Monday, June 02, 2014

Good Morning America, How Are You?

The weekend was busy in the garden.  I planted beans this weekend, even though normally I would wait for 2 more weeks.  I just could not wait.  Ever get like that in your garden?  Did you ever get anxious and dig up the seeds to see if they sprout?  Did you ever look at your tomatoes every day hoping there would be one ripe? 

The way I get impatient over planting and harvesting reminds me of how much control I must have in investing.  I must remember there is a time and place for everything. 

Lilacs were beaten down by the rain on Friday.  Normally, the lilacs would be beautiful for the next two weeks, but not this year.  They are still very fragrant and will be for a couple of more days.  So many flowering perennials bloom such a short time.  That is why I have a succession of flowering perennials; but to be truthful, I'm not very good at it.  

I hope you have a very good week.  Enjoy your food, your work, and your spouse.  For these are what God gave you to enjoy.

Summary:  JUNE 5 - The EURO Show

1.   As you know, Friday, the USA stock market set a new historical high and set a new historical closing price.  Disappointing news?  So what? 

2.   The reason the market in the USA and Europe are going higher irrespective of the bad news in the USA is the European Central Bank.  President Mario Draghi is expected to announce negative interest rates for.  The excitement among-st politicos is palpable.  In 2012 when he announced OMT the impact on financial markets in Europe was spectacular.  The interest spreads narrowed, equities rallied and the Euro appreciated.  Of course, economic growth tracked lower, but has started to rise in 2014.  The European Treaty forbids monetary financing of stimulus (QE in the USA).  Therefore, it seems unlikely there the impact on the Eurozone economy will be anything but modest.  The ECB can purchase sovereign assets (as they did for Italy, Spain and others).  The big banks in Europe are not expecting a large-scale sovereign asset purchase.  London's Barclay is publishing that the monetary policy will feed through to the real economy in 3 ways:

a.    A weaker Euro will deliver higher import prices (drive the Euro down against the US dollar).  Recent experiences form the Bank of England and the Bank of Japan is that a weaker currency in the current currency market will have little impact on boosting exports.  Instead, it erodes household purchasing power via higher import prices.

b.    Negative deposit rates have proven costly in the past.  The main reason for creating negative deposit is to drive the currency down.  That probably has already been factored into the Euro.  Will it drive the cost of the currency down? 

c.    Portfolio re-allocation of Big Investors and Big Banks may even boost the Euro.  Experience from the USA and others (including England and the Eurozone) suggest that the hunt for yield will actually boost Euro Assets - lifting the Euro.  The trickle down to the real economy from such policy is very slow unless the money finds its way into real-estate. 

3.   You, the reader should expect June 5 to cause appreciation in the equity markets on a short term basis.  Ultimately, most bond traders agree that the Eurozone needs deep structural reform, and actual progress on the Eurozone economy is slow. 

4.   Finally - overnight - DOW up... S&P 500 up... NASDAQ UP, US Dollar UP, Gold Up, Silver UP, Markets are following the Super Mario plan before it is announced.  If that surprises you, then please consider that markets are forward looking; investing in the future, not the past.  The future cannot be known, but one makes money investing by investing in the future.  This remains correct even if you are a believer that markets have repeatable patterns; where the patterns are determined by the past.  One still is investing in the future, and that means since the future is unknown, investors are investing in probabilities - not investing on absolutes.