Last Man Standing

We’ve discussed several models and the different methods they use to place a valuation on stocks. Now, we consider one last approach, which doesn’t bother with valuation at all: eliminating any and all competition to equities.

Conceivably, this is a designed strategy intended to increase the equity markets, which will in turn improve consumer confidence, which will help in jump-starting the economy, which ultimately may start creating jobs.

That concept is consistent with the jawboning heard from both President Bush and Federal Reserve Chief Greenspan (and other Fed members). From the March lows, the market has enjoyed lots of stimulants: weak dollar, increased liquidity, tax cuts and rate cuts. These have put starch back in the markets’ sails. Despite many indicators suggesting we’re overbought, with sentiments at extreme levels), the rally continues to show that it’s not quite ready to quit.

Stocks have become the “Last Man Standing;” Cash, Money Market Accounts and Bonds (including Junk) have all become increasingly unattractive places to deposit monies:

· Money Markets are now yielding 1% and falling; The widely expected Fed rate cut will take Money Market account rates to 0.5% or below; This makes these accounts unprofitable for the firms that manage them;
· Treasury Bonds are now offering yields at 45 year lows; The 10 year Note is about to penetrate below 3.1%; The 30 year is at 4.15%.
· High Yield Bonds have run up over 21% (Lehman Brothers High Yield Index), over the past 6 months; As we have seen, momentum begets additional momentum.

The Bond action suggests one of several possibilities: Investors may believe that rates are about to enter a deflationary spiral, and are buying in before the rates plummet further; Or, they are buying ever-decreasing quality in a desperate bid for Yield. Lastly, and most ominously, Bond investors may be doing the same thing their equity counterparts did at the top of the Bull market: Chasing momentum, believing they will be able to jump off before its too late; That self confidence is rarely well placed.

The risk, as any good conservative knows, is that broad government intervention in the marketplace rarely works; It’s often accompanied by many unintended consequences. Equity holders should enjoy the ride while it lasts . . .

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