Are You Still Falling for the Headlines?

Are you still falling for this:

Stocks Rise On China Stimulus Bets As Italy Bonds Advance

This was from this morning’s front page. For those of you who haven’t paid attention, this type of headlines pops up every two to three days – typically on a day after the market falls. And it has typically been headlines out of Europe – about some meeting EU leaders are having to solve all of their problems. If you still believe that, let’s just get that straight – the EU has 2 choices:

  1. dissolve
  2. Print money
  3. solve all problems

It’s that simple. However, they will dance around those two possible outcomes for as long as possible – basically trying to delay the inevitable, as any teenager would when faced with a tough decision. And yes politicians are like teenagers – and who can blame them? When they try to do the difficult correct thing, we vote them out. So they just don’t make those choices.

The results are headlines like above – maybe someone somewhere will do some stimulus that will fix everything and as some people believe these headlines, stocks will rise. However, I would urge come caution.

Is That Your Investment Thesis?

Is Expecting Government Stimulus your investment thesis? It’s not a bad one (if you understand how the political animal behaves) but first, understand the full parameters. I’m not sure who buys every morning when a rumor headline pops up about Europe or China and a stimulus plan, but it appears that pros are market timing (even though the news media likes to blame retail investors, “professionals” are timing too). They’re trying to buy right as the stimulus is announced, hoping it will go somewhere, and then selling out, disappointed as no significant stimulus is announced (yesterday’s post). If this is you, be careful. While it is true that there are a lot of buyers with their fingers on the buy button (made obvious in a couple of recent trading days when the world though it was saved), markets are not reacting for longer than a day without significant Federal Reserve commitment and so far it hasn’t gotten that.

Therefore, it may take a serious slump, and I mean something scary, for the Fed to act. First off because as Bernanke has said, monetary stimulus is just not working to promote growth; and two, this is the biggie and I have mentioned it numerous times here before, Bernanke is under so much scrutiny for his prior bailouts and stimulus that he will wait until people are BEGGING him to act, before he does. And that means serious pain in my opinion. That’s just what I think – I could be wrong, often am, but these fools who think the Fed will come to the market’s rescue just because an 18% NASDAQ gain has turned into a 5% gain are just silly. We need serious hurt for Ben to act, and it will be something new and creative (and destructive, those PhD’s at the Fed and their minions at US Universities have lots of ideas).