The concerns supporting a bear view on U.S. indices issues prior to yesterday's FOMC press release were clear:
1) "I'm negative on the market because the economy is not recovering."
2) "The Fed is killing us by keeping interest rates so low. Savings accounts are a negative carry, hurting the household."
3) "The QE's were a disaster and did nothing but we'll take another serving."
4) "The banks can't make money with a flat yield curve."
5) "Inflation is an issue."
6) "Europe and China will take us down."
In my view, the FOMC press release was perfectly turned out for everyone except for those misguided souls staying too long at the bond party. To paraphrase the statement: the economy is recovering but we're going to keep rates low until the end of 2014. Instead of driving the markets lower, investors should do a hosanna, take a breath and start picking stocks - not any stocks, but those more dependent on the U.S. economy. The rising tide lifting all stocks is ebbing making this a great environment for stock picking.
By not hinting at a QE3 while paying homage to an improving economy and labor market - I trust the Fed's mark-to-market much more so than their forecasts - a large part of the bear case for US equities was served a debilitating blow. After a short period of adjustment the market will continue its assent. Yes, markets do rise as the Fed tightens as long as monetary policy remains fairly accommodative. But all is not lost as to the Fed and monetary policy. As with a recovering addict in rehab who has been mainlining heroin courtesy of a benevolent pusher, the Fed will not force us to go cold turkey so I look for a modest bridge to higher rates upon the expiration of Operation Twist in June.
The focus of naysayers will now increase on the purported impact a slowing global economy may have upon the U.S. and, ultimately, our equities. What has resonated so loudly is silence on the fact that the U.S. still has largest economy in the world and that while not entirely self-sustainable, we can drive decent growth given that our reliance on the EU and China as markets for our goods is small relative to our internal consumption.
Banks, already on the upswing from improving credit, upward trending existing home sales, and being the beneficiaries of distressed European banks' need to sell non-distressed assets at distressed prices, will soon be able to make money on a steepening yield curve. This environment should be panacea for U.S. banks providing they remain disciplined in feeding out their inventory of homes to an improving market.
Inflationary pressures caused by a weaker dollar will abate, not that the Fed ever saw them as anything more than transitory, pressuring gold but helping the consumer as will higher yielding bank accounts but pity the fool who doesn't see major principal loss in much small moves in yield.
I continue to like the market primarily because I anticipate upside in this reporting season relative to expectations, laboring under the belief that businesses and individuals are stronger. I like the USD long versus the Euro short. I hate the Aussie dollar and added to my short; China is a drag on their export and minerals economy and they have extremely high rates that have to come down. I am long domestically focused equities. Technology continues to play an important part in my portfolio, the issue with SNDK specific to their business model (I bought today). I am opportunistically shorting steel, copper and coal on a trading basis.
Go U-S-A. U-S-A. U-S-A.
The market of the last two days reminds me of my grandfather, Phil. He was a surly guy and had his voice been disassociated from his body, one would have envisioned a much more stout individual than he actually was. Gravity had taken its toll as he advanced into his 90's, shrinking his frame to little more than five feet two on his tallest days. The often inverse correlation of age to patience took its toll and his gruff and demanding personality continued to overshadow a diminutive frame, expanding to a size that would better fit someone sporting the physique of Ray Lewis or Vitali Klitcshko. Phil was never indecisive in his demands but increasingly, he never wanted what he asked for. The following true story provides an example and a parallel to today's market.
"I'll take the sirloin," he grumbled.
"Of course, sir. How would you like it prepared?"
"Medium" he groused in response.
The kitchen turned it out perfectly medium but his rote response, his knee jerk reaction, was to send it back.
"This is raw," he said, misconstruing pink for red. "It needs more fire. I don't want to see any pink. I want it well-done," he barked, clearly contradicting his original order although he didn't see it that way.
The waiter did as he was told and again delivered the steak perfectly prepared to order; well-done, not charred. My grandfather's rebuke was even more harsh.
"This is burnt," he said, chastising the defenseless waiter.
And so it went. I left significant compensatory damages behind, padding my grandfather's meager tips, hoping to assuage my embarrassment and to maintain my good standing with the service establishment in New York City.
The moral: While you can hardly compare ordering a steak to positioning a portfolio but if Phil had not pre-judged the result, determined to return the slab of meat even if it came out perfectly cooked, perhaps he would have been able to profit from a good result.