June 15, 2013

Bulls, Bears and Pigs: Taper your Tapering Fears

Commentary by Bulls, Bears and Pigs:

The buzzword of the month seems to be "fed tapering" and it's this worry that is the apparent culprit of the correction. Isn't it funny how when QE was first  introduced it was widely criticized and dismissed? Very few people if any, believed that it would have a lasting impact on the markets. The consensus view was that all it would do is crater the dollar and stoke inflation. Then as the bull market progressed without the dollar disaster that was expected, you heard all this griping about how the bull market is solely due to QE. Wait a minute, wasn't QE supposed to be useless? Where is the mea culpa from all the pessimists? This is why I show so much hostility towards the legions of permabears that are still out there. They have shown ZERO in the way of admitting how hideously wrong they have been about pretty much everything.

As far as the effectiveness of QE I would speculate to say that it has more of a security blanket effect than anything. I doubt very much that it is the underpinning of the bull market despite the charts that show the correlation between the initiation of QE rounds and market performance. At best, it's a moderate contributing factor. If for instance, QE was implemented in early 2001 I doubt very much it would have stymied the bear market that was in place because the excesses of the late 1990's had only begun to be purged. Only when that purging was completed did favorable monetary policy gain traction. I remember clearly how when the fed slashed rates by 50 bps in January 2001 the financial media got all excited pointing out how anytime the fed cut rates like this the market was up a year later every time with the exception of 1931. It turned out that despite drastic easing, the fed was rather powerless to stop the purging that was in process. Once the economy is purged from the excesses and pessimism has swelled, then the path of least resistance is up and so any kind of "push" from the fed/government will be much for effective but it's NOT the main reason the market will go into bull mode - the market has to be primed for it. You do not get a 4 year 140% bull market making new all time highs solely due to the actions of the fed/government. You have to be really delusional to believe that and yet there's so many people who do. It just goes to show you how badly scarred and bitter so many still are from the 2008 collapse. I think this is the true underlying cause of the pervasive pessimism out there. It takes lot's of time to heal from such a devastation and I suspect a lot of people will remain a pessimist for life much like investors who got burned during the depression. Life is too short to be a perpetual pessimist like this.

I'm sure there's a significant cohort of reluctant longs out there who are only long because they think the fed is propping up the market. These people will be very quick to run for the exits at any hint that the fed is going to let off the pedal even just a bit. I'm quite sure these folks have been selling. So far this pullback looks like a run of the mill correction as opposed to something more nasty. Trader types were very quick to run for the exists and the put/call ratio was very quick to zoom higher. I suspect we will see choppy markets for the rest of the summer with a possible downside scare or 2 to work off the very IT overbought condition the market reached in late May. One thing that is concerning is the weak action in bonds. Typically, correction bottoms are accompanied by a strong rally in bonds and that has not been the case. We'll see how things play out. As always I'll make adjustments if warranted.