I believe that the risk markets are discounting a recession that isn’t going to happen. Not yet, anyway. So I am going to start adding some small, limited risk call options here.
After analyzing the statement from the Federal Reserve yesterday, it is clear that Ben Bernanke is holding a gun to your head, threatening to pull the trigger if you don’t buy stocks.
By taking the ten year Treasury bond yield down to 2.0%, some 80% of equities now have dividend yields greater than bonds. A substantial number of companies are paying dividends double or more the ten year yield. This is unprecedented in economic history. Take a look at the yields of some of the most conservatively run companies:
AT&T (T) 6.2%
ExxonMobile (XOM) 2.70%
Procter & Gamble (PG) 3.50%
Wal-Mart (WMT) 3.00%
Johnson & Johnson (JNJ) 3.70%
3 M Co. (MMM) 2.80%
Dupont (DD) 3.70%
McDonald’s (MCD) 3.00%
There is something else important that no one is focusing on. The 25% crash in the price of oil from $100 a barrel equates to one of the largest tax cuts in history for consumers. Each dollar decline in the price of gasoline adds $10 billion a month to the purchasing power of American consumers, and $40 billion a month to consumers globally. You can make the same argument for other commodities as well, which have all suffered enormous declines.
In fact, today’s surprise draw of 5 million barrels in inventories reported by the Department of Energy suggests that the economy is stronger than perceived, not weaker. Someone is going to notice this soon.
Since the July peak to the Asian bottom, the (SPX) has plunged 23%. This is with an economy that is growing at a 2% rate. During the 2008-2009 crash, the (SPX) fell 52%, when GDP was shrinking at a 6% rate, we had just lost several major financial institutions, the credit markets had seized up, and the ATM’s were two weeks away from shutting down.
Am I the only one that sees a mismatch here? Have the markets just imagined a phantom disaster?
I think the no brainer here is for the (SPX) to rally back up to the 200 day moving average at 1289. That is up 170 points from this morning’s opening. Get even a piece of that and it will boost your performance nicely.
By. Mad Hedge Fund Trader