September Bullish, Midterm Bearish And What I'm Watching

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 |  Includes: HPQ, NOK, TIF
by: Mayo Welch

August was a rollercoaster of a month and now we are looking towards September. I think we will rally, in September, due to government intervention and not based off of economic indicators. It is reasonable to believe that if the market spikes down one more time then QE3 will be around the corner and any news about QE3 tends to rally the markets.

Investors should be concerned about the potential QE3. QE3 from an economic perspective would be in similar fashion of popping prescription painkillers one after the next trying to fix your problem. The only thing you will have accomplished is hurting yourself. So, QE3 should not be something that we look forward to witnessing.

Understandably many will argue that QE3 is nothing like what I have mentioned, but it is. It is a failed Keynesian policy that only causes inflation in the long-run... but in the long run we're all dead according to Keynes, the man who created the theory. Simply looking through history at other countries that have utilized this approach we see Latin America in the 1980s as the biggest example of failed Keynesian policies.

Now, I have talked poorly about QE3 without giving a definitive answer on why it is bad so let's take a look. The way that Keynes had designed his policy was to limit the "bust" of the business cycle and try to smooth it out where there was a steady climb up. I will commend him on his contributions and theories they really are quite innovative, but they don't work.

The problem with smoothing the "bust" of the business cycle is that he is interfering with the free market distorting price signals. Anytime a price signal is distorted economists cannot clearly identify the problem. So, think of the Keynesian policies as a teapot. The pressure continues to build and will eventually pop.

Take a look at Alan Greenspan, one of the most revered central bankers of our time. He managed the Federal reserve so well that we had what appeared to be a rally from 1990 to 2000 with a small pullback in 2001, but then we were rallying again right up until 2007 when the pressure built up just a bit too much.

Now not all the blame goes to the Federal Reserve for 2008. Washington policy makers did a bang up job of making mortgages easier to get, but this coupled with the Federal Reserve easing the "bust" cycle created an economic disaster of economic proportions.

So, while I am bullish for September my portfolio will continue to add to bearish ETFs. The underlying economic indicators are bearish, but the market sentiment is still bullish. I think we will dip back down, I am just not sure when and thus I remain cautiously bullish.

Stocks I am currently watching:

  • Tiffany & Co. (NYSE:TIF): Below $70
  • Hewlett Packard Co. (NYSE:HPQ): wouldn't mind buying under $25.50
  • Alcatel-Lucent (ALU): at $3.50

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TIF, HPQ, ALU over the next 72 hours.