Ben Bernanke did not apply another round of stimulus or a QE3 (another Quantitative Easing program) as many had expected or more likely hoped. His non-action on more stimulus is a good thing right now and will ultimately soothe investors because it gives the impression that the Fed has things under control.
A move would have signaled a panic on their part, and because investors and the market tend to overreact, it would have caused a sell-off. By not throwing another QE program out there, the Fed looks like they are not in panic mode and are confident things are getting better, and that Ben must see (good) things that we just do not see right now. More stimulus would have riled investors into thinking that things are actually worse than we see.
This is where impression and reality break apart though. It is definitely a good thing that they didn’t give the impression that they were panicking and things were out of control by adding more stimulus to the economy. However, the reality is that things are worsening and more stimulus will be on the way whether it is simply a continuation of QE Mini-Me or another round of major quantitative easing.
Last week's GDP came in at 1%, which is pathetic no matter how you look at it. Let us not forget too that that is after trillions of dollars in stimulus. Unemployment also seems to be getting worse. I know many economists and pundits believe employment is improving. I don’t know about you but I keep seeing companies announce more layoffs. Add to that a housing sector--which is a huge part of the economy and peoples net worth--that is “deader than a doornail” and another potential banking crisis on the way, and we have some serious headwinds, the exact headwinds that are coming true in Facing Goliath: How to Triumph in the Dangerous Market Ahead.
Given that the market actually got what they wanted and that earnings season is now just a few weeks away, the market looks to be bottoming here… as long as the August 8th lows are not broken. Therefore, it’s safe to remove the portfolio hedges that were put in place to prevent a cataclysmic event. In addition, investors should start snapping up the tremendous bargains in the corporate bond and high dividend paying stock area. It is not often that you can get yields over 8-10% with appreciation potential.
GMA - is a preferred from the old GMAC now Ally bank yielding over 8.5% (cusip 36186C2)
Edison Energy (NYSE:EIX) 7.5% of 6/13. This is yielding almost 10% for less than 2 years
Colt Defense (CLTDEF) is a corporate bond at 8.75% of 2017 yielding over 18% (cusip 19686TAC1). The company is being impacted by the budget crises and likely reduced defense spending. However, even if they have profits squeezed, they should have sufficient liquidity to more than meet their debt obligations. Remember, as a bond holder, you don’t care about the stockholders. You just want the company to stay in business.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.