Wednesday, May 15, 2013

Where do we go from here?

In the fall of 2010, hedge fund manager David Tepper predicted that stocks would gain measurably based on the economy improving and/or the Fed maintaining an ultra-easy monetary policy. Well, he certainly got the stocks gaining part right. Yesterday, he found himself on an early morning CNBC program making a numeric case for the rally to continue well into the foreseeable future. Hence, yesterday's market action was dubbed "The Tepper Rally". He figures that with the budget deficit coming down measurably, as Freddie and Fannie pay back the treasury, as tax revenues increase (I'd add that smidgen from the "devastating" sequester), etc., over the next six months, that the Fed's monthly bond-buying will result in $400 billion worth of newly "printed" money that won't be needed to fund the budget for the balance of this fiscal year. He says it has to go somewhere; spending, savings or stocks. I guess he's betting it won't snuggle up with the other few trillion in banks' excess reserve accounts.

Now I love a rally just as much as the next guy --- smiling clients make my job a joy. But whenever I hear anyone---smart as he may seem---profess to have factored in the myriad factors and conclude with a prediction as to the short-term (six months is short-term btw) direction of stocks, I cringe. Particularly when the specific factors that he factored are anything but myriad. You see, as I preach ad nauseam, market winds can change on a dime. And the time to get nervous is when nobody's nervous. Now if Tepper indeed, once again, gets it right in terms of price action he'll enjoy the spot light, and heavy net inflows to his hedge fund. But at the end of the day, all he is doing---his quantifying notwithstanding---is making a guess. All the factors in play that would inspire stocks to future highs cannot be known, even in retrospect, by any human being.

All that said, allow me to stick my neck out and make my own guess (two guesses actually):

The stock market will trade measurably higher well into the latter half of this year because buyers, each for his/her own reasons, will come to market with cash, and the holders of stocks will become the most stubborn of sellers. Or, the stock market will trade lower well into the latter half of this year because the holders of stocks, each for his/her own reasons, will bring their shares to market and those with cash will become the most stubborn of buyers. The potentialities behind what will inspire either scenario are too numerous to even begin to assemble, let alone predict.

So what do you do? Now that part's simple: You own stocks because you own stuff, and you want to invest in the companies that are making money selling you that stuff. Knowing full well that the market will give you ample opportunities to rebalance back to your target to stocks. That is, periodically buying when prices are declining and selling when they're rising --- all in the context of your time horizon and tolerance for volatility...

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