I’m sure many of you have read One Up on Wall Street and are wondering what that has to do with the economy. So am I, but I started with it, so let’s keep running with it.
His lesson, at least as I took it, was to stick to things you know. Simple things in your own life can help make good investment decisions. That somehow got morphed into buying the stock of any company that makes something you like regardless of the price, but that’s another story.
What I want to focus on here is the economy. What do we “know” about it? Not what “experts” are telling us, or what we want to believe, but what we ourselves know about it.
Pent Up Consumer Demand Post the Cliff
I keep hearing that somehow consumers are going to buy a lot because they were saving in case the cliff was bad. I don’t see it. I see two pretty distinct groups:
- those who paid close attention, and executed some tax strategies around the potential outcome, but have enough money that they didn’t cut back on spending
- those who paid little attention, live paycheck to paycheck and are about to be surprised by smaller take home pay
Talk to people. Who really cut back because of the “fiscal cliff”? Concerns about bonus, yes, but fiscal cliff, no. Talk to other people and most thought it was some nonsense out of Washington. It was CNBC that had the Cliff Countdown clock, not NBC, or even CNN for that matter.
Pent Up Business Expansion
I don’t know of anyone changing their business plan post cliff. I haven’t talked to a single person who works at a real company that has a growth plan just waiting the fiscal cliff resolution for approval. I will admit I talk to far more people in financial companies than real companies so my sample size is small, but it also seems logical.
We got NFP today. Personally I don’t find it to be a great report. Not bad, but at 1,460 on the S&P 500, not bad doesn’t seem to cut it. Last December we produced 223,000 jobs. So this December produced few jobs than last year.
The household survey came up with a measly 28,000 jobs.
As far as I can tell, from the people around me, the “broken glass” people got their wish and Sandy increased jobs. There were a lot of people busy on fixing and cleaning things up after the storm. I know our lawn guy was the busiest he has been in awhile and had some employees I hadn’t seen before. We got work done we wouldn’t have otherwise had done.
QE Will Flood the Market with Money
In general I have been on board with this. Yesterday’s Fed minutes though put a bit of a damper on that. I also went back and it was the Atlanta Fed that took time to clarify the difference between “asset purchase requirements” and “rate guidance objectives”. It seems that rate guidance is meant to be tied to 6.5% unemployment, but asset purchases, maybe not so much. With so much bet on the Fed purchases, we have to be very careful.
Separate from the risk that QE may turn out to be smaller than many are banking on, is the question of what is priced in. I think I finally have a good way to describe my view of QE. I am pretty sure it is at the water park in Atlantis, but somewhere I have seen a bucket that gets filled with water. It gets filled and filled until at some point, the amount of water and the angle the bucket is at is just right, and the bucket tips, sending the water all over a bunch of delightfully happy kids. The bucket rights itself and starts refilling again.
So yes, I see QE as a bucket of water at a chidren’s water park. I think the bucket has spilled, flooded the market to the delight of the bulls, but now is filling again. It won’t come in dribs and drabs, it needs to get filled before it gushes again. During that wait, a lot can happen to risk assets, but being chased around by more Fed money, isn’t the likeliest thing, at least not yet.
Peter Tchir’s version of Peter Lynch
I may be wrong, and maybe what I know isn’t correct, maybe the people you talk to are different than those that I have been communicating with. If so, then I will turn out to be wrong, but I think too much has been invested on the potential action of others, and too little time has been spent seeing if anyone is likely to take those actions.
I’m not ridiculously bearish, but I see little upside in U.S. stocks and think we get to 1,425 and even 1,400 as a target. I remain convinced there are better opportunities in other markets across the globe.
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