“But even though that would cause some short-term pain, it’s a huge opportunity to buy. Because longer term, we know exactly what the play book is.”
After trending higher for the first three weeks of September, stocks closed the month on the decline on fresh concerns over Europe. The S&P 500 is up 15% on the year, 5.8% on the quarter and 2.4% in September. Take a look below at the weak close to an otherwise strong month and quarter.
The bullish action in the usually bearish month of September has been fueled by activity from the central banks of the world. This is a theme we have discussed at length here and it continues to play out in force. In the last three weeks the market fielded a nuclear round of monetary stimulation from the Fed, Bank of Japan and European Central Bank, all unleashing new measures to stimulate liquidity.
That’s what drove the averages into a new 4-year high in the first three weeks of September. The central banks provided a nice little sugar high for the market to sink its teeth into.
But the last week has been a different story. So different in fact that the averages have now given back all the gains from the post QEternity announcement.That’s a fairly bearish development that could spell trouble for stocks in the short run.
This recent blast of weakness is being driven by Europe, which is in worse shape than ever as Spain, Greece, Portugal and Italy all battle their financial demons.
The market is also starting to talk and worry about the fiscal cliff, a combination of automatic spending cuts and tax increases set to go into effect Jan 1 that economists estimate would whack 4% off GDP. This is a huge, huge deal. It’s the #1 issues in the market right now. The politicians will have only weeks to create an amendment to the legislation after the election. And with a historically divided Congress, that doesn’t bode well for a market that hates uncertainty.
That could cause a big pullback in stocks. But even though that would cause some short-term pain, it’s a huge opportunity to buy. Because longer term, we know exactly what the play book is.
The central banks will stimulate at all costs. The central banks know they are the last line of defense in the battle against deflation and a global depression.Their options are simple: let the market crash or stimulate. Stimulation is good for stocks, gold and commodities.
So even though there are a million reasons to be bearish, you have to stick with the trend. It’s just so much easier for the politicians to prop things up then deal with real reform.
The Big Picture
The market has been on a serious tear for the last 3 months, lifting the averages to a 4-year high. But now that the super high from recent central bank stimulation is wearing off, stocks are showing some signs of weakness. This could the beginning of a medium-term pullback fueled by seasonally weak September Octobers and uncertainty over the presidential election and fiscal cliff. If the market does pullback, I will be looking to buy more stocks, gold and commodities with full faith the central banks will be forced to inflate their way out of debt.
Apple, Inc. (AAPL) was a rock star in the third quarter, adding 15% and hitting a new all-time high above $700. Here’s my question on Apple: Is it over? Seriously. I’ve been following the Apple story closely for a long time, and for the first time I am seeing cracks in the armor. Here are my biggest concerns: What’s the next big product? Your current products are facing INTENSE competition, companies are gunning for Apple like never before. No Steve Jobs.
The company has already well deviated from the Steve Jobs play book by issuing a dividend, using celerity endorsements in a not well received advertising campaign and admitted to messing up a product with their maps application on the iPhone. You think one of those things would have happened with Jobs on the watch? Do not underestimate what Steve Jobs was as a human being and to that company. He WAS that company. The loss can’t be calculated.
For the time being I’m still bullish on Apple, but I see more headwinds than ever before. Take a look at the solid quarter below.
Google, Inc. (GOOG) was also on fire during Q3, adding a very outsized 30% gain. Longer term, I think Google is a better investment than Apple. Founder Larry Page taking over the CEO spot seems to have revitalized the company, which has been delivering strong earnings that have helped keep the valuation picture in check in spite of a nominally high share price. Google is also a $250 bln market cap. That’s not exactly small but it’s less than half of Apple at $625 bln. I like having Google and Apple lead the tech portfolio, but for now I see Google as the bigger growth story.
And finally, with the central banks going crazy, Double Gold (DGP) was up 22% on the quarter. Take a look at the surge below ahead of the Fed announcing QEternity.
That’s all for this week, but until next time, here is a follow up to the Apple conversation with CEO Tim Cook admitting the company messed up its maps application. That whole scene doesn’t feel very Apple-like to me. Enjoy.
Your Investment Partner,
Michael Vodicka is the president and founder of the Vodicka Group, Inc., a Registered Investment Advisor (RIA). He specialized in trading fixed-income derivatives at the Chicago Board of Trade before spending five years managing equity portfolios for a private investment research company.
Michael graduated from the University of Kansas with a degree in business communications and is registered with the State of Illinois and the SEC (Securities and Exchange Commission) as a Licensed Investment Advisor (Series 65).