Time to re-think 2011.

The news of the last three weeks plus the market reaction to that news demands a rethink of investment strategy for 2011.

2011is going to be a lot less linear, a lot more volatile—if not necessary more or less profitable– than I thought it would be just a few scant weeks ago. 

Let me begin by contrasting what I thought then with what I think now and what those changes mean for how to approach 2011. Read more

With no strong trend out of today’s market, stocks hang on tomorrow’s news flow

Bounce or rally? We still don’t know.

The U.S. stock markets started with a strong bounce this morning. The Standard & Poor’s 500 index moved up 1.1% off the starting line.

Key was “news” from Europe that suggested Ireland might be closer to a rescue deal. That led to a retreat in the U.S. dollar against the euro. Which helped commodity and commodity stock prices. A rebound in China overnight helped tee up the European rally.

But the market couldn’t muster much follow through from there. The S&P bounced between 1198 and 1200 for much of the day before finally moving down to close at 1196.69.

As the day wore on, the market noticed that there’s still no actual deal in the Irish debt crisis. Read more

2000. 2007. 2011.

Is the Federal Reserve about to do it again? Is the Fed about to preside over the creation of another financial bubble?

Asset prices in the world’s emerging economies are climbing on the crest of a flood of dollars from the Federal Reserve. Central bankers in the world’s emerging economies certainly have started to worry about what happens if all the hot money flowing into their economies and markets suddenly starts flowing out. “As long as the world exercises no restraint in issuing global currencies such as the dollar,” Xia Bin, an advisor to the People’s Bank of China said, “then the occurrence of another crisis is inevitable.” (For more about reaction to the Fed’s policy see my post http://jubakpicks.com/2010/11/04/everybody-loves-bens-600-billion-at-least-in-the-short-term/ )

I think some degree of worry—less than full panic but more than polite concern—is appropriate at this stage. And that worry should play a role in shaping your investment strategy as the decade advances. In today’s post I’m going to lay out the Whoops, the Fed’s done it again scenario. In a Friday post I’ll tell you what I think you can do about that danger.

In 2000 I’d say the sin was one of omission. The Fed sat on the sidelines aware that a stock market bubble was building but it did nothing to head it off. Remember then Federal Reserve chairman Alan Greenspan talked about “irrational exuberance?” Well, it was all just talk. The Fed, which had the power to try to moderate the bubble by tightening credit on Wall Street, believed that trying to manage bubbles was futile. All a central bank could do was watch from the sidelines and then help clean up the wreckage.

And quite a bit of wreckage there was. The NASDAQ Composite Index peaked at 5048.62 on March 10, 2000 and it bottomed at 1114.11 on October 9, 2002. That was a loss, top to bottom, of 77%.

Eight years after the October 2002 bottom, the NASDAQ Composite is up handsomely—131% from October 9, 2002 to November 5, 2010.

But ten years after the bear market began in March 2000 the NADAQ has barely recovered half its losses. From a high of 5048.62 the market has clawed back to 2578.98 at the close on November 5. That means the NASDAQ Composite Index is still down 49%.

I’d put the Federal Reserve’s role in the financial and economic crisis set off by the U.S. mortgage crisis in a different class. The sin here was one of commission. The Fed played an active role in creating this global meltdown and in making it as bad as it was. (Or maybe that should be “is”?)

To clean up the wreckage from 2000, the Federal Reserve lowered short-term interest rates. Read more

Everybody loves Ben’s $600 billion–at least in the short term

The reviews are in: Global financial markets love the Federal Reserve’s $600 billion program to buy U.S. Treasuries. And why not? In the short term, the logic goes, the Fed has pledged to support global asset prices with $600 billion in U.S. dollars.

So overnight in Asia after the Federal Reserve’s announcement in the afternoon (New York time) of November 3 stocks climbed. The MSCI Asia Pacific index rose 1.7% to its highest level since July 24, 2008. The Shanghai Composite Index rose 19%. In Hong Kong the Hang Seng index was up 1.6%. Japan’s Nikkei 225 index gained 2.2%.

Europe’s markets, in their turn, were just as glowing in their reviews. The Stoxx Europe 600 Index was up 1.5% as of 1 p.m. in London. That’s the highest level on the index since April 26. The FTSE 100 gained 1.9%, the CAC 40 in France was up 1.9%, and Germany’s DAX climbed 1.6%.

All this even though the Bank of England decided not to follow the Fed’s lead. That central bank said today that it would not increase its bond-buying above the 200-billion-pound already announced.

Whether global financial markets will be quite so enthused about the long-term effects of the Fed’s $600 billion buying spree is open to question. Read more

Are global markets happy with the Fed’s move? We won’t know until tomorrow

$600 billion by June.

Add in the re-investment of interest and you get about $110 billion a month.

The Federal Reserve’s announcement on quantitative easing came in at about the Wall Street  consensus of $100 billion a month in Fed buying And as you’d expect from an announcement that met expectations, the reaction on the U.S. stock market has been, what shall we say, muted. The S&P 500 which opened the day at 1194, sank to 1184 (a 0.08% drop) before recovering to 1198, a 0.37% change on the day.

The reaction wasn’t much more violent on the bond and currency markets. The five and seven year Treasury bonds climbed in price and fell in yield—the Fed is expected to concentrate its buying in this part of the Treasury market. (In a supplementary statement the Fed said its purchases will show an average maturity of five to six years.) Longer-dated Treasuries, the 10-year and the 30-year fell in price and climbed in yield with the 30-year Treasury with the 30-year bond moving back above the 4% level.

On the news the dollar fell against the currencies of most of its trading partners—the Canadian dollar, the euro, and the pound all gained against the dollar. Gold rallied.

This afternoon’s move—or non-move actually—is only part of the reaction. Read more