The market is giving you another opportunity to lighten up on SPDR S&P 500 ETF (SPY), PowerShares QQQ (QQQ), Vanguard MSCI Emerging Markets ETF (VWO), SPDR Barclays Capital High Yield Bond ETF (JNK), Select Sector SPDR-Energy (XLE), bank stocks like Bank of America (BAC), JP Morgan (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) among others. Ishares metal ETFs such as Gold (GLD) and Silver (SLV) as well as metals stocks like FCX should be sold too as this latest rally is merely mean reversion. Even high flyers like Apple (AAPL) and stocks that have relatively outperformed like AT&T (T) and Verizon (VZ) might be giving you an opportunity to gently let them go.
Global economic growth is slowing and Greece may leave the euro but the past few days the focus seemed to be on the possibility that Europe will find some back-door way to fund Spain's bank recapitalization and on Federal Reserve Atlanta President Lockhart's comment that an extension of the Operation Twist program is "an option on the table." The release of the Fed's "Beige Book" showed a lack of the use of words slow, subdued etc. to describe regional economic conditions and that has been a noticeable pattern in recent months. It seems that other Fed member's statements lately seem relatively sanguine about U.S. economic growth and not really contemplating more quantitative easing.
That being said, U.S. equities and some key commodities soared almost 2.5% on June 6, while bank credit spreads tightened 20 basis points and some emerging market credit like Venezuelan bonds jumped 3 points higher. That means that bond funds with high yield and emerging market bonds in them like Ishares ETFs HYG and EMB bounced back nicely, giving you another chance to sell them. The media pointed to the possibility of more quantitative easing on the way just because one Fed official said it was on the table.
The reality is that not only is global economic growth slowing but the necessity for most of the world's major economies to cut spending and make painful fiscal reforms should perpetuate the malaise for a few more years. The U.S. has a "fiscal cliff" approaching so either U.S. leaders enact ground breaking legislation to fix it or automated adjustments like massive tax hikes and spending cuts will be implemented.
It is only through the magic of discounting cash flows at near-zero percent interest rates that the present value of assets prices remains inflated. Treasury yields have bounced off their lows recently but at 1.65% they still clearly reflect distress in the global economic environment and as we move closer to the June 17, Greek elections, that anxiety might become exacerbated.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
