Let the Good Times Roll

“Don’t stand there moaning, talking trash
If you wanna have some fun,
You’d better go out and spend some cash
And let the good times roll
Let the good times roll
I don’t care if you young or old,
Get together and let the good times roll”
B.B. King, Bobby Bland

It appears Monday’s low in the stock market averages concluded this last little sell off. The decline occurred, courtesy of Standard and Poor’s credit agency. It reduced its outlook for U.S. Treasury bonds from neutral to negative. Since then the markets have climbed back and are now preparing to test the next level of resistance.

Blue skies ahead

We can credit some stellar earnings announcements, especially in the technology sector, for the turnaround in investor sentiment. Most investors were worried that the Japanese earthquake disruptions–especially in semi conductors– would hurt hi-tech companies this quarter. But the strength in demand from around the world, especially in the manufacturing sector, has more than made up for any Japanese-generated short falls.

None of this should come as a surprise to readers since I have been expecting (and writing) that global economic growth would gain momentum this year. It is one fundamental reason why I think equity markets will experience upward momentum into the summer.

“But what about the deficit, the declining dollar, inflation, oil prices?” wrote an exasperated reader, who has disagreed with my bullish calls of late.

“How can the market keep going up and up when all these negatives are out there?” he moaned, while still sitting in cash.

All of those concerns are quite real and I am not discounting any of them. See, for example, my recent column “A Shot Across Our Bow” on Standard & Poor’s debt warning. It is obvious that the market is choosing to ignore these negatives for now. I’m sure investors will re-visit these worries when the time is right, but remember Maynard Keynes once said that markets can stay irrational about certain things far longer than you or I can stay solvent.

I contend that as long as the Federal Reserve continues to supply cheap money to the markets in the form of its quantitative easing operations, the markets will go up. The historical low short term interest rates that are now a fact of life are forcing more and more investors to take on riskier assets in order to get a decent return for their money.

I’m looking for a quite sizable “melt-up” in global stock markets over the next few weeks or months. I’m also expecting some new moves by China to allow their currency to strengthen in an effort to combat their soaring inflation rate. That would add further impetus to a declining dollar, which would boost our exports and add more growth to the U.S. economy. It might also turn investor’s focus back on China, which has lagged world markets for some time. Stay tuned.

5 Comments

  1. Good call on the global markets and you’re right China is about to get very interesting again. It looks like they have got inflation somewhat tamed. A lot of transitioning going on here: with Emerging Markets becoming more of a growth engine from a demand rather than supply perspective, and the big one in my opinion will be if the US can transition from public sector credit growth (QE1, QE2, etc.) to private sector credit growth, I think the pump is primed, and when we start to see it happen, watch out! What will individuals borrow against? Depressed real estate, of course.

    Reply
    • Dear Mike,
      As usual, you have it right. Readers should be aware that Mike is one of the world’s experts in Japanese equities.

      I think it would be great if he gave us his thoughts on where Japan is going and why. Readers send me an e-mail if you think that wouold be useful.

      Reply
  2. Here’s a column idea I’d love to see:

    My wife just read where gas could go to $6 a gallon by summer. That would surprise me. But it made me wonder if there was a particular investment one could make that could be used as a hedge against that particular rising cost? Do institutions or small investors ever play that game?

    Right now, I’m thinking most of my money is making good returns that give me that hedge. I’ve been pleased to see my IRA’s going up as you predicted they would in your columns, and I’m hoping by year’s end, my funds will be back around where they were when they took the big hit in 2008. I’ve also taken a large part of my cash and put in a Putnam Absolute Fund as a safe way of getting more out of it than bank interest (like the guy in Saturday’s column is apparently doing).

    And here’s what I’m wondering now: for the rest of my cash, is there a good alternative to a bank money market account that provides liquidity, easy access, and yet can actually make me a decent return? I think a lot of people out there are like the reader you quoted Saturday and are sitting on cash that, if there was a safe alternative, would redeploy that money.

    Thanks,

    Bob

    Reply
    • Dear Bob,
      I would suggest looking at Fannie Mae bond funds as a higher yielding alternative to CDs for example. These funds normally invest in only Fannie Mae bonds which are guaranteed by the U.S. government. The reason they yield higher than Treasury bonds is that Fannie Mae, itself, is not a governmental agency even though their bonds are guaranteed by the U.S. government. I use Payden GNMA Fund (symbol PYGNX) but just about every fund family offers a GNA fund so go with the one that charges the lowest fee. This one in particular is yielding a little over 4.5% which is considerably higher than CDs. The price of the fund will move up or down but not by much.
      As for a hedge to rising gasoline prices this summer, I would normally by an oil exchange traded fund if I think oil/gas is rising, however, I believe oil has peaked for now and should fall to the $85/bbl. range and gasoline prices should decline along with the oil price.

      Reply
  3. Dear Bob,
    Great question and the answer will be the subject of next week’s column.

    Reply

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