This Correction May be Coming to a Temporary End

Yes, I know there is plenty of ambiguity in the title of this discussion. What I mean is that the uncertainty surrounding several issues mentioned in these discussions before have, at least for now, been resolved. Bernanke was reconfirmed, and whether he has done a good job or bad job, at least the market knows WHO will be heading the FED. The uncertainty of his confirmation, I believe, had plenty of investors sitting and waiting. The market had a nice run at the beginning of the month and then dropped considerably in the last two weeks. I think investors can now apply their asset allocations with slightly more comfort and we will see a reversal very soon. I mentioned that the correction may have come to a 'temporary' end because even though I think the market will recover in the immediate short-term, it's possible that it will go through yet another correction in the coming months. It's just too sensitive to bad news and the inevitable truth is that even in a recovery, we will receive economic data that disappoints and we will have periods of uncertainty that will cause investors to pause. Over the last year, I have been using the 3X leveraged ETF's and invested a bit more nimble than I have in my entire career. I was able to capture a substantial multiple of up months and minimize losses when the markets declined. Using options, I was also able to protect my portfolio during sudden and dramatic drops. I don't recommend this strategy for everyone. I'm still a proponent of asset allocation! But in this environment, nimbleness can generate alpha.

"Cautious" is the Word of the Week

With plenty of doubt on whether Bernanke will be reconfirmed and Donald Kohn coming under fire for his role in the AIG bailout, we might be left with a leader-less FED. If so, how will the markets react? I say, NOT GOOD! On the other hand, if Bernanke does get reconfirmed, despite opposition and a questionable ability to be in that position, the markets may actually pop higher. So if you're like me and you don't really want to speculate on how Congress will vote, be cautious! Be vewwy vewwy cautious. Personally, I think he will get confirmed, but I won't bet my retirement account on it.

Fear versus Greed

Alas, the fight is not over yet! Throughout 2009, the markets went on a torrid pace, recovering 50% or more from the March 2009 lows. The greedy smiled and claimed victory as economic data began to improve, or rather, deteriorate less. But this last week showed that Fear is still alive and kicking!! With Bernanke’s second term in doubt and China pressing ever so lightly on the brakes of economic growth, investors reacted as they would while driving in a light drizzle….cautious and at a much slower speed.

What happened? Well, fear is driven by risk and risk is driven by uncertainty. The Republican victory in Massachusetts was a surprise to many and the passing of the Healthcare bill is now a major challenge for the Obama Administration. It’s not like they had a clear path to success in the first place but now, the task looks daunting.

As for China, if they slow down from their 10%+ growth and they are the main driver of global demand at the moment, what will be the impact on other economies and their equity and fixed income markets?

Your guess is as good as mine! Hence the uncertainty that increases risk, generates fear, and causes investors to flock to safety. We were due for a pullback! Now what?

Book Review - The Great Money Binge

A call for the return to supply side economics!!
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