Report From the Front: Were the Fed's Actions Positive?
The Fed changing its stance so shortly after a meeting is a clear indication of how far off the reservation it was.
For the last several weeks each market open has felt like storming the beaches of Normandy. Unfortunately, individual and professional investors are inundated with advice from the ivory towers. These "generals", who often are viewing the battle from 30,000 feet, are removed from the life and death struggle of armed combat. If you want to know what is going on in the war, talk to the grunts-not the generals. That is what I intend to do. Because, just like any battle, a good strategy and quick thinking can help you navigate dangerous terrain.
Good investment houses are rarely about one man's vision. It is usually team work that gets the job done and my firm, DC Nelson Asset Management, L.L.C., is no exception. We talk to everyone and, if one of our contacts has a great idea to help you make money, I am going to put it on this site. At Minyanville, I find myself surrounded by some very smart investors. My intention is to live up to that standard.
Let's go to work.
How should we view the Fed's action last Friday? Positively, in the sense that it corrected an out-of-touch policy position. It has validated the markets and acknowledged increasing systemic risks in the economy. When investors question their advisors about the safety of their money market cash, all is not well.
The bad news? The Fed changing its stance so shortly after a meeting is a clear indication of how far off the reservation it was.
Ok so the Fed is on our side. What do we do now?
Last week's Goldman (GS) conference call (on the status of its failing hedge fund) was both informative and frightening. The leverage and risk were beyond even my hardened expectations.
I am sure we were all wondering why our best stocks, the ones with the great fundamentals, were getting hit the hardest. The answer is, of course, that Goldman and other large managers were selling. Their models aren't flawed-the leverage is.
Tom Hallen, the portfolio manager of Santa Monica-based ION Partners, L.L.C. and one of my sub-advisors is very good at spotting market landscape shifts. His recent purchase of two apartment REITS, Equity Residential (EQR) and Apartment Investment & Management (AIV), sparked my interest and spurred some homework.
Tom's research shows them to be statistically oversold and likely to benefit from an ease in Fed policy. This makes intuitive sense. In addition, rentals are picking up as potential home buyers choose to rent rather than buy into falling U.S. home prices. The sell side clearly doesn't agree-there are almost no "buys", a number of "holds", and lots of "sells". I think, at the very least, you will see some upgrades in the near future. Recently, stocks seem to make their biggest upward move on changes from "sell" to "neutral" rather than "neutral" to "buy".
How about the financials? Of course, the Fed change is a benefit, but keep in mind that, at least in my humble opinion, almost every brokerage firm in the next couple of weeks will be guiding lower. My work shows very few cuts in estimates for this industry. The recent revenue and earnings streams are not sustainable in this environment. I think it is more important to focus on how these securities respond to the inevitable bad news.
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