The Wise Man

Leon Cooperman, the head of Omega Advisors, has been around this business a long time and to do that you have to have a great track record. Cooperman who was bullish on  equities last year and correctly predicted 10 of his 10 stock picks at last year’s Delivering Alpha conference had this to say at the conference in 2013. “What the wise man does in the beginning the fool does in the end.” It seems that Coopermen feels that with the market at all time highs valuations are not cheap and not the choicest of bargains. The bar for earnings estimates has been set very low for the 2nd Quarter and will not take much for corporations to surmount. The 3rd Quarter is quite a different story. The rising US Dollar and economic headwinds may force corporations to guide lower. That may make valuations seem a bit rich at this point.

Taking heed from Cooperman’s words the Fall of 2013 looks to be an inflection point as the bull market that began in 2009 is now over 4 years old. That inflection point could be initiated at the September FOMC meeting as the committees may begin the process of winding down QE. While interest rates may remain on a steady course from the Federal Reserve, elevated earnings estimates and the tailwind provided by QE may both turn into a headwind for investors.

Why did Bernanke allude to a tapering of QE that caused to the bond market gyrations in the first place? He answered that in the Q&A portion of his Congressional appearance yesterday.  Bernanke said that not providing the market with guidance about its plans for monetary policy would have “risked increased buildup of leverage or excessively risky positions in the market, and that the unwinding of those positions is the reason for some of the market volatility”. So that was a warning shot across the bow?

The unintended consequences of QE. The only thing that central banks can do is buy time. They cannot lend to help business. They can only make rates lower and money more available. Central banks cannot formulate fiscal policy and spend thereby creating jobs. That is Congress’ job. The FOMC and Bernanke have been quite clear that their ability to help the economy only goes so far and that much fiscal help is needed. None of that help from Congress is coming. FOMC members seem to realize that and the time may have come for QE to wind down. Any furthering of which would only help to inflate even further the levels of asset prices and increase leverage and excessive risk.

Keep an eye on bond yields. The Chairmen has successfully jawboned rates on the 10 year from 2.78% down to a much more acceptable sub 2.5%. Bernanke seemed to lose control of the bond market for a bit there but has since been able to quiet things down. The bond market may have tried to call the tune but Bernanke’s lullabies seem to be doing the trick. Market may stay quiet and hit higher highs as volatility remains low throughout July and August. Professional investors and shorts are chasing the market and performance. Continued earnings warnings from bellwether UPS and INTEL have analysts questioning Q3 earnings. We may slide by here in Q2 but the fall is shaping up to what could be a secular change. It’s all about September.

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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Published in: on July 18, 2013 at 10:41 am  Leave a Comment  
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