Friday, October 26, 2012

What interest rates actually mean ! ! !

Martin Armstrong Now we come to the argument that if interest rates rise the stock market will decline. I am sorry. That is pure bullshit! Interest rates rise with bull markets and decline with bear markets. Look at Japan. Here is the Great Depression and the Fed kept raising interest rates as the market rallies. They then cut rates sharply as the market declined. So just where does this nonsense come from. The idea that the stocks will go down if the interest rates go up because it will cost more to borrow presumes everyone is leveraged. It also assumes the cost of business will rise lowering profits. The sad part of this reasoning is that it has been so prevalent. This is the reasoning that dominates the TV shows and spread the nonsense perpetually. Interest rates ALWAYS rise in bull market because people are investing. As the economy is expanding, people bid for capital because they see an opportunity. In Japan, interest rates are virtually zero. The market still does not rally because they see no opportunity. That is the key that is being ignored in this very shallow reasoning. All you have to do is actually demonstrate with evidence where this idea even comes from. Nobody can show the stock market rising with a bear market in interest rates. Impossible!

Barry Ritholtz on possible bear market beginning now

"All this week, I have been discussing why I thought we may be coming to an end of the cyclical bull market that began in March 2009: Listen to Ritholtz Sees “Major Cyclical Correction” from Tuesday morning, and watch this and this from Thursday. I have cut back on some major holdings, and raised our cash levels to 25% in the asset allocation model I manage. I removed half of our energy positions, eliminated our emerging markets exposure. The biggest move was cutting S&P500 exposure by 50%. A handful of clients who had outsized Apple exposure saw those positions reduced by a third. We maintain a heavy bias in long portfolios in health care and in consumer staples. I have no desire to reduce treasuries or munis, which will become a safe harbor if and when things get choppy. (I have NOT added inverse ETFs, but that is something I may consider in the future)."