Cyprus? The tiny island nation off the coast of Turkey (and Greece, sort of) that makes up 0.5% of the European economy?
Let’s go back in time a week. How much did you know about Cyprus? Did you know it made up only 0.5% of the EU’s GDP? Did you know it was considered a banking haven for slightly-less-than-legitimate Russian businessmen? Did you know Cyprus was in such desperate need of a bailout from the European Union that their government was considering implementing a one-time bank levy on all its banks’ deposits to qualify? Did you know someone from Cyprus was called a Cypriot? Could it be that Cyprus is just the worry du jour?
What’s the worry du jour? “That’s the worry [sic] of the day. Mmmm. That sounds good. I’ll have that.”
Why is this an issue for you today? Remember how you were feeling one week ago? I’m guessing you were starting to feel like maybe those Doom-and-Gloomers really have been wrong for a few years now. Or that fundamentals are actually playing a role in this rally for banking stocks and housing. Maybe you were starting to finally wonder if your portfolio has been woefully underinvested for almost half a decade….
Here are the factors that I believe have been contributing to the bull market that started almost exactly four years ago:
1. A bottoming in the stock market (March 2009) followed by a bottoming of the US Housing Market (2011-12), resulting in the “nowhere-to-go-but-up” momentum that has been slower than an Airbus getting off the ground (but maybe even more powerful).
Do these just sound like obvious observations? Keep in mind there is still a huge faction of the professional investment community maintaining its bearish stance despite the 100%-plus move we’ve seen in the last 48 months. I don’t think they are outwardly denying that the stock market and housing market have turned; they just believe it is completely artificial and unsustainable. I like to point out Newton’s First Law which can be summed up as An object in motion tends to stay in motion…. Sir Isaac did not include an asterisk for “unless the Federal Reserve has intervened, in which case the object will plummet to the ground very soon.” Below is a chart of the S&P500 over the past five years.
2. The tireless efforts of global banking powers not just to “ease” via lower interest rates, but to instill confidence by reinforcing that this is, in fact, a coordinated global effort.
We saw European leaders go without sleep for what seemed like weeks last summer. Most importantly, we saw Angela Merkel, Mario Draghi, and Christine Lagarde work together and even include Tim Geithner and Ben Bernanke in their ongoing resolution of Europe’s debt crisis. I’m not sure that got enough attention from the media. I heard once that any good negotiation leaves each party feeling like they gave up too much — I feel like that’s exactly what has happened so far. I don’t think the European crisis is over. However, I do feel that banking officials are aware of, and prepared to do, what’s necessary to keep their economies on course.
Today Ben Bernanke (and the other Fed Governors) agreed to maintain the $85 billion per month ‘stimulus’ known as QE4. They are steadfast that this program continue until unemployment reaches 6.5%. Bernanke also provided guidance confirming the labor market is improving. Should we believe him? I don’t know….
3. The slow but steady restoration of faith in our governing bodies to — not without a few missteps and some discord — end up doing what is right for the taxpayer.
The US consumer is responsible for 70% of our country’s GDP. Something that is all but ignored (and at the very least it does not make headlines) is the dramatic improvement to the “wealth effect” here in America. When people feel richer, they consume more. They also feel more comfortable investing and less inclined to hoard cash under their mattress (or in their freezer). Sure, income taxes are higher this year than last — does that bother you as much when you login to Zillow and see that your home’s value no longer makes you nauseous? Or when you open the statements for your 401k and say “Wow, I didn’t realize…..” Would it be better if taxes were lower but asset prices were still 30% below current values? How would that be better? I would really like someone to explain this argument to me.
As we speak our government has agreed on a deal to avoid self-destruction at the end of the month. Sounds about as silly as taking credit for remembering to breathe today, but it is very apparent to innocent onlookers that some measure of progress has been made with regard to our political parties working together.
4. A painful deleveraging by banks, corporations, and consumers that is not over. But isn’t it possible that the most painful part (admitting there is a problem) is behind us?
We have seen unbelievable resilience among consumers and companies alike to reduce debt and/or increase equity since our housing bubble burst. We have seen companies like General Electric (GE) and Bank of America (BAC) shedding non-core and non-performing assets by the billions. We have seen individuals go through bankruptcies, foreclosures, settlements, negotiations, unemployment, under-employment — just like corporations, families have done what is necessary to survive. It has been painful. What are we starting to see now, though? The companies that have faced reality and taken action, and their shareholders, are being rewarded. Families that have cut costs, continued to make contributions to their retirement accounts, and stayed in their homes and refinanced have been rewarded.
Not everyone has been in the fortunate position to take advantage of these conditions but the majority have; the ones who have not are the ones speaking loudest on television.
Now ask yourself: Are any of the four points laid out above going to be reversed by what’s going on in Cyprus? Or Syria? I certainly don’t think so….
Have a great night!
Disclosure: I am long SPY, BAC and GE.
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main