Don’t Forget About the DOW

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Interestingly, the Dow was a big outperformer on the day (up .76%), and usually when that happens there is one stock that is up several percentage points that skews the average.  Interestingly, that was not the case on Monday, as the strength in the Dow was evenly spread across many of the index components (TRV, The Travelers, was the best performing stock in the index up just 1.79%).

The Dow is now up 5.76% for the year, about half of the S&P 500.  The reason for this underperformance has to do with the sectors that have rallied the most year to date (Tech and Financials) which are more heavily weighted in the S&P than in the Dow (plus the Dow doesn’t have AAPL).

But, the outperformance today should be noted.  If we are heading into a period of concern/weakness in the markets, the sturdy, somewhat stodgy, industrial companies in the Dow, with strong cash flows, good yields, and decidedly less economically sensitive businesses, will outperform.

If investors are concerned about the market trading like it’s 2011, then perhaps it’s helpful to look at what worked in 2011.  Keep in mind, in 2011 the Dow finished up 5.5%, while the S&P was flat, and the NASDAQ fell 1.8%.

 

Government Waste and Taxes

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I was watching the coverage of the Republican primary results on Tuesday night, and as I was channel surfing I came across Bill O’Reilly’s talking points memo with which he opens each show. I have mixed emotions about Mr. O’Reilly—his understanding of markets and economics leaves something be desired, but generally speaking his talking points memos are pretty good.

The one on Tuesday night was focused on a conference that a government agency called the General Services Administration held outside of Las Vegas that cost the tax payers $820,000 for 300 attendees!

First, I didn’t even know we had a “General Services Administration” but apparently it’s been around for a while (President Truman created it) and it seems to be a sort of procurement arm of the Federal government.

Regardless, the agency spent $820,000 on this conference which consisted of $146,000 on catering and $130,000 to scout the location!

To be fair, upon hearing of this President Obama promptly fired the head of the agency, but this is anecdotally representative of why some people so vehemently hate paying taxes.

I think most rationale people realize we all need to pay taxes—we need a military, roads, the FAA, inspection of our food, etc. I don’t think most people mind paying for those things.

What they do mind is having their hard earned money pissed away by a bunch of people who seems to have no regard for the effort it took to earn that money. It’s a respect and waste issue, and it’s been going on for years—well beyond the current administration, although I think they’ve exacerbated the problem.

I believe it would be a good idea to make everyone in the country pay their taxes by writing a check each quarter, just like I have had to at different points in my career, and which I do presently.

It’s one thing to have your taxes automatically deducted from your paycheck as so many do—human psychology makes it so that you really don’t even notice the cost. They money was never in your account, so you don’t really miss it when it’s gone.

But, to write a check to the U.S. Treasury—and to have that check be the biggest check you have written the entire year (most likely) and to get no direct benefit for writing it (as opposed to spending that same amount of money on a TV or boat or something) is a totally different story. It makes you appreciate that taxes are real money that is yours—it’s not just some numbers on a statement that you don’t ever receive.

Then, to know that much of that large amount of money that is coming out of your savings account will be wasted by a bunch of jack asses paying 130k to scout a 5 star hotel to have some convention, makes you want to scream in anger.

I believe waste is at the heart of the tax debate, and why so many in this country don’t want their taxes raised. It’s not that they don’t mind paying their fair share—it’s that they don’t want even more of their money being completely and utterly wasted.

The utter disregard and lack of respect for the people’s money is at epidemic levels in this country, as evidenced by the explosion of government spending over the last ten years, and sadly it continues unabated. What a disgrace.

 

 

Takeaway from Hawkish Fed Minutes

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The bottom line of the minutes from The Fed’s March meeting was that there is little probability of the Fed doing any additional stimulus unless the economic data weakens.

In particular, this is the sentence that got markets moving: “A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below two percent.”

The important part of that statement is “could become necessary” which signals that the committee does not view any additional QE as necessary at the moment.

Effect

The minutes had a big effect on markets. Stocks were already lower heading into the release, but fell sharply post release (Dow down over 100 points) as the realization hit traders that, for now, additional accommodation is off the table.

The U.S. dollar, Euro, Gold and Treasuries were also big movers off the release, as Gold and the Euro fell hard, while the U.S. Dollar and Treasury yields moved sharply higher.

Takeaway

I had said in Monday’s issue, and throughout last week, that I thought the market had misinterpreted Bernanke’s testimony from last Monday and that is wasn’t signaling additional QE. That turned out to be correct.

For a market that has become addicted to quantitative easing and accommodation from the Fed, this news is obviously disappointing in the short term.

But, we need to see the forest for the trees here. The Fed doesn’t see the need to do additional QE because the economy appears to be getting stronger and it isn’t needed.

That is a good thing for stocks if we look beyond the very short term. It is also a good thing for commodities, even through it doesn’t look like it right now. The reason is because The Fed is not going to raise rates any time soon, and we can expect the inflationary implications of The Fed’s previous actions to begin to filter through the economy, and continue the re-inflation that has already begun.

This is a time to use short term weakness to establish a position in equities and commodities. I’m not saying to do it today, as we probably have some more selling to be done—but I will view any decline in the commodities markets based on the disappointment of less stimulus as a buying opportunity. Get your shopping list ready.