Glee: Embracing the Stalemate

Glee is back. I’m not referring to the FOX hit series that premiered a few weeks ago which highlights a diverse group of high school students who solve all of life’s problems with a song — ending last season on a high note with their rendition of Journey’s “Don’t Stop Believing”. I am referring to the recent performance of the DOW which topped 11,000 for the first time since the May 6th crash despite the report from the labor department that the nation lost95,000 jobs last month — signaling that the recovery is faltering. Ben Bernanke led the central bank in their version of “Don’t Stop Believing”, as he hinted that they would continue to buy up to 1.2 trillion of treasuries, believing that injecting cash into the economy would finally spur growth. It has been my contention that this quantitative easing will be a detriment to the long term health of the US economy. It has done nothing but artificially inflate bond prices and destroy the value of the dollar which is now trading at 81.73 yen — a fifteen year low.

So what are investors so Gleeful about? In most cases, a stalemate is not something to break into song over. Anyone who has ever been involved in a negotiation which ends in a stalemate is usually disappointed, because virtually nothing has been accomplished. The upcoming elections will most likely shift the House over to the Republicans, with the Senate very much up for grabs — the end result will probably be a stalemate. The recent rally is a celebration of “nothing” which is exactly what the government will be doing in the next couple of years until the next Presidential election — “nothing”. However, in the case of the current tax policy, doing nothing is impossible since the current tax policy will expire in January — possibly ending the initiative that’s been in effect since 1996. Possibly ending the very same policy that lowers taxes for small business’ or job creators and investors — the people who President Obama refers to as the “wealthy”. The expiration of the Bush tax cuts will have many negative effects, but the most relevant is the profound effect the Obama tax plan will have on small business’ willingness and ability to hire. It’s simple math — the more a small business owner pays in tax, the less money he has to hire workers. If the sky high unemployment rate continues or increases, no amount of quantitative easing, government bailouts or empty promises will prevent the debacle ahead. Every single government initiative that this administration has put forth has failed miserably; hence, investors eagerly anticipate the government continuing to do absolutely nothing after the Bush tax cuts are extended.

In the midst of our “gleeful nothingness” it is imperative to hypothesize the effects rising interest rates will have on our portfolios. I know that some believe that a brilliant congress will prevail in restoring the value of the dollar, while keeping interest rates low, without Central bank intervention. The optimist in me wishes that were true, but in order for the economy to improve, it will have to endure the hardships associated with rising interest rates. My short term strategy reflects four main factors:

1. Interest rates will rise (bond prices decline)
2. Commodity prices will rise exponentially (including OIL)
3. The stock market will continue to rally in anticipation of the stalemate
4. Precious metals will rally until interest rates rise and the dollar stabilizes.

However, in all likelihood, the stock market will become vulnerable to a decline when interest rates increase and unemployment doesn’t improve — which is why I remain negative on the equity market in the intermediate term once this short term rally runs its course. Our strategy is to trade the rally short term — continue to buy commodities, precious metals, convertible bonds and inverse treasuries, ETFS as well as TIPS . We are hedging our equity with Inverse ETFS and holding short term, while maintaining tight stops on our long equity positions, with less tight stops on our short positions, and inverse ETFS — recognizing that the market is vulnerable at these levels.

In the show “GLEE” turmoil ensues throughout the show, but what people remember and talk about is the final song. In the real life economic turmoil of today, we will surely persevere if we hold onto the fundamentals that have made this country GREAT. Conditions are far too complicated to ever think that all economic problems and problems in general could be solved with a song, but it is a song — possibly the best song ever written that will make us forget all the turmoil that created this crisis. The song was written by Katherine Lee bates, and it’s called “AMERICA THE BEAUTIFUL”.

Thank You,
Jeffrey C. SicaPresidentSica Wealth Management, LLC