Thursday, November 21, 2013

A Bubble Begging for a Pin

With the market not sure what bad news would send it soaring today, here comes the Philly Fed to save the day by tumbling from October's 19.8 to a paltry 6.5, slamming through expectations of 15.0. This is the biggest miss since February and assures that ahead of today's POMO there is enough ammunition for a stock ramp to end the three days of declines. Since the economy is once again sliding on every possible banana peel, we can calmly go back to the "market" ramp.

The Fed has become masterful at blowing insane investment bubbles. Like all bubbles, they eventually burst (LTCM in the late 90's, 2000 Dot Com crash, 2006 Housing Market Crash, 2008 Leverage Crash). This time will be no different. For now, the Fed has managed to bypass the laws of rational finance. Who knows how far they can take it this time, but eventually you ignore fundamentals at your own peril. The Fed is already losing control of the bond market. I suspect we'll muddle through the holidays in a sideways to slightly up bias followed by a possible stock market reset happening sometime in conjunction with the next debt ceiling debate early in 2014. This could erase many months of gains in a few days. Is it really worth buying (or holding) at all time highs and trying to capture the last 3%-5% of upside in conditions like these? We'll soon know.


  1. Hey you guys! I just found your blog through Life's Little Adventures. We're in the Airstream down by the lake. Maybe we can meet up for a glass of wine one evening this week!

  2. Very interesting. I'm holding all stocks in the market for last 2 years and I'm ready to pull the parachute cord and get more diversified. I know I'm playing on borrowed time (house money) and like your comment about holding out for 3% to 5% more and risk the bottom falling out of this market (which we all know is coming). As far as diversification... what options do you like? P.S. 50yr old future full-time RVers once our youngest 14 goes off to college.

    1. It used to be that diversification meant bonds vs stocks. Interest rates are so low that bonds aren't the best choice anymore. Now the choice is between stocks vs cash. I've been slowly selling stocks and going to cash. It looks like there may also be a chance to rotate out of the general market indices and into commodities. The stock indices have been on a tear while commodities have been hammered over the past 14 months. Timing is never perfect, but scaling out of the highest returning sectors into the poorer performing sectors is one way to "diversify". It will be interesting to see how far the Fed's easy money policy will push stock prices.