Here's the game plan for dealing with the Fed, Brexit and oil
One down, one to go. I am talking about how this stock market now has gotten through another Federal Reserve meeting unscathed.
Yep, the Fed agreed to do nothing and that keeps stocks on the agenda as the best place for a return for your money.
I was pleased to hear that the Fed paid attention not to the ideologues who want higher rates so they can be lowered after the Fed threw us into a recession. I am glad that the Fed recognized that the economy only grew by 38,000 jobs and that mattered to the governors. I like that they recognized that the economy is on a real slow growth path and that rate hikes aren't going lockstep.
I like these things because they recognize that job creation has slowed. No, there is no recognition that it might have changed because of technology, because of digitization, because of the ease with which jobs can be transported overseas and taken away from our country. The governors still can't seem to come to grasp with something such as CNBC's disrupters -- companies that are taking away jobs by the hundreds of thousands just by their nature. Look at your cellphone. Look at those apps and icons. They represent millions of jobs taken away, with everything from clerical jobs to calendars to sports programming to P.C. makers and camera companies being eviscerated.
Still, I am glad that they are giving the rest of the economy a chance to catch up, perhaps while the paralysis in Washington runs its course. I also am thrilled that the Fed took no action that would boost the dollar. Right now it is unchanged versus many currencies year over year. That's good news as we wind down the corporate quarter.
Look, I wish that the economy were growing and creating all sorts of jobs. Then we could raise rates and the stock market could handle it. But that sure wasn't the case in December when the Fed raised and the stock market got hammered. And Janet Yellen was on point when she said the job growth has slowed despite some pick-up in the economy, an anomaly that means getting more out of fewer people.
But I think the Fed isn't being clever. The Fed owns trillions of dollars in U.S. bonds. As colleague and writing partner Matt Horween points out, we have a worldwide shortage in all treasuries and only the Fed is sitting on a vast storehouse of them. Why not have the Fed selloff these treasuries, which gradually would allow interest rates to rise from the supply, and it could accomplish what it wanted, make a huge profit for the Treasury and get rid of the craziness of negative rates worldwide.
This could be the biggest win of all time and eliminate the biggest worry the Fed has -- all of those bonds! I have heard talk that this wouldn't be right, that the Fed has to own these bonds to maturity. It's really the opposite, though. If the Fed took the extraordinary act of buying treasuries in the open market to get the economy to a better place, it can take the far less extraordinary act of selling them in the open market to gradually raise rates while ringing the register and solving the dilemma of a dearth of worldwide risk-free assets. There is no rule, no law that says the Fed can't do this.
Sometimes being creative is better than standing pat, and that's what the Fed needs to be to get us out of this jam.
Which brings me to the second of the two hurdles this market has to go through: the coming decision in Britain about leaving or staying in the European Union.
I believe that uncertainty about this issue as well as the price of oil -- more on that in a moment -- explain why we didn't have our usual explosion higher in stock prices after the meeting ended without a rate rise.
Now I think more people are worried about this British vote than they would be otherwise because they sure weren't worried not that long ago. I believe that many of the scary stories we hear about what could occur are being circulated by people who ignored or dismissed this very possibility not that long ago and don't want to look like idiots.
The rhetoric is pretty terrifying. I saw research today predicting that the stocks of the big British banks are going to fall 40% if Brits vote to leave.
Here's where I come out on this. We could have a couple of day buying opportunities in high-yield stocks like the utilities and the real estate investment trusts that could be a godsend. You might get your chance to buy AT&T or General Mills or Bristol-Myers Squibb or Pfizer at prices that are ludicrous. I would stand there and buy all the Dominion or American Electric Power -- which is part of our Action Alerts PLUS portfolio -- or Con Ed there is to buy. I can imagine being at my old hedge fund bidding, literally bidding for a million shares of any one of these stocks if the vote goes down badly. I could see grabbing the phone and shouting, "Seventy-seven bid for one million shares of ConEd, right on the line, come on, hit me."
Yet, I don't hear that kind of talk. All I hear is fear.
So all I can say is when everyone is scared you have to worry that you are going to miss the opportunity, not get a good one. Or, to put it another way, with Johnson & Johnson at $116 it would be gift to get that stock under $110 because of Brexit, but that's a gift I bet you never get. AT&T hit a 52-week high today and it yields 4.74% when the 10-year treasury yields a third of that. The stock is at $40. Now that it owns Direct TV it is more levered to the New York Giants and the Chicago Bears than it is to Brexit. If you can get that stock at $38 either before or after Brexit, take it.
Recall that these big hedge fund managers find it so easy to say there could be a 10% to 20% decline in stocks, but they find it impossible to name a stock that they would buy if it were to come down that much.
That's typical, and it's a sign of how unhelpful these siren singers with their jeremiads really are.
Now, I am not calm about Brexit. I am simply saying get ready for the next day down. However, if we are down 3% to 5% ahead of the vote, I am going to ask you to buy stocks that yield 3.5% ahead of the vote and then buy some more after.
What keeps me from saying get aggressive right now?
We were rallying just fine today off the Fed when oil turned down, and I have to tell you that the wall of $50 is less likely to be banged than the floor of $45. When oil goes down, the S&P goes down. There was a moment where the Dow swooned 40 points and I checked everywhere to find out why. There was only one reason -- oil turned negative.
We got our big oil inventory numbers today and they showed a further drop in production in this country, which makes the $45 level one that could provide support. Nevertheless, with the Fed on hold and Brexit not for another week, crude is what matters, which is a variable that's hard to game.
Anyway, with the Fed out of the picture but oil playing havoc and Brexit coming up, we can only remain cautious until oil drops three bucks and the stock market drops 3% to 5% ahead of the vote. That's when you put some of that mad money to work in higher-yielding, all-domestic equities. That's the game plan -- you just have to be ready to implement it.
This article originally appeared on Real Money on JUN 15, 2016.
