I'm interested in your view on this. >>>
Yeah, but take it with a grain of salt, because I couldn't trade my way out of a paper bag these days. <g>
Here is something that is extremely different from the last easing cycle. I'm stating the obvious here, but bear with me.
We tightened 6 times from June99 to May2000 to cool off the economy for a grand total of +175bps. The last of those rate increases is affecting the economy now. However, the economy's high rate of growth brought about tremendous paper wealth that led to mass consumer spending and (best termed by Uncle Greenspan) investor irrational exuberance. He was dead-on BTW, even though he was scorned for those remarks. Anyway, consumers spent beyond their means based on unrealized profits from rising assets values. Those who were lucky enough to take some profits had very little left after paying the bills and the tax man. While this was going on at the consumer's level, corporations were guilty of doing the same thing. As a matter of fact the recent bull run helped to prop up corporate profits. How many times in the last couple years have you read in an earnings report about a gain on equity sale? Think about that now with the NAZ ending 2000 at -38%. The same shit happened in Japan in the 80's as companies bought stock in each other on margin.....remember? Anyway...you can see the vicious cycle that was started several years ago. Now add to that 6 rate increases! I'm sure the Fed now realizes the possibility that they just might have tightened a tad too much??? But a cycle is a cycle and that's how the economy works. So to get us back on track for sustained growth, the FED is going to help the economy along with an easy credit policy, and George W is going to back it up with tax reform (because he doesn't want to get blamed for the 2001 recession).
Fundamentally, that bodes very well for the asset markets.
The only problem is that the lag time will be significant because of the extent of the rate increases that helped to get us in this rut to begin with. Remember, we hiked 1.75% in just about a year. I figure we have to unwind half of that and factor in 2Q's of lag time before the economy will start to see signs of a pickup in growth.
Consider that the Fed has shaved 50bps already, and that they will likely do another 25bps at the end of the month, and follow through with perhaps up to another 100bps throughout the year. At some point this year as well, Bush should be successful with some measure of tax reform. IMO, that creates a tremendous opportunity for the DJIA to rally to new highs. The NAZ will lag, but will rally also.
THE TIMING and what do do??
That's the undefined variable unfortunately. But FWIW, this is how I'm viewing the opportunity. We should start seeing a real rally buy mid year. If we don't it could be very troublesome, as it will indicate unforeseen problems. But, I am averaging in to companies on big down days, and holding the positions....trying never to buy on UP days. I've only added three stocks to my portfolio in the last 6 months or so as long-termers, but I have averaged down on almost everything else, except my financial and value stocks. Most of what I'm averaging into is tech. But my point is that you have to be able and willing to average down, as long as you think the company is solvent and stable. If you don't think you have enough $$$ for this type of plan, then you need to scale back on how much you spend each time you buy. Discount brokerages have made it easier for investors to implement this type of investing plan, but very few people actually do it.
The time to be doing this is NOW.
Because when we do start to see the effects of the rate cuts, the markets will gain much momentum and suck in a new batch of buyers who will drive prices up even more. That's when we should be looking to sell partial positions (to improve averages). I've always tried to stick to this approach, which may seem a little contrarian in nature, but in the long run usually works.
So in a nutshell and IMO of course:
Do we agree that we need to be long on the second cut??>>
We need be buying now in small pieces.
Or do you not think a second cut will work??>>>
No, not by itself. But a series of cuts coupled with tax reform will present a great opportunity. The effects of the cuts will start to surface at the beginning of Q3. Hopefully George W. will enact some retroactive tax cuts by that time which will enable investors to pump more funds into the markets.
My fingers are starting to cramp. And I did this while chomping down a Wendy's cheeseburger.
-B (Can eat and type too!) |
