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Jun-12-2012 16:24printcomments

Will the Fed Dress the (Election) Market?
Waiting For Bernanke

When the rank and file are jumping off the caboose, you'll see me climbing on the locomotive. - Joe Granville, The Kansas City Guru

Bernacke and gold

(SASKATCHEWAN) - (My sainted mother provided me with three precepts or prescriptions to live by, which have stuck with me and ordered my quasi-successful life. They are, in ascending order of importance: (1) clean up your plate, (2) never miss an opportunity to go to the bathroom, and (3) don't squat with your spurs on. Lately, that final admonition has reminded me for some reason of our distinguished Chairman of The Federal Reserve System, Ben Bernanke. - Editor)

There are two Wall Street dictums (dicta?) which have been in vogue in recent years. The first, often noted every fourth year (that is to say, every presidential-election year) along about this time is that: the stock market will go boots and saddles from now till November. The simple explanation for this bull market rally, straddling the second and third quarters in the run-up to the November vote, is that the presidential protagonists will both be promising the moon. And then of course it follows like the night the day that unbridled optimism will hold sway, with every campaign manager, every deep-pockets seeker after sooth and later benefits, and by every newsmonger and car dealer. The Presidential Rally.

You can look up the stats – in a vast majority of cases, in every autumn since Abe Lincoln whipped Stephen Douglas, this rally has taken place, except for a few oddities such as the Roosevelt bear market of 1932 and the Cotton Panic in 1864 after Sherman trashed Atlanta.

The other popular nostrum going around might be called the Fed Fandango, which goes something like this: if Ben Bernanke is spurred to get off his haunches (like my Mother suggested) with some legerdemain like term-lengthening, Fed buying programs or simply saying nice inflationary things to Congressional inquiries, he can also make the stock market roll, not to mention the heads of all the short sellers.

The Fed Model, it's widely recognized, is that the near-zero interest rates on ten-year Treasury notes make just about any stock – from high tech to moose pasture - look good by comparison. But that's no reason to conclude that you should forsake your mattress in favor of the stock market. Hey, if there are two ugly sisters, and one of them can't dance while the other one is capable of dancing with the stars, they're both still ugly.

So the key question is, how do you call this market from now till November? And if you can't say anything nice (another one of Mom's sayings) don't say anything at all. In fact, with certainty, where else can you go, marketwise?

First of all, consider the headwinds, as the CNBC pundits say. As an investor, you have to consider the headwinds if you want to leave a footprint. Especially if you're wearing spurs. (I made that last one up.) That's the way financial pundits talk all the time.

So there's gloom and misery everywhere. The Chinese economy is only growing at the rate of 10%, for starters. For 1.3 billion people, that's not that great, considering where they started. But we shouldn't lose heart over the stagnant fortunes of rice and General Tso's sweet and sour. Because, to quote Alan Abelson, my constant weather vane at Barron's mag, it's just possible that the American economy will improve regardless of our Chinese connection. Like it's also just possible that the Chicago Cubs might win the pennant. But I wouldn't bet your food stamps on either eventuality.

What other crises are we facing, global-wise? Well, for one, the pain in Spain falls mainly on the sane, at least in the last little while. Meaning that wise Spanish heads are determining how they'll put the arm on the rest of the Euro Community to bail them out, a scant $125 billion or so. It may be a go, but like the Gershwin lullaby, it ain't necessarily so.

Here at home, car sales are buoyant, if you listen to the give-away artists in the auto mall, but with the fall rapidly approaching and the 2013 models jostling for position, the outlook is as uncertain as a MSRP, which any first-grader who owns a smartphone can tell you, means “manufacturer's suggested retail price,” which doesn't count in the closing room.

Housing starts are still the pits and let's not even talk about unemployment, because Mitt and Barack have worn the subject to the bone. And in Wisconsin they just re-elected a guy who doesn't believe in labor, except that of Republican women who don't believe in abortions.

Here's another caveat, or at least caution - world central banks (not necessarily including the Fed) have recently been buying gold like it's going out of style, which of course it isn't, at a rate not seen since 1965, which is usually taken as ancestral voices prophesying exit strategies for stock players.

One idea you might consider in order to bypass any bad market – the Summer Olympics in London will produce huge traffic across the Channel for the obvious benefit of the Chunnel operator, Groupe Eurotunnel, which has the concession to operate the rail link from Europe to Blighty, and which will also be running motor shuttles through the tunnel all Olympics-long. If that isn't good enough news for GET – it trades on the Paris Bourse – it seems that a rival organization, operating a ferry service, just happens to have gone into the drink financially. All of which means that GET will be handling the most cross-Channel traffic since the Dunkirk Bug-out. This special investment opportunity beats anything in lower Manhattan, where a light at the end of the tunnel usually just means New Jersey.

So assuming the old standby won't work this election run-up, because the candidates have run out of market stimuli, if we're going to have an election rally, it's got to be up to Benevolent Ben.

It's widely acknowledged that Bernanke, or rather the faith in Bernanke, can move mountains, and as a matter of fact, a recent profile of the Dow since 2009 in cross section looks like an outline of the Sierra Madre. The Fed Chairman can do something mountain moving if he wants to. He can announce a maturity extension in Treasuries, or engage in quantitative easing by buying up Treasuries, kind of like expanding the money supply, which Republicans call printing money, and they should know. And Bernanke can drop the hint that there's other things the Fed can do to goose the economy if it needs to. I dunno. He's tried about everything but having the First Kids set up a lemonade stand outside 1600 Pennsylvania.

The point is, the Fed Chairman is highly principled and will only do what's in the best monetary interests of practically everybody, including government lobbyists.

On the other hand, it's worth remembering that Ben also works for the guy in the Oval Office, so guess what? The Fed's Open Market Committee (FOMC) meets this week, and they might decide on something bullish, but there's no rush. They meet again at the end of July, and that may be soon enough – if the jobs numbers don't look any better by then - to take some monetary easing measures, with announcements, “leaks” and testimony to Congress, all of which the press will take up and the Street will breathe easier. And higher.

And if all that happens, we'll have a traditional three-month Presidential Election Rally. That is if Bernanke and the members of the FOMC (who have all the spurs necessary) will follow my Mother's sage advice, and get off their squatting position.

So given all that, along with Maria Bartiromo's encouragement, if nothing good happens, and the pre-election market doesn't take off, all of you investors - like those central banks I was telling you about - will have still another alternative:

Bye-bye. Buy gold.


Bill Annett grew up a writing brat; his father, Ross Annett, at a time when Scott Fitzgerald and P.G. Wodehouse were regular contributors, wrote the longest series of short stories in the Saturday Evening Post's history, with the sole exception of the unsinkable Tugboat Annie.

At 18, Bill's first short story was included in the anthology “Canadian Short Stories.” Alarmed, his father enrolled Bill in law school in Manitoba to ensure his going straight. For a time, it worked, although Bill did an arabesque into an English major, followed, logically, by corporation finance, investment banking and business administration at NYU and the Wharton School. He added G.I. education in the Army's CID at Fort Dix, New Jersey during the Korean altercation.

He also contributed to The American Banker and Venture in New York, INC. in Boston, the International Mining Journal in London, Hong Kong Business, Financial Times and Financial Post in Toronto.

Bill has written six books, including a page-turner on mutual funds, a send-up on the securities industry, three corporate histories and a novel, the latter no doubt inspired by his current occupation in Daytona Beach as a law-abiding beach comber.

You can write to Bill Annett at this address:



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