Wouldn’t it be great if we all had access to unlimited funding through some sort of opaque and mysterious financial institution? One that was able to print money and lend at its discretion without any regulatory, political or economic restraints?
If that sounds absurd then you’ve probably never heard of the Fed.
Back in 2008 it was the Fed and other Central Banks that bailed out the financial institutions and saved the global economy. And now, in the late stages of 2011, it is the Central Banks once again coming to the rescue to save the Euro zone and other financially stressed countries/regions.
That’s what happened this week, when a group of global central banks that included the Fed, Bank of Japan, European Central Bank, stepped in to lower the cost of lending in Dollars. With borrowing costs falling, fresh capital gets pushed into the market, providing additional liquidity and driving asset prices higher.
Is it Sustainable?
No doubt that was good for stocks in the short run, which saw their best gain in almost three years this week. But the real question is the sustainability of this model.
If the financial system isn’t strong enough to stand on its own then it clearly operates in a broken system. The way problems like these correct themselves in the free market is through innovation and competition, where weak hands are allowed to die off.
But that’s not being allowed to happen in the financial sector, because what we have learned over the last three years is that stress in even the smallest area/region has profound implications across the globe.
So as it stands, the Euro zone and global financial system continue to limp along in spite of ongoing support from the Fed and other Central Banks.
But even countries and central banks can go bankrupt. And with a river of debt being used to fix a “too much debt” problem, that leaves one of two options; Financial Armageddon or hyper inflation.
So that’s a bigger picture look at what’s going on right now. It’s also a strategy for how to play your portfolio. If you think the financial system is going to collapse then stocks will get killed. But if the long-term solution is inflation, that is usually good for stocks.
Let’s get into some updates.
Updates:
With the marker regaining its appetite for risk, growth stocks were in play.
Cimarex Energy (XEC) was up 13% with Baker Hughes (BHI) close behind at 10%. Energy stocks have been pretty brutal this year, one of the worst performing sectors in the S&P500 as investors worried about economic growth. But this is a good example of how stocks that fall the most in a selloff are also usually the ones that gain the most in a rally. Bigger picture, both of these stocks are trading well off their 52-week highs, but if you believe in the commodities super cycle on diminishing resources, energy companies are a great way to play that.
Sticking with the commodities trend, stimulated by the most recent central bank intervention, Market Vectors Junior Gold Miners (GDXJ) posted a solid 10% gain. This ETF has been volatile this year in spite of gold’s bullish trajectory, something that has been a bit of a mystery to the market. But in the meantime, earnings are way up, creating some very compelling value that suggests plenty of upside.
We saw some decent movement from Apple, Inc. (AAPL) adding 7% on the week to close at $390. Apple has been fiddling around with this $400 level for the last six months, so a strong close above and good holiday sales could provide the support we need for another leg higher and fresh all-time high.
You really have to love McDonald’s (MCD). Not just because they have good French fries, but also because their share price is resilient in a weak market and strong in a bullish one. We saw that show up this week, with shares adding 5% to move within $1 of the all-time high of $96.48. This stock is a great combination of growth and stability.
That’s all for this week. Until next time, here is some good insight into using coporate bonds to generate a solid yield while also staying defensive. Enjoy.
Pad Your Portfolio with Corporate Bonds
Your Investment Partner,
Mike
