Well, it looks like the Fed finally got a clue last week and slashed short-term interest rates. They must have bought a "u" or an "e." Their 75-basis-point fed funds rate cut now has them less behind the curve. After this week's 25- or 50-basis-point cut, they will be close to, or at, my expected 3% level. It's about time.
Now many are criticizing this Fed move as irresponsible or pandering to shareholders. They note the sloppy but hardly collapsing economic data and claim "bailout." Poppycock. The Fed has been behind the curve since the financial crisis began. All they are doing is following the fixed-income market lower. The more appropriate criticism of the Fed should be their tardiness.
Better Late Than Never
The Fed is not trying to save the stock market. It is not even trying to rescue the real economy. Right now, neither really need nor deserve saving. However, the Fed does need to aid the banking system with a more normal yield curve. It does need to mitigate the ugly residential housing bear market and rapidly fading commercial real estate market. It should help jump-start liquidity in the fixed-income markets. It probably wouldn't have an issue with the resumption of normal risk-taking in the financial markets as well.
The Fed is not bailing out anyone. The humongous losses in real estate and the debt-market bubbles, which the Fed helped create in the first place, have already occurred. The bloodletting in the financial services/real estate industry is only beginning. There are more write-offs and capital-raise announcements coming, so get over it.
The purpose of shockingly short rates is to insure against the actual debacle in the housing and debt markets from spreading into the real economy and causing economic Armageddon. The bears in the markets jeer this Fed action because they so desire a deflationary/recession spiral. Some are just talking their book, others believe in some moral cause to eradicate the evil that is leverage. But understand that those who criticize the Fed's moves want more financial pain. I don't. Short rates will help us avoid some pain.
They will not be panacea. Even with 2%-3% cash, the real estate markets will probably head lower, maybe even significantly. The banking system needs much more time to heal and recapitalize. The domestic consumer will continue the belt tightening and bump up their savings rate. We should experience below-average growth for a couple of years as the excesses in the financial and asset markets are worked off. But we don't need to have an economic implosion.
Incredibly low money rates will lower financing costs, stimulate investment and support consumption more than otherwise. They will add some support to the housing market and help stretched homeowners refinance their mortgages. Lower rates will aid purchases of consumer goods and services, supporting general economic activity. They are an insurance policy against the financial crisis dragging down the real economy. We should be so lucky as to have to reverse them sooner rather than later.
These positive forces will mitigate some of the negative pressures on the economy from the unwinding of the great debt bubble. They will not reflate the Great Stupidity, as I have termed it. The "still dancing fools" have had their legs removed permanently.
So ease up on the Fed. They were late, but better late...
So, Where Do You Put Your Money?
So what does all this mean for stocks? The decidedly mixed flow of news should result in continued volatility, but I believe with an upward bias. If the real economy holds, led by still-reasonable global growth, especially in long-lead-time energy and infrastructure investments, then the U.S. stocks market can work higher. There is still economic and market risk. But right now, much more economic doom is priced into cyclical shares than is visible.
I am buying shares in companies that have exposure to the global growth trade. I believe we will avoid economic Armageddon. The best time to purchase shares is when fear and uncertainty provide exceptional value. Many economically sensitive sectors are right there now. If the global economy collapses, I will have to change my position, but at this moment, I don't see the implosion.
Since I am very active, I cannot put out individual names at this time. Blame the lawyers for trading restrictions that mentioning companies brings. However, I do like individual stocks in cheap cyclical sectors like energy, raw materials, machinery, computer components, hard drives, airlines, specialty and "tween" retail, shoes and toys. Check the archives for stock mentions in the past.
I am underexposed to many traditional defensive sectors of the market, such as staples, health care, utilities and REITs. If the economy holds, their trade has passed. Maybe surprisingly, I am avoiding financials, housing, autos and other large-ticket durables. While a good trading bounce may exist here, the fundamental headwinds are simply too strong for the intermediate term. Remember, the healing process in the real estate/financial industry will take longer than many believe.
When the market bounces back, shareholders will pay for growth, even if it is cyclical. Buying companies with strong top- and bottom-line growth should provide decent returns when the financial market panic subsides. The Fed's rate cuts, as well as stabilizing economic data, should support the real economy and financial asset prices. Investors are throwing out some very attractive babies with this panic bathwater. I am buying babies, especially compellingly cheap, economically sensitive ones.
At the time of publication, Marcin had no positions, although positions may change at any time.
Robert Marcin is the founder of Defiance Asset Management, a private investment management firm. Client accounts managed by Defiance Asset Management often buy and sell securities that are the subject of commentary by Marcin, both before and after it is posted. Under no circumstances does this column represent a recommendation to buy or sell stocks. This column is intended to provide insight into the financial services industry and is not a solicitation of any kind. Neither Marcin nor Defiance Asset Management can provide investment advice or respond to individual requests for recommendations. However, Marcin appreciates your feedback;
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