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Don't Stop Believing in US Equities: This Time Might Be Different

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There are some different dynamics in place to sustain this bullishness longer term.

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Also, although we have seen some record outflows from fixed income products, i.e. the first week of April, from the junk bonds (NYSEARCA:JNK) and the IG corporate bonds (NYSEARCA:HYG), the rotation has not even begun yet in earnest. One has to presume that the average investor does not truly understand duration. In essence, if need be, it will bit a lot easier to sell a liquid high yield stock than to liquidate a bond portfolio, with prices underwater as rates rise.

Bonds will always have a place with a proper allocation, but I believe, a smaller allocation. We also know that when inflation does creep higher, historically it generally favors stocks under the premise that costs can be passed on to the consumer. Again, a bond portfolio laddered to buy the back end in in a rising-rate period can work fine, but I think, as a smaller percentage of the portfolio.

3. We hear the axiom all the time, "Don't fight the Fed!" It was one of the first things I heard at Morgan Stanley (NYSE:MS) when I was being sent home for sneezing on someone and / or grabbing coffees. Many are saying it's simply not working, that the Fed is not creating jobs or stimulating the economy, and even that there's now risk of deflation by government measures.... Really? Have you sat down and figured out your inflation rate? Moreover, last I checked, the Fed's main purpose is to increase the money supply, not address the fiscal side. We all know in this country that there's a lot of work to be done from a fiscal perspective.

So, let's just look at it from the perspective that the Fed is simply helping boost stocks. We have recently heard at least three Fed presidents, notably James Bullard, in light of recent data, suggest bond purchases could increase, not taper. We read the minutes that showed intentions of holding assets, namely mortgage-backed securities, to maturity, as opposed to selling. The Smartest Man in Global Capital Markets said that when the music (from the Fed) stops, there will be no chairs (buyers). Well, we may not need that many chairs if their holding the bulk of purchases to maturity, right? So, the landing could be softer, in theory.

But hey, we're not at that point. Not even close: This is the Brandenburg Concertos in whole. Thus, there's a lot of music left to be played in the context of reaching 2.5% CPI , or 6.5% unemployment. Can we shove the QE3 taper argument under the carpet for a bit, allowing stocks to move higher...a lot higher? We know how this has been working: Bad headlines are met with knee-jerk downside reactions. Then, the investor stimulus addiction kicks in and the high takes over, which just means more QE: "Buy, Mortimer!" The Fed may not increase purchases, but I think most of us can agree that the current purchases in place are not ending in the near future.

Just today after some early signs of panic-type buying in higher-beta energy and financial names, the equity markets, from my feedback, purportedly sold off on a couple macro headlines: First, Fed President Ben Bernanke at a Financial Stability Oversight Council meeting uttered that "vulnerabilities remain in the markets." Well, my reply was, will those comments just be construed as the continuation of QE and all its merriment? That the trend has been correct? And in trading, we tend to follow the adage "the trend is your friend." We all know Mr. Bernanke hates surprises.

Second, Bloomberg circulated a story citing that the Bundesbank had rejected outright monetary transactions, or European Central Bank buybacks, in an opinion to the top court. That would have the potential to put a trigger lock on the "pea shooter" that Mario "Ivan" Drago, I mean Draghi, has been wielding in the global stimulus war with Japan and the US. Let's face it: If investors in the US are "buzzed" from stimulus measures, then investors in Japan must have sake coming out of their pores.

4. To me (and I'm no expert!), social mood and recovery are most dependent on jobs and real estate. Last month saw a hideous payroll number as retail canned and / or stopped hiring. But, US job postings are near all-time highs. Sequestration effects are just starting to be felt, affecting places like IBM (NYSE:IBM) or contractors where there's presumably less money to go around. Some of the cuts are needed, and we're not talking about canceling White House tours in symbolic grandeur.

Seems to me that in the face of higher lending standards, the low rates inspired by the Fed have allowed a lot of bad inventory to move off the real estate market, i.e. spurring people to make foreclosure purchases, take a trip to Home Depot (NYSE:HD), and then flip the new house to a first-time buyer. As a baseline, housing is showing signs of being robust again. Prices are up nearly 8% year-over-year, and a whole cottage industry has been created around buying depressed property. It's simple: Working off the excess inventory allows neighborhoods to be cleaned up and new homes or existing homes to then come to the forefront. Now, many speculate that last week's figure of reported US existing home sales -- 4.9 million, or 85% of the market -- was light because of lack of inventory. However, in general, people are just starting to feel good again about housing. Moreover, when rates do in fact tick higher, that will, in my opinion, simply create a panic among those who have been reluctant to jump back in.


On the commercial real estate front, I posit that some analysts and / or talking heads (and maybe even Fed presidents) may be a bit offsides, except maybe Jim Cramer, who blurted out the other day: "I love REITs!" According to industry sources I have talked to, we're not yet at the top here, whether talking commercial mortgage-backed securities and/or REITs (and I mean select REITs, as this industry is typically "haves" and "have nots"): A good proxy for dummies like me is the iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR), as it is diversified.
No positions in stocks mentioned.
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