Founder & Chairman
In the spirit of Halloween, I don’t know what’s spookier today, the global macro economic conditions or watching the Lions trying to cover kickoff returns. There never seems to be a shortage of scary headlines to keep investors on the defensive, and yet the market appears to defy logic, and gravity, and climbs when common sense would dictate that it should fall. Speaking of fall, October can be a very scary month for the markets; and with this being an election year, there are plenty of ghosts and goblins lurking in the shadows. The famous quote “There is nothing to fear, but fear itself” comes to mind. In fact, it may be the perfect statement for the current market. The fact is, we have a caped crusader fervently working to save the day, in our very own Federal Reserve Chairman, Ben Bernanke. His recent overture to the financial markets, affectionately known as “quantitative easing” round three, has put what appears to be an invisible floor under the market, preventing it from falling very far given the current economic conditions. Some call it QE “ternity”, as it is an open ended program with no official ending date. Make no mistake, each time the Fed has stepped in with an easing program, the markets have responded quite favorably. We suspect this time may be no different.
Perhaps we should state that, while we are cautiously bullish on the remainder of 2012, 2013 is an entirely different story. From a political point of view, neither side (Republicans or Democrats) have a big incentive to avoid the fiscal cliff. Both parties are aware that fiscal changes need to be made, and if you believe that a recession is imminent, then getting it over in the early part of your presidency makes all the sense in the world. Furthermore, if you are longer-term bullish (and there are many reasons to be) then the sitting president could take credit for “fixing” things as the economy performs better in the last year or two of their term. There is much speculation that one of the reasons Bill Clinton stumped so hard for Obama, is that he believes the economy will be in much better shape by 2014, and he wants his party to get credit for the improving economic conditions. If that happens, then the door is wide open for Hillary to run for president in 2016. Speaking of Hillary, she has been working very hard behind the scenes to help topple the Iranian economy, and it looks like it might be working. The theory goes that if the economic conditions continue to deteriorate in Iran, it’s possible that the Iranian people could overthrow the government, thereby eliminating the need for the U.S. or Israel to get involved. It has obviously happened several times since the beginning of the Arab spring. If that did happen, it could be a VERY BULLISH scenario for the markets. Only time will tell.
There is no shortage of opinions as to how the elections will impact the stock market. The truth is nobody has any idea. If I had to handicap it, it would make sense that an Obama presidency with a Republican House and Senate would be the market’s first choice. It is clear that if Romney were to win, he would not re-appoint Bernanke as Fed Chairman, something the markets probably would not take too kindly to. The glitch being, that if Romney doesn’t win the presidency, it seems very unlikely that the Senate would go to the Republicans, which is probably a long-shot no matter who wins. Ultimately, I think the bigger issue will be the fiscal spending cuts, along with a slowing economy. That powerful combination could make it very tough on the equity markets for much of 2013.
Let’s get back to the present. There are some changes we would like to make to the models today. This is probably not a time to increase risk much, but what we do have committed to risk-based assets should be directed to a few areas. The Federal Reserve’s policy regarding the purchase of mortgage-backed securities has created some opportunities. We have updated our current models to reflect our thinking, and you will notice changes regarding the types of bonds we recommend, as well as a move into other assets that we think should benefit from QE3. If you have already signed a discretionary agreement to have us automatically update your accounts, then you can relax and rest assured that we have already done so. If you haven’t signed a discretionary agreement, then you should consider doing so, but until you do, you will have to send us an email or call our office and tell the staff that it’s okay to make the changes to your account. As always, no changes can or will be made to your accounts if you haven’t signed a discretionary agreement, and you haven’t emailed or called us telling us to do so.
We continue to monitor the markets very closely, and get daily research from some of Wall Streets top minds. Should things change and force us to alter our approach, we most certainly will. The fourth quarter is loaded with potentially market-moving dates and events, and it promises to be anything but boring. Bill and I thank you for your continued trust and confidence and are working hard to deliver results that we can be proud of. Let’s hope the markets give us something to cheer about, heaven knows the Lions certainly haven’t.
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