Dow Hedges Higher for the Eighth Session

Published by City Blaster on Wed, 13/03/2013 - 11:06 in
bull market personal income

Daily Market Commentary for March 13: For the eighth consecutive session the Dow edged higher. In eight sessions the Industrials index accumulated a 2.8% gain, one quarter of YTD gains. Monetary easing is working and everybody should be happy!

Similarly to what Greenspan achieved in the past, Ben Bernanke is also driving markets higher and contributing to the rise in consumer confidence. What he isn’t doing is creating employment as monetary policy is worth almost nothing on that matter, especially when the patient is intoxicated with that medicine. With economic indicators still pointing to weakness as was the case with the last reported GDP numbers in the US, stock markets are trading at all time highs. It is true that the US economy has been recovering but not as fast as the stock market. US households now hold too much financial assets and are counting with Ben Bernanke to help them through QE infinity.

The problem with all this is that the FED’s balance sheet is growing everyday and something must be done with all those assets the central bank is buying. It seems to me that what is driving stocks higher isn’t the economy but rather monetary easing alone, meaning that if the FED stops, the market will crash.

For now optimism dominates and both the Dow and the FTSE rose in almost 70% of this year sessions and are up more than 10%.

market data

With an accumulated 10.4% gain so far, I would say the FTSE is on muddy waters. If there are many doubts about the health of the US economy, there’s none about the Brittish. The British economy is heading towards a triple dip recession while the FTSE is just 6% behind all time highs. Something doesn’t add up. When there is a disfunction between asset prices and fundamentals, we have a bubble.

Even though the picture is grey, stock markets will continue to rise while the bubble is forming. It is too soon to short the market but it is time to be selective. Regarding bonds, just short them. With inflation expectations in the UK above 3% and with a 10-year benchmark yield below 2%, there’s only one way to trade Gilts, and that’s on the sell side. Another good investment is to buy houses and ask for a mortgage. With 30-year benchmark rates at 3.3% and with depressed house prices, that’s really a good business.