Greetings from a rather chilly Chicago! A decidedly pleasant 5 degrees and slightly warmer than my visit in January!!!
The profits have flowed from that research – our clients have been banking profits – have you?
Since then we have been able to bank a profit, for our active clients, and I hope you too have profited from those trades that fell directly out of my previous research trip.
The past week or two has seen the markets kick into gear with a sharp and dare I say, needed spike in volatility – exactly what we have been looking for from an options trading point of view. What has been especially interesting is the market’s reaction to what has largely been good news.
Back in December, in our Outrageous Market Predictions 2015, (click here if you have yet to grab your copy) I talked in some detail as to my case for a stronger US economy. It is happening – you were told and I hope you profit from that knowledge! Here’s a quote from the book:
“So making money is all about going with the tide – not fighting it or finding reasons to not believe what is actually happening.”
So why has the market reacted poorly to further signs that the US economy is coming out of the doldrums and is recovering. The answer is the potential for a rise in interest rates – no kidding!
Everyone knows at some point, they can’t stay this low for that long… This is a classic case of headline hoppers getting the wrong impression of what is going on and what it means. Then again, the performance of the stock market and the state of the economy are, despite what many think, totally disconnected.
Afterall, the US economy has been grinding along, barely out of recession, yet the stock market has doubled post GFC – go figure!!
Rising interest rates happen for a number of reasons and have several impacts – a quick economics 101
Interest rates go up in response to a firming economy – good right?
- Interest rates are used by most Central Banks – the Fed included – to manage inflation. Inflation (at targeted levels is a good thing) as it creates a demand for goods and services which is not there if prices are falling.
- From an economist’s perspective, fighting inflation is preferable to trying to dig out of a recession.
- During times of inflation, real assets ie property and shares tend to outperform (HINT!)
- The US economy has had trillions of dollars of “easy money” pumped into it, by the Fed – think of this as an antidote to recession – in order to keep some level of growth. The question is can the US economy self sustain?
- That growth is happening – organically and most likely boosted by the benefit of lower energy prices (think of this as a weekly household income boost) as average Joe/Josephine now have to spend less on fuel. This cash boost is going into spending – crazy as it may sound, but an extra $35-40 per week is a lot in a country where an average hourly wage is just over $24.
- Spending triggers a lift in the job market – hence the recent employment data.
- The firming US dollar is a reflection of this anticipation of a move higher in US interest rates.
- It’s also more than that. Money has to flow somewhere – it can’t go under the mattress! Looking at the global economy, China is a non-starter, Japan is in year 26 of recession, Russia is a no go zone, the Eurozone remains in turmoil, Australia is a miniscule 1.5% of the global economy, the fall in commodities has put many emerging markets on hold, leaving, yep, you guessed it – the US. Bonds aren’t the flavor of the month and that means US equities and real estate.
The one concern is whether the Fed, with its loose policy has created a MASSIVE inflation bubble
And given the volume of money that has poured into the economy, there is a pretty good chance that is the case. However, that is a “next year” problem and as such, will be dealt with later. Do not miss being long US equities.
That said, there will be areas to tread carefully. Tighter rates will impact on the banks, which to be fair, have enjoyed years of open field running, while one specific area I would urge caution toward, is the shale oil industry.
But just so you know….Weaker oil prices aren’t helping everyone
With massive investment in the past couple of years, both at a production level and in the associated peripheral services ie towns building new infrastructure, in South Dakota (and yep we have seen the property spruikers trying to get Aussies to pile into real estate in this part of the world based on the promise of massive yields – try and get a refund if you can!) be warned!!
Think about the Johnny Cash classic “I hear a train a coming, its rolling round the bend…” The collapse in oil prices has and will have a significant impact in this region.
However, don’t be spooking yourself by worrying about next year’s problems today….
Our job, my job, your job, as a professional investor (remember professionals get paid, amateurs don’t) is to capitalise on the opportunity now and that is precisely what we are doing.
Don’t get “sucker-punched” out of the potential for you to be making money
This is precisely what is happening for many investors, sitting in cash (and therefore locking in a guaranteed post tax and post inflation negative return – LOSS) or remaining lightly exposed to the equity market. The fear of what may or may not be around the corner is a substantial profit roadblock.
We have been consistently looking to buy on pullbacks and it is working. Think of this as buying in the sales, rather than full freight. It makes sense logically, it makes sense in the context of the trading plan and it makes a lot of money for those that take the trades.
If you want to learn how, or see how we can help you get onto the next round of trades click here.