golden age of full employment and government surpluses.
We're going to see a Tesla in every garage and a free-range organic chicken on every home rotisserie. And yes, you will be able to afford one.
That's the bad news, the good news is that the market doesn't have to correct. It doesn't have to skid hundreds of points just to get back at a more reasonable level. You know, one that reflects GDP growing at a 2% rate, not 20%.
So what's the solution? Three things:
First, the housing market has to stabilize. That means banks need to settle their ongoing litigation stemming from the crisis and clean up the foreclosure mess.
Just to give you an idea how far off course they still are: A recent lawsuit against Bank of America (BAC) found that the bank was paying employees a $500 bonus to foreclose on clients.
And, of course, that's just the latest horror story to come out of the housing crisis. After being pressured by regulators, banks ended up giving loan modifications to just 43% of those eligible (another 2% are still waiting). Just 817,000 received temporary or permanent modifications.
That's not only discouraging, it's been damaging. For many, home ownership was a financial anchor that allowed them to spend in the economy. Contrast those modification levels with the more than 17 million foreclosures since 2006 and you can see how many lives have been financially devastated -- job or no job.
Secondly, companies need to start investing. In the aftermath of the financial crisis we watched as company after company began stockpiling cash "just in case."
At the end of 2012, U.S. companies had stockpiled more than $1.7 trillion in cash or other liquid assets. They added $40 billion last year and now have $300 billion more in cash than they had at the start of the financial crisis.
Moreover, more than half of the cash, roughly $840 billion at the end of last year, is being held in overseas subsidiaries. That means lawmakers here need to act swiftly to enact a tax amnesty program to return this cash for investment here, rather than abroad.
Bernanke to the rescue
And finally, in order to keep investors in equities, Ben Bernanke's Federal Reserve needs to keep interest rates low.
Now many of you will argue that this is a bad idea. Cheap money, you say, will only lead to more inflation. It's a bubble, not unlike the kind of easy credit that got us into this mess in the first place.
Yes, that's the risk. But the reality is that U.S. interest rates aren't set in a vacuum. The U.S. central bank competes with central banks around the world. Moreover, the Fed needs to keep in mind that even mentioning "tapering" of its bond-buying program is sending bond investors to the exits.
The Fed has the luxury of time, so why not use it?
Ultimately, the market rally has a sort of overenthusiastic feel to it. But feeling good isn't necessarily a bad thing. There are a lot of reasons to have bought during the last year.
It's just that investors have gotten a little ahead of the reality. Should housing and corporate spending improve, and interest rates stay in line with other economies, there will plenty of reasons to justify the current market levels -- and more.
More from MarketWatch:
1) pump $85 billion into the economy every month
2) keep on pumping $85 billion into the economy every month
3) continue pumping $85 billion into the economy every month
Barry, I`m much better off than I was 53 months ago.Party because of the market in which
you weren't smart enough to participate in.My invesors club meets tonight.If I told them
to avoid the stock market like Barry S. does, they would think I`d lost my mind.They would
ask"Who is this stupid idiot named Barry, that thinks this is 1929?"I would be removed from
leadership role for stupitiy.Do you catch my drift?
Barry, let me see how smart you are.I get over $2500 in stock dividends every month.
Does that tell you how vast my portfolio is?Do some basic math.If you learned any in those
numbered schools in NY.
Barry, not all stocks pay dividends.I have some tax free holdings.I`m not showing all my
cards.You`re the one that missed the bull market.
The rally will only be saved by continuing to pump new money into the system. The market isn't doing anything on it's own to justify it's value.
The rally doesn't make a s--t to most people. The market and the economy are not the same thing. The economy is dying.
Obama is actually is centrist.With this congress, they would love to impeach him.Those
wiretaps were approved by judges.That`s a big difference than violating the Constitution.
If there had been a terrorist attack on Obama`s watch the right wing would shout it from the
rooftop.I know the right, is going to say BENGHAZI.We shouldn`t even be there.It`s a snakepit.
We all know Embassies are just spying operations.
FREE JOE BIDEN; what`s amazing is how many righties can`t decide whether Obama
is a socalist or a Nazi dictator.They need to get a dictionary.Those views are complete
opposite.The right believes every conspiracy.There`s a commi under every rock.When
Obama winks, he`s signaling to the Marxist.
Well, the nurses have put Barry to bed for he day.His depends is on,he`s had his
meds and it`s sweet dreams now.He can dream about how perfect the world was
back in the 1950`s.
Classic Lady:I know your right wing leaning teach you conspiracies at every turn.Here goes:
I worked my way through college doing manual labor jobs like sweeping floors and
working 1 summer at a farm.I`ve worked my tail off from 1967 until 2011 when the wife
and I retired.Yes, we`re millionaires, but not in the 1% club.If hard work and the use of
brains is fantacy island to you, maybe you`re in fantacy land.
Classic Lady;No interest in moving to Germany.The women don`t shave there.I`m not much
for been either.I like my Harvey Wallbangers at Morton`s steak house.
It`s not 1929, most Americans are doing fine.The right wing tells so many lies about Obama
that too many believe their lies and conspiracies.
Contrary to what righties like Barry S, says, most Dems are not deadbeat.Only about 55%
of americans even vote.If the middle class voted in huge numbers you wouldn`t see
tax breaks for the rich and corporate welfare.
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An interest rate tease in The Wall Street Journal sends the market into an optimistic tizzy -- but one that doesn't end quite at the top.
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