Buy the Rumor, Buy the News?

The Market showed just how strong it is this week. Having sat through more instances of “buy the rumor, sell the news” than I care to remember, I was fully prepared to see something of a pullback given this week’s Trifecta. We had the electorate rendering its verdict against the despotism that calls itself Progressivism, the Fed announcing the terms of its latest truckload of monetary easing, and the culmination of another earnings season that showed the global economy still gaining traction. It seemed more than plausible that a 20%+ surge in the NDQ in nine or so weeks had more than adequately discounted all this, that somewhere along about Wednesday or Thursday, “sell the news” should have kicked in. On the surface, there was nothing all that surprising in any of these developments, other than maybe the $600B being higher than what we take to be the consensus estimate. But no, instead of a “pause that refreshes” that normally occurs when something so enthusiastically anticipated gets cleared up, there was almost imperceptible hesitation before the Market tacked on Thursday’s big gain and then refused to pull back from that on Friday. What’s up with that?

The election outcome really was hardly surprising, though a highly encouraging sign did appear in the aftermath. Who, save that 20% of us living in that parallel universe we might call the Progressive Bubble, could possibly be surprised that there would not be a rightward shift in the legislative branch caused by a felt need amongst a plurality of the other 80% to send a message to an arrogant and dangerously out of touch executive branch? Musings saw the seeds of this clear back on March 25, 2009:

It occurred to me that this time, the collective efforts of this crew had thus far been so amateurish, so evocative of Commencement Day at Clown College and so presumptuous of success as to perhaps set a land speed record for blowing one’s political wad. One of the reasons the Market didn’t seem to mind that which was objectionable about the Clinton Administration was that it, too, rapidly squandered its ability to render things like “health care reform” and had to spend the rest of its years triangulating and otherwise playing it safe. The Market doesn’t seem to mind nickel-dime changes that actually happen so much as the prospect of Big Change with even bigger and grossly unknowable unintended consequences. One also senses enormous tensions building up among the acolytes and variously sordid hustlers who are impatiently awaiting a payback for helping bring all this into being, the sort of tensions that invariably corrode the efficacy of the endeavor. The wheels might not have come completely off of the Hope-N-Change Express, but I think we have heard at least a few lug nuts clattering down the highway. The Market has breathed a sigh of relief that all that talk of radical change looks to be just that, a lot of talk. Damage will be done, to be sure, but nothing like what was in mind as pundits were setting their sights on DJIA 5000.

Imagine the odds I could have gotten had I thought this through at the time and found a casino willing to take a bet against the Republicans regaining the House in 2010! What I think might have been incremental about the election was that, unlike in 1994, the resurgent opposition is not taking their victory as a sign that it is time to ram through a mandate and otherwise run the table. No, they are calculating the percentages and playing the longer game. They will put the Progressive element even more on the defensive by offering incremental improvements that would be political poison to oppose. For example, that “file a 1099 for every purchase over $600” provision that got secreted into the Health Care bill. Can we please have the name of the tone deaf dimwit who stuck that in there? This is a tremendous impediment to jobs creation not just because of the quantifiable compliance burden it imposes but the signal that it send to every business owner, large and small, as to just how intensely involved their “partners” in government might try to get in the months and years ahead. You get a clear and vivid sense of this by talking to any business owner about how they feel about it, but that’s not something that anyone in the Administration seems capable of doing. It is a wet blanket smotherer of entrepreneurial spirits of the highest order. The good news is that it and measures like it are easy targets that fit well in the Republican game plan. How many Democrats, having witnessed the slaughter of November 2, are going to vote against measure to repeal this monstrosity, especially those 23 Democratic Senators who are up for re-election in 2012? So I think that investors at the margin got a little more confident that not only have the enemies of ownership been routed, but that either at least a few of the most egregious enterprise dampeners will be addressed in the weeks ahead or there will be an even more pronounced stampede to the right in two years.

In terms of substance, the Fed action strikes me as a nonevent, like a kid jumping in front of a parade so he could tell his folks that he led them across town. This sentiment is rooted in what the earnings season told us, a development that was only surprising if you believed that the summer slowdown was anything more than an inventory adjusting speed bump. As previously noted, knocking a few more basis points off of lending rates is not going to stimulate borrowing and so hiring by either the cash rich or barely-hanging-on enterprises that make up most of the economy. To the extent that rates drop, the greater impact will be a negative one on savers. What QE2 does seem to have done is send a signal to those who unleash tsunamis of buying or selling on a daily basis that “risk on” is, for the time being, much more prudent than “risk off”. So on more days than not, money pours out of safe havens and into just about anything that has the potential to go up in price. At least for now.

Also lending impetus to the upward bias in equity prices is the calendar. The number of weeks until every money manager’s 2010 performance get indelibly printed is rapidly dwindling, and not a few of them are wishing they had been more fully invested. This alone makes me think that the intermediate up-leg that commenced in earnest on September 1 will continue for a few more weeks at least. And as we look to 2011, I see a global economy not only gaining traction but perhaps even shifting gears. While large swathes the US economy continues to face dreadful obstacles, the export oriented portions are thriving. What will likely put 2011 in a much better place than 2010 will be that construction activity appears poised to swing from being a drag on the aggregate (declining) to being at least a slight positive. It is also likely that while lay-offs by state and municipal entities will continue, the rate at which these necessary cuts are made will slow. It adds up to more spending power coursing through the economy, more discretionary spending on things that millions of households have underspent on for the past four years. The resultant improvement in GDP and earnings should be such that we should not be surprised to see the Bull Market tack on a third year. That said, I believe the intermediate trend that commenced on September 1 has advanced to the point that thinking about selling, harvesting a few positions around the edges in order to insure that one has buying power the next time the Market goes into one of its periodic swoons, probably ought to be taking precedence over thinking about adding new positions. But that is a tactical consideration in what remains a positive long term outlook.