Quarter end is always a tricky period in the markets as institutional money managers, mutual fund managers and the like attempt to “dress up” their portfolios for reporting purposes. Also adding to the confusion is a quarter-end pattern related to the warning period before earning announcements. Specifically, the last months of each quarter since mid- 2000 have been tough as corporations break the bad news to Wall Street that earning numbers are not going to look good. Subsequently, the market reacts negatively and by the time the actual earnings announce is made, the market begins to head higher. Classic case of sell the rumor, buy the news. At this point in the final days of June, most of the bad news regarding earnings, appears to be baked in the cake, as Rob Grey likes to say. July, like April and January of this year, could be a very strong month.
Yesterday’s quarter point drop in the federal funds rate was a non-event as this information also appears to have been factored in. It was a bit grotesque the way CNBC and their star guests attempted to analyze the rate cut as not enough, just right or too much following the announcement. Fed bashing is becoming a national past time perhaps in the absence of anything else to talk about. The big is picture is this. The Fed has created a mountain of liquidity (cash) in the system by cutting rates 6 TIMES. A quarter or half point now is immaterial. This liquidity might take the form of swelling corporate cash accounts, money market accounts or even bank checking accounts. As of now, this cash appears perfectly content to sit where it is until conditions improve. So we’re caught in a catch 22. Businesses and consumers are not especially hurting financially (yet) but they are reluctant to spend. The recent 2 month spike in the jobless numbers certainly doesn’t help either. What will it take for spending to resume? Signs of an improving economy. What will it take to improve the economy?.....Increased spending. Catch 22.
One thing is clear; somehow, businesses and consumers need a big dose of confidence to begin spending again and induce an ECONOMIC recovery. Efforts by the Fed have been effective in putting cash in the system but if no one spends it, the impact remains nil. What will provide the stimulus for that confidence, I have no idea. The stock market is a different story. We know that the stock market bottoms 6-9 months in advance of the economy. There seems to be a lot of talk about investors looking for sequentially positive earnings as in back-to-back positive quarterly earnings. Bunk! Mark my words; by that time the market will be 50% off its lows. After the ’74-’76 market decline, the bear market just ended without a notable event, without any fanfare. The various market indexes just started to trend up and they never turned back. I think there’s a good chance that this bear will also end in a similar fashion. The bottom line is, we should be looking for a major market low between now and the end of the year. This “low” will not make sense to anyone who is waiting for positive sequential earnings. This “low” will arrive quietly and most likely correspond with headlines announcing a formal recession.
I am looking forward to making strong returns again as I’m sure everyone is. I hope you share in my enthusiasm that the time is near. We will be back on track to doubling money every 4-5 years before long. I will be writing the quarterly edition of this update next week so there will be no weekly update next Thursday. Have a good week. Sam Jones

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