On Friday, February 5th, we saw capitulation in the stock market that spelled the beginning of the end of this Q1 correction. One week later, today, Friday February 12th, we had a capitulation of stupidity coming at us from the news media. Consider the negative interpretations of the following three news items:
(1) China is increasing its reserve requirements for banks. A country that everybody is worried about because its lending and growth appear headed for bubble territory does something to bring stability to its economy and the media wants us to believe that is a negative thing? The threat of the bubble bursting in China is the real cause for concern. Less leverage decreases the risk of downside volatility. This is a wonderful step in the right direction and the global economy continues to recover from the financial crisis.
(2) Ben Bernanke begins to formulate a plan to withdraw Federal programs and we’re supposed to assume this will bring new fear and volatility to the market? Hmmmm. Let’s get this straight. Our cancer patient (the panic market of March 2009) has improved so much that the doctor thinks its time to formulate a plan to get the patient off of his medicine. Is this really a bad thing? Getting rid of government aid is the best signal of strength we could possible have.
(3) The rising dollar will halt the U.S. recovery. The media honestly believes that a rising dollar will doom the stock market. Yes, a rising dollar does negatively impact exports, but the overall effect of a declining dollar is what really dooms the stock market. If the dollar is losing value, foreign investors take a hit when they convert their funds back into their domestic currency. This negative effect was evident throughout the last decade. Since reaching its high in the summer of 2001, the dollar dropped 38% by the end of 2009. During that time the real return for buy and hold investors in the Dow Jones Industrial Average was minus 33.9% after accounting for the dollar decline. Don’t let anyone tell you that a declining dollar is good for U.S. equities. The underperformance of the last decade proves otherwise.
In conclusion, there aren’t enough voices of reason in this market; the action is dictated in the short run by traders who don’t understand the root causes of economic events. Chinese tightening is not a reason to panic and sell. The Federal Reserve removing economic medicine is not a reason to panic and sell. The dollar rising after nine years of decline is not a reason to panic and sell.
Investors who make money are the ones who see the the daily news flow for what it is and stick to their well reasoned convictions. Unfortunately, the media does a terrible job of interpreting the news for you.
Disclosure: Long uup