TSP Trend Timing for 24 Sep 07
Guest Commentary by Alan Abelson:
Debasing Bernanke
BEN BLINKED.
Or was it a wink? Was he only funning the folks with all that malarkey about acting judiciously lest he encourage reckless financial behavior among the great unwashed -- moral hazard, as the cognoscenti like to put it? Or did he blanch at the notion of trudging up the Hill and facing a posse of angry lawmakers unless he dished up some red meat in advance of his slated appearance to mollify the wild beasts?
John Mitchell, Mr. Nixon's ill-fated attorney general, for all his sins was absolutely, if inadvertently, on the money as to how to treat office holders regardless of political party and however high their office. Referring to the administration he was such an integral part of, he urged one and all to "Pay attention not to what we say; watch what we do." (Unfortunately for Mr. Mitchell and the administration, that's exactly what one and all decided to do.)
Following that priceless piece of sage advice in judging the Fed's chairman's action last week in taking a half-point whack out of interest rates, we're forced to conclude that Ben Bernanke is Alan Greenspan with a beard.
Not, as all the world knows, that Mr. Bernanke's efforts were without effect. They ignited a vast and powerful rally in stocks, not only here but in bourses around the globe. Which, we have a hunch, was not exactly an unpredictable reaction that might just have crossed the chairman's mind as he weighed whether to go prudent or whole-hog in reducing rates
In using an ax instead of a scalpel to trim rates, Mr. Bernanke would appear to be changing his mind about not saving investors, much less speculators (the difference, in case you wondered, is that investors hold a tradable asset for a week, speculators for a day) from their follies. In his defense, he specifically disavowed the savior's role when it comes to the mortgage mess, vowing not to bail out those who have lent fecklessly or those who have borrowed recklessly; but he carefully refrained from pledging not to rescue stock buyers (perhaps in hopes of freeing his arm from behind his back where that tough hombre, Wall Street's gift to Washington, Treasury Secretary Henry Paulson, had pinioned it).
No argument that Mr.Bernanke's action provided a tonic for a very jittery stock market, as evidenced not only by the immediate boisterous reception that greeted it, but also the sharp turnaround in what had been seriously drooping investor sentiment. On the latter score, the latest soundings by Investors Intelligence of advisory sentiment showed that 53.9% were bullish and 27% bearish, a striking contrast to several weeks earlier, when bulls, who typically boast a sizable edge over their downbeat counterparts, were barely over 40%, while bears weighed in at something like 37%.
Beyond its resounding impact on equity prices, Mr. Bernanke's mucho macho cut in both the discount and the federal-funds rate may prove more an instant wonder than an enduring influence. As Charlie Minter and Marty Weiner of Comstock Partners point out, when on Jan. 3, 2001, the Fed, then under Mr. Greenspan's guileful management, after an extended stretch of nudging up rates, reversed course and made its first cut (to 6% from 6.50% on fed funds and to 5.75% from 6% in the discount rate) stocks, then as last week, exploded on the upside.
In that single session, the S&P 500 was up a full 5%, while Nasdaq went absolutely bananas, racking up a stunning 14% gain. Alas, over the next 21 months, the S&P lost a formidable 43% and Nasdaq fared even worse, skidding some 57%.
History may not repeat itself; in truth, it rarely does, as least precisely. And it may not always even rhyme. But, as that observant philosopher George Santayana warned, it has a way of causing pain for those who choose to ignore it.
NO GOOD DEED, OF COURSE, goes unpunished. And wouldn't you know, Mr. Bernanke's muscular move that touched off a blistering rally in stocks also, it grieves us to report, had less salutary, if equally predictable, consequences in other trading arenas. Turmoil in the credit markets, which presumably was among the Fed's primary concerns prompting the rate slash, though hardly erased, nonetheless was suddenly overshadowed by turmoil in the foreign-exchange market and ominous disturbances in key commodities.
Our own beloved currency turned garishly green around the gills, nicely matching the traditional color of its back. A euro fetched a record price in U.S. dollars and the Canadian dollar -- the loonie -- achieved parity with our battered buck for the first time in over three decades (who's crazy now?). Virtually every currency known to man appreciated against our beleaguered greenback, which did hold its own, we're happy to say, against the Zimbabwean dollar (inflation in that ruined nation is running an estimated 15,000% a year and seems determinedly headed for six figures).
Moreover, the latest dizzying descent in the buck can only make our foreign creditors, those generous folk whose forbearance, encouraged by our insatiable appetite for their goods, has enabled us to live the good life on borrowed money, all the more antsy. They had already shown growing disquiet over the steady erosion of their huge hoards of our IOUs, by edging their reserves into more stable currencies.
The incidental devaluation of the U.S. dollar sent the price of crude, which is denominated in dollars, barreling to an all-time high above $84 a barrel before it paused to take a breath. And the fresh debasement of our coin, coupled with prospects of a surge in inflation, powered a spurt in gold to nearly $745 an ounce, the highest price since January 1980, when it hit $850 as bungling Bunker Hunt tried to corner the market for the yellow metal.
The moral imperative that inspired Mr. Bernanke to take down interest rates half a point instead of a quarter was to ease the pressure off the reeling housing market. In the event, though, he managed to steepen the Treasury yield curve, which means that the longer-term obligations, which effectively determine the level of mortgage rates, went up. Not, we suspect, the ideal medicine for what ails homebuilding.
Indeed, it's doubtful that any of the palliatives being proposed to dull the pain of mortgage holders who can't meet their payments or improvident lenders in the soup are likely to prove very effective. The latest data certainly provide little comfort. The news from the builders is uniformly bleak. And, as the aforementioned Minter and Weiner note, foreclosures on subprime loans alone could result in cumulative losses of -- gulp! -- $164 billion. It's also reckoned, they say, that a 15% decline in house prices -- not exactly outside the realm of possibility -- could wipe out $3 trillion of household net worth.
It's ease to see what got us into this bloody bind: a breathtaking binge of mindless borrowing accommodated by legions of lenders uninhibited by scruple of any sort, mightily aided and abetted by Wall Street's ingenuity in discovering new ways to create and peddle leverage. And, of course, by snoozing watchdogs, like the Fed.
How to get out of the very sticky mess is a bit more difficult to envision. Except cutting rates and going the way of Zimbabwe probably isn't it.
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What to Do for 24 Sep 07
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L Fund (Lifecycle Income)
Current L Fund allocation is 50%.
F Fund (20 Year + Treasury Bond Fund)
Current F Fund allocation is 0%.
***Effective portfolio allocation considering L Fund is 05.0%.
C Fund (S&P 500 Index) If SPY < $147.63, move 20% to G Fund.
Current C Fund allocation is 20%.
***Effective portfolio allocation considering L Fund is 40.5%.
S Fund (Wilshire 4500 Index) If DWCP or $EMW < $658.33, move 10% to G Fund.
Current S Fund allocation is 10%.
***Effective portfolio allocation considering L Fund is 19.0%.
I Fund (EAFE Index) If EFA < $78.26, move 20% to G Fund.
Current I Fund allocation is 20%.
***Effective portfolio allocation considering L Fund is 32.0%.
G Fund (Money Market)
Current G Fund allocation is 0%.
***Effective portfolio allocation considering L Fund is 03.5%.
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