Many years ago, I bought a book by Charles Givens entitled Wealth Without Risk. One of the key themes was to move to bonds (falling rates) to stocks (low rates) or to cash (rising/high rates) based on interest rate trends. There’s only one right place to be. The memorable rule of thumb was “When interest rates are low, stocks will grow. When interest rates are high, stocks will die.” The enigma though continues to be whether or not interest rates are low or high, as these are relative terms. Givens’ answer was to subscribe to his service.
The Fed’s scheme (bond/equity bubble) requires that they keep interest rates under strict control. Dr. John Hussman http://www.hussmanfunds.com/ made the point over a year ago in an article entitled “Sixteen Cents: Pushing the Unstable Limits of Monetary Policy,” that given the huge distortion in the Fed (and now ECB) balance sheet, just the slightest movement up in interest rates will require enormous unwinding of their balance sheet to keep inflation from going out the roof.
The past few weeks, we’ve seen a small, but definite rise in U.S. Treasury interest rates. Have we seen a turn, or is this simply a bump in the road? We know we have a determined Federal Reserve, but will they be able to stop this trend? Will they crash the stock market to turn the tide? Something is definitely going on. Notice that precious metals are feeling the windburn here from the possible turn in rates. We need to keep a watchful eye on this signal.
It was interesting to learn the parameters of the latest bogus Fed stress test: a 21% drop in house prices, unemployment at 13% and a 50% drop in the stock market. Did you notice the elephant in the room? What does the Fed know that we don’t know? With stock prices now up 100% from their 2009 lows, are we to expect or at least view as possible a drop back down to the former lows? Even “contrarian” Adam Hamilton (who’s sounding a lot like a CNBC cheerleader these days) expects we’ll eventually see S&P 500 Index down to 750.
Friday, volume finally shot up to something respectable. The very likely culprit there was “quadruple witching” —relating to option expiration. For that reason, and because the market really did not move much, we really cannot make much of the one day volume spike.
Many advisors maintain a strongly bullish stance here. Investor sentiment moved even more strongly bullish, the VXO fear gauge dropped to no-fear levels. I remain a bit lonely as I continue to witness the relentless march higher of stock prices.
Zombie banks have had a field day lately with spectacular blowout gains as the blind bid up those worthless stocks. The bidding has also been fast and furious for the big-name darlings. This has propelled stock market indices to heights not seen for years. Enthusiasm for the broader market though remains restrained.
The bottom line here is keep a close eye on interest rates and the big banks.