Don't fight the Fed's party
The rally is on. There are reasons for worry, but until the Fed changes policy, the party is inescapable.
I apologize for my lack of posts since late spring. Contrary to what some might think, I did not fall into the abyss; I just wrote a book. Now that the copy edit is finished, I can turn my attention back to the Top Stocks blog.
Before I went on hiatus I had placed 11 positions in my portfolio at Wall Street Survivor. To be honest, I haven’t looked at them until today, but I'm up 15% since the end of May. Let’s take a look at what has worked and what hasn’t.
Let’s start with the 5 bottom positions first, which were my “safe” picks just in case the market went to hell in a hand basket:
Archer-Daniels-Midland (ADM), up 20.33%;
Cool summer weather, a decline in industrial use, and a small drop-off in customers hurt earnings and the stock price at Exelon. With the exception of management talking gibberish about the importance of cap-and-trade, there’s nothing to scare me away from this stock and I would feel comfortable in adding to the position.
Of the remaining 4, all still offer good historic value although I wouldn’t add to Atmos Energy unless I could get it under $26.
In the top 6 positions, Barrick Gold (ABX)
has been the beneficiary in the rise in gold prices with a 40.08% gain. While the gold bugs are celebrating at finally getting a chance to say I told you so, I have a suspicion that 1145-1150 might be it for awhile so a stop loss wouldn’t be a bad idea. If gold puts in any kind of a correction you can pick up ABX again in the mid-$30 range.
Occidental Petroleum (OXY), Schlumberger (SLB) and Overseas Shipholding Group (OSG) have done as expected with gains of 38.93%, 33.21% and 29.73% respectively. I wouldn’t add to any of these right now but I also wouldn’t worry about holding them either.
When I added IBM (IBM)
at $101 and change I suggested we could see a high price of $135 per share. That still seems reasonable to me so I would hold on for another $8 or so.
Lastly and still the lone buy in this group is Chevron (CVX)
Although it is up almost 24%, the dividend-yield still represents good historic value.
Going forward, that the market would retrace at least 50% of the decline was fairly simple to predict; retracements of at least 50% are the norm and not the exception. Further evidence that the script is proceeding along predictable lines is that the mood and sentiment of investors has once again entered into the Land of Fantasy and Illusion.
That there is little or no fundamental justification for the levitation act that is pushing stock prices higher has been completely ignored by the un-washed masses who are reveling in the fact that the Laws of Gravity have been circumvented. On one level, it is hard to blame those who have adopted euphoria as their primary mindset, as the signal has gone forth from the Fed that the party will continue based on four simple words: “for an extended period.”
Fed extends the fun
For those of you that are confused by Fed-speak, “for an extended period” means that the Fed will keep its fed funds rates next to zero and will continue to pump liquidity into the system through various means. While this isn’t good news for investors that buy or hold high-grade fixed-income investments, it is fabulous news for investors in risk-assets; the currently in-vogue term for stocks.
Historically, what stock investors fear most is either a recession or unexpected Fed tightening; or, in the worst case scenario, both. As to recession, investors don’t seem to be tied up in knots about that as we've just had one, although it might not even be over. So, with the comfort of knowing that “for an extended period” is the operational bias of the Fed, stock investors are free to plunge into stocks with impunity.
Back in the day, when stock prices were moving higher on steroids, the Treasury-bond market would be moving in the opposite direction; lower prices and higher-yields. Today however, the T-bond market shows no signs of buying off on the robust recovery meme. If stock prices continue to climb unabated however, the Fed may be forced into doing the unthinkable; reversing course and nudging fed-funds rates higher.
Common sense tells us that a robust economic recovery with soaring stock prices and a T-bond market with benign yields simply don’t go hand in hand. Of course, there is nothing common about the Fed’s current policy, and there is no rule that the markets have to make sense. As long as “for an extended period” remains in place, however, this freight train called MOAB II (mother of all asset bubbles) has a head of steam behind it and it would be foolish to stand in the middle of the track.
That being said, it is no time to be chasing stocks that are well into a rising trend. If you have money that is burning a hole in your pocket look to shares that offer good historic value. Remember, at some point the fundamentals will out; until then, either the stock market or the bond market is very, very wrong.
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