Wednesday, December 18, 2013

To the moon, Alice, to the moon!!!

Earlier in the week, I said that I was placing higher odds on a taper being announced than the rest of Wall Street. A recent run of decent data (we'll have to discuss the quality of that data at another point) seemed to indicate that the dreaded taper might come sooner than expected.  However, I also cautioned that everyone expected this to be the end for the stock market.  Pull away the Fed's juice and the stock market engine goes kaput, right?

Well, not so much.  Everyone had two assumptions - no taper and if a taper was announced it would be bad for stocks.  So what happens?  As usual, the exact opposite of the consensus opinion - a teeny, tiny taper is announced and stocks held their initial gains.  The computers took over late in the day and bought everything in sight so we could have the RECORD close that Ben Bernanke needed to have on his resume.

So, what is the bottom line?  Well, for all of the talk of the "Fed pulling back because of a robust economy" the taper means that instead of buying just over $1.0 trillion of debt next year, they'll buy $900 Billion.  When positioned like that you see that this is relatively insignificant.  Stocks are still poised to benefit from multiple expansion in a low interest rate environment and now that they've crossed into record territory you can expect all of the nonsense "Santa Rally", "January Effect" stories to get trotted out to carry it higher.

This fits with my original thesis that we are setting up for a very March 2000 like blow-off in stocks.  They could soar another 5-15% in the very near future without any fundamental shift (as they did in 2000) before a black swan changes things.  My concern in February/March is that we see unemployment reverse and start climbing again.  The initial reaction might be "Woohoo no more taper", but eventually people will realized that the Fed has no policy tools left to spur hiring.  If you've ever watched the Walking Dead it will feel an awful lot like a person standing outside of the prison when they've fired their last bullet.  You may be able to duck and weave for a few minutes but eventually something bad is going to happen.

Having said all of this I have to come back to the original point - Always take the opposite side of the crowd and right now EVERYONE expects the market to coast higher.   That's usually when something can go awry, but I don't see anything (short of some Chinese lending issues) that could derail that thesis tonight, but tomorrow is another day.



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