July 16, 2013

Sell the Rumor, Buy the Fact

It could also be buy the rumor and sell the fact but more importantly it has rarely failed me during my career. It weighs heavily on the idea that most people are going to be too easily swayed by an idea with no legs. In turn when that idea is empirically proven, well, don't we all feel silly?

So goes the newest saga of affecting the financial markets that began with the densely worded but still unclear musings of Chairman Bernanke of the Federal Reserve who mentioned the idea of slowing down (Tapering) the current stimulus program (QE). While no one was really clear what was said with regard to timing or any other fact the reaction amongst traders and investors was to sell bonds with a speed that in turn concerned stock investors and traders who sold equity holdings. In the end at one point the S&P500 declined by over 7% and 10yr Notes declined by over 15%. The media had a field day.

The result was less than glamorous but the opportunity was clear. Once the dust settled, sounder minds presented conflicting ideas. First came from other members of the Federal Reserve Board who insisted that without improvement in the economy and unemployment the opportunity to taper would be more elusive.

But while the markets then recovered in response the logic seem equally elusive. When the markets moved lower I chose to put new cash to work. The reason being that the spike in interest rates reflected in lower bond prices, easily the more fragile of the capital markets these days, is more responsible for the decline in stocks than fears about tapering. And to further confuse matters, the conventional wisdom (which is often wrong) saw the extension of tapering supporting the idea that stimulus is responsible for the stock market rally. I disagree because I believe tapering is a sign of a more fundamentally stable economy and should therefore be good for stock. 

So, the take away is equity holders win if they taper and win if they don't.  And although tapering is inevitable, the events will be borne out by the statistical evidence (Employment, GDP and Inflation). Which means if the economy is strong along with many more people working and the consumer is unafraid to buy maybe everybody will be too distracted to notice?

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