Posted By: Matthias Paul Kuhlmey
In his speech at the Economic Symposium in Jackson Hole this past Friday, FED Chairman Bernanke reminded us that he still has “bullets left” to support an ailing economy: “The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability.” And there it happened again: U.S. equity markets ended a more prolonged, significant losing period and posted strong results at the end of the trading session – with more buyers than sellers (as we often joke), and most likely a good deal of short-covering involved.
What is it with the increasingly more frequent Attention Deficit Disorder (ADD) impacting our investment community? It should be clear to everyone, by now, that severe challenges still remain and will overshadow the financial system for some time to come. It is our sincere view that this is not the time to “bet the bank” on quick money to be made. To refresh our memories:
In Europe, issues are far from resolved. One very important aspect to follow is the upcoming vote of the German Bundestag and, most importantly, the German Constitutional Court ruling on the legality of the European Financial Stability Facility and the European Stability Mechanism. This aspect will most likely “disturb” markets until decision day, September 7th, 2011.
In the U.S., the economy (according to Strategas Research) needs 2% Real GDP growth for S&P profits to just be flat. With recent numbers reported, Street estimates are very likely to be revised downward, once everyone returns from vacation. So what will happen to all those wonderful high-dividend paying (or not) stocks that everyone is telling us to buy?
In Asia, China announced a plan to now extend reserve requirements to margin deposits, which has not been done previously in this fashion. This latest measure, which will be implemented gradually over the next few months, is equivalent to at least two, if not three, +0.50% interest rate hikes (Source: GaveKal Research).
On a pure technical basis, major indices around the world continue to trade in bear market territory, even after Friday’s and today’s sessions. The S&P could advance further, but will experience resistance already at the 1200/1210 level. We see the chance of an advance back to 1250, but more likely also a retest of last Summer’s consolidation range, around the 1000 level.
Let’s face it, and be bold to correct Mr. Bernanke a bit: if the Fed had the ultimate solution/policy to fix what global investors are looking for, wouldn’t they have applied it by now? Above in mind, the truth is that the more policy options that fail (as QE2 certainly did), the more risky the subsequent policy decisions and consequences become (see Wolfe Trahan Research for excellent work on this matter). Consider also that the huge imbalances that were created prior to the Credit Crisis of 2008/2009 have never been fully de-levered; this process will take time, and we are most likely only halfway through.
Understand higher equity levels as a good opportunity to allocate more defensively, rather than chasing momentum, and continue to hold more cash than usual to take advantage of deals when offered.