When an investor decides to invest for the long haul, meaning retirement, it is more valuable to tune out 90% of the background noise than it is to focus in on 10% of the baloney. These last few days have been classic "fear," knee jerk reaction, doom and gloom, nonsense.
The baloney that was fed to the markets directly from the Federal Reserve was a classic mixed signal "trial balloon," if I ever saw one. I have been trading and investing in the markets for more than 40 years, and to read what the contradictory comments from the various Fed Governors, the FOMC minutes and Ben Bernanke himself were, made me feel like punching out my computer screen.
The Mixed Signals Cost Investors Money
Fear takes hold in all sorts of ways; a major disaster, a terrorist act, a sick rumor, or whenever the Fed opens their collective mouths. Yesterday, the Fed was at center stage, and in the center of the center was Bernanke himself.
First there was this gem of a report that announced that the Fed would think of tapering off in 3-4 months time:
"I don't really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out," Dudley said in an interview with Michael McKee airing today on Bloomberg Television. "Three or four months from now I think you're going to have a much better sense of, is the economy healthy enough to overcome the fiscal drag or not."
In my opinion, Dudley knows just about as much as the rest of us as to when we will "have a much better sense" of the economy. All reports still show sluggish growth, high unemployment and as far as the Government is concerned, no inflation.
Regular investors MIGHT have sold and taken a loss with Dudley's words.
Bernanke himself stated these facts:
Federal Reserve Chairman Ben S. Bernanke told the Joint Economic Committee of Congress today that the economy remains hampered by high unemployment and government spending cuts, and raising interest rates or reducing asset purchases too soon would endanger the recovery.
So does this mean that in 3-4 months the economy will be strong enough to pull the plug on QE? Not in MY book. The stock market however took the initial signal of imminent doom to cause a rapid sell-off, right after the market began flying high as Bernanke spoke.
In testimony that showed little immediate desire to retreat from the Fed's third and latest round of bond buying, Bernanke emphasized both the high costs of unemployment and inflation that continues to run below the Fed's target.
"Monetary policy is providing significant benefits," he told the congressional Joint Economic Committee, citing strong consumer spending on autos and housing, as well as increases in household wealth.
"Monetary policy has also helped offset incipient deflationary pressures and kept inflation from falling even further below the (Fed's) 2 percent longer-run objective."
Just to add to the confusion, Bernanke added this little gem:
"If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases," he said.
"If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather, we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward."
In the world that I come from, this is double-talk. I also believe the Fed got precisely the reaction it was looking for; a large stock market sell-off (to gauge the investor sentiment of course). For us retired folks, we also had an opportunity to take advantage of a red tag, special sale day, in my humble opinion.
Buy The Dips? Absolutely!
For those who follow the Team Alpha Retirement Portfolio, just about every stock was down for the day, and many were down again today. The mixed messages directly from the Fed created somewhat of a buying opportunity, especially in the wonderful dividend income seeking stocks that are in the Team Alpha Portfolio.
The Team Alpha portfolio consists of Ford (NYSE:F) Chevron (NYSE:CVX) Apple (NASDAQ:AAPL), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NASDAQ:CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Annaly Capital (NYSE:NLY), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), and Wells Fargo (NYSE:WFC).
As dividend income seeking investors, when we can pick up a few shares of mega cap, blue chip winners, at a 1%or 2% discount, just because of background noise, we can make more money down the road, as things settle back into reality.
The reality is that stocks are cheap on a relative basis. Forward PE ratios are well below other bull market high water marks, and just about each of the companies in the portfolio are raising dividends, and/or buying back shares.
As I stated in this timely article:
The annual income of the portfolio is based on a current YOC of roughly 4.96%......Markets will always pull back or correct. It is unavoidable. That being said, if investors keep their eye on the ball, and know what their financial goals are, as well as risk tolerance, I believe each of you will gain more clarity with your decisions.
Following this strategy should have reduced some fear, and perhaps had some investors embracing the moment, and opening positions as well as adding to them, as I did (I added some more shares of NLY and CSX to my own portfolio, not Team Alpha's, since TA does not have a huge cash reserve).
Seeking Alpha's "Market Currents" also announced support of my thesis:
4:15 PM Market recap: Buy-the-dip remains the overriding psychology of this momentum market, as stocks mostly overcame a morning swoon fed by fears the Fed would take away the punchbowl, plus the Nikkei's 7.3% plunge and weak manufacturing data from China. Once positive economic news came in (I, II) and the Fed's Williams and Bullard offered dovish remarks, investors decided to buy instead of run for cover. The dollar dropped as the yen soared, while gold jumped 1.8%.
Which came after this "market current" was issued early in the morning:
7:08 AM The Fed trots out St. Louis' Jim Bullard who says it's been awhile since the FOMC discussed an exit from QE, and he doesn't think the group is about to start talking about it anytime soon. In fact, making Mr. Bullard nervous these days is inflation that is too low. S&P 500 futures are well off the lows....
The bottom line to all of this nonsense is that investors can still focus on company fundamentals, as well as a financial goal of dividend income and remain calm in a sea of turbulence.
From my point of view, that is all that any of this is.
Disclaimer: The opinions of the author of this article is not a recommendation to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.
Disclosure: I am long AAPL, BKCC, BMY, CSCO, CSX, F, GE, JNJ, KFN, KO, MCD, NLY, O, T, WFC, XLF, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.