So what we initially thought was a QE 3 policy that would come to an end at year end was just not enough for this Fed. Instead we now have what is being coined as QE Unlimited where the Fed will be buying back some $40B worth of mortgage backed securities each month until it sees a turnaround in the economy and more specifically the unemployment rate.
You see the Fed has now decided to take additional action that our Washington politicos are just not capable off. And that is to come together to make better economic policies and help move the country in a forward direction.
Instead the Fed has now shifted to focus on it's other mandate which is full employment. According to some reports the Fed is looking to draw the unemployment rate down from the low 8% level to 7.3%.
We do not believe that the Fed will be able to accomplish this target with monetary policy alone. While the stock markets may like this addiction to easy money, we see it as completely bad for the future of the economy and the country. Maintaining artificially low interest rates isn't doing much of anything to stimulate the economy in any meaningful way. The one clear consequence of the Fed's decision is too crush the savers of this country and force them into higher risk assets. Exactly what you don't want people to do.
These actions we fear are reinforcing bad habits within America that say, "well since I'm not gaining any interest or income off of my assets, why save?" This is exactly the wrong approach to take. Whether you are getting any interest or not, saving for an emergency fund, retirement, or education is still the prudent approach to take in order to accomplish financial and lifestyle goals.
The concern we have as we listened to characters on CNBC this week especially on Thursday was the call to buy anything and everything, "you can't go wrong," one person commented. This is precisely when things can start going wrong. The old adage is don't fight the Fed. The Fed will supply liquidity in good times and bad......until it can't. Until the bond market says enough when no one will buy US Bonds and interest rates will begin going up.
Needless to say, we stayed on the sidelines this week as the markets took off. And while we enjoy seeing our clients and Fund assets go up in value and our investment strategies payoff something feels a bit unsettling.
This has been called the most hated rally in Wall Street history. The reason, no one expected it and it is doubtful that too many people have been participants in the run up this year. Endowment funds begin to report annual returns soon and it is expected that they will show under performance compared to the broader markets.
With that said, this rally could very well continue on even through what is usually a very volatile Fall season into October. People do not want to feel like they have been left behind which makes them want to rush in and buy near tops. During this rally pull backs have been buying opportunities and this trend will likely continue until it doesn't.
We have had some very successful strategies implemented this year. However one strategy that has not worked out this year has been our short position in the home builders. We still believe that this industry has run too far too fast and faces some major headwinds, it has the Fed in it's corner and that is all that matters. Interest rates are likely to stay low indefinitely and even though the jobs market is weak, this action by the Fed will likely hold home builders up.
So with that said we will be looking to exit our short position in the upcoming week. We'll use the proceeds to bolster our cash position.
The Week Ahead
This week is rather light as far as economic data is concerned. The biggest event this week is likely to be the DreamWorks Capital Management quarterly lecture at The Community House in Birmingham, MI. We look forward to what is believed to be a record crowd for one of our education lectures. There are still a few open spots but register soon as time is running out.
- Mon - Empire State Mfg Survey
- Tue - DWCM Lecture,
- Wed - Housing Starts, Existing Home Sales
- Thu - Jobless Claims, PMI Manufacturing Index Flash, Philadelphia Fed Survey, Leading Indicators
- Fri - N/A
Have a Great Week!
DreamWorks Capital Management
FREE LECTURE: Our next finance lecture will be on Tuesday September 18th at the The Community House. The topic will be Balancing Your Changing Investment Needs: Emergency Fund, Investments, Retirement, Education, and Philanthropy. We will cover significant points regarding creating, developing, and executing on your wealth management plan. We hope to have another interactive group, so be sure to sign up by emailing me directly at pfenner@dwcmllc.com or by contacting The Community House at 248-644-5832. There is no charge and light refreshments will be served.
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