Monday, February 25, 2013

Comments on the Selloff and the Sequester: Still Cautious After All These Years

Things are beginning to resemble 2011, though with tech and the Russell 2000 small stocks as the "rage" this year, rather than commodities in 2011.  If past is prologue, stocks will survive a scare and rally.  Then, later in the year, "the horror, the horror" that most of this "recovery" from the Great Recession was exactly as Reinhart/Rogoff expected.

If the above scenario comes true, and of course it's pure speculation, we will see what we will see.  If my long-held Japan scenario continues to play out this year, new lows in long-term T-bond rates loom before yearend.

The speculative way to play this is to buy EDV or ZROZ.  Somewhat less speculative is to directly purchase a zero coupon T-bond of the longest duration possible.  In either of the above cases, one is basically gambling on reversion of long-term bond yields to the Japanese mean, as it were.   I and some of the accounts I manage are long EDV (we are Vanguard clients, and EDV is commission-free to Vanguard clients) and zero-coupon T-bonds, plus the more sedate TLT.

Regular readers know that the last time I had anything really nice to say about the US stock market came in early August 2011 after the mark of the beast 6.66% down day on the Dow  Even then, my bullishness was tepid.  Unfortunately, the late September recession call by ECRI made me step away from stocks and focus on the muni market, which was seriously undervalued relative to Treasuries.  Oh well...

But it looks to me as if the Russell 2000 is this market cycle's equivalent of the NAZ in the later '90s.  It's for mo-mo players only.  A lot has to go right with the economy for it to be even a fairly good investment on a multi-year basis.

One final thought.  The media is downplaying the effect of the sequester on the economy.  How, the mouthpieces ask, could a mere $85 B spending cut by the Feds harm the "recovering" juggernaut of the  economy?  Doesn't the stock market predict a boom ahead?

Yours truly thinks that the Fed is all in and cannot "stimulate" more, and the second derivative of fiscal stimulus will turn definitely negative if the sequester takes hold as legislated.  If anyone thinks this is somewhat the opposite of the situation in early 2009, given the tax increases that took hold on Jan. 1, please join me in raising your hand.

I am all for less unbalanced budgets.  I just think that in the investment world, they tend to lead to stock market selloffs and renewed bull markets in Treasuries.


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