Tuesday, April 5, 2011

QE3, Quick Easy Fix

The Fed's quantitative easing has clearly helped move U.S. equity markets in the right direction.  With the possibility of the Fed's third installment of quantitative easing right around the corner, investors should take a close look at their current positions and what effects the Fed's decision may have on their portfolio. 

After two rounds the fed is clearly winning, but at what cost?  Yes the market has seen some substantial gains since the inception of the QE policy, but it is impossible to distinguish the success of the program with corporate profits reaching all time highs.  Overall trading volume has been substantially down in 2011.  Individual investors have been on the sidelines all year watching their equity heavy portfolios grow.  Hedge funds, mutual funds, and ETF's are responsible for most of this years volume, which is somewhat scary.  As long as the large active fund managers stay bullish investors will continue to see their portfolios grow, but it doesn't take much to change the fund mangers mind.  No matter how good the U.S. economy is doing, no matter how much hiring is taking place in the private sector, and no matter how many billions U.S. corporations are beating estimates by, the market is at the mercy of the "Mega-Fund Managers."

It all comes back to jobs.  The most common talk among amateur investors is about the market growing without any substantial job growth.  Truth be told, the businesses that survived "The Great Recession" have learned how to run their operation as lean as possible and will likely not be hiring at the same rate as they did in the past.  Expect to see corporate margins continue to increase across most sectors as revenues surpass 2007 levels, but yet headcount remains at 2009 levels.  The fat has been trimmed and those that survived are highly skilled and much more valuable to their employers than ever before.  There will be plenty of cannibalism of employees in certain industries, putting much more of an emphasis on applicable experience over education.  This will only make the job hunt that much harder for recent grads. 

Where do we go from here?  Well, there are two options...  QE3 would likely keep markets climbing north for a few more months, and the end of quantitative easing will likely have fund managers scrambling to sell and harvest some profit from this rally.  Looking long term it would probably be better to go ahead and ween us off the QE bottle now during the upcoming summer lull and expect to see a very active fall if this holds true.  If there is no QE3 the 3 - 5% correction following the announcement should present a great buying opportunity.  U.S. companies are making money and no matter what the fed does they will continue to grow revenue and margins.  This fall could look very similar to the rally in 2010 that started when Republicans took over the house.  Equity markets continue provide investors with the greatest growth potential, while the fixed income market remains asleep at the wheel.

Bond funds are the last place growth oriented investors should be investing.  Instead, those that are seeking income should look to closed end funds.  Most of the well managed funds that have a proven track record of not touching capital, have increased NAV in line with the S&P 500, but their price has surpassed the benchmark index.  Whether it is REIT's, CEF's, MLP's, or high yielding telecom/utility/pharmaceutical stock, there are plenty of alternatives to bonds for the income needy that actually offer the potential for growth.

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