A Little Too Quiet on the Western Front

By Keith Springer

It's awfully quiet in world markets right now...a little too quiet. The combination of world banks taking a break with any new stimulus and that we are in that quarterly lull period in between earnings releases is keeping stocks from surging higher. On the positive side, the same two issues will keep stocks from plunging as well.

As I have noted, the amount of the growth in liquidity in global systems has become staggering, with Helicopter Ben Bernanke's US. Federal Reserve's $2.9 trillion, the ECB's (European Central Bank) $3.6 trillion and the BOE's (Bank of England) $1.1 Trillion. Add in the BOJ (Bank of Japan) and other Eurozone members, we cross $15 trillion that was not in the system pre 2008. This is equal to over one-third of total world equity values. It is this massive infusion of liquidity from world banks which has kept this market afloat and what will keep it from plummeting... for now.

This massive coordinated injection of capital is the world's banks attempting to combat what will take years to overcome: the demographic overhang of 92 million baby boomers past their peak spending years, the massive over-indebtedness of the American consumer deleveraging at light speed and the powder keg in Europe set to explode again.

In addition to the colossal printing of free money, aka liquidity, there has also been a consistent pattern of stocks going down as we lead into earnings season a few weeks away. This is due from company warnings and lower of earnings expectations. That's where we are now. However, this tends to reverse as earnings come in above expectations. Of course this can't last forever, and look for a peak in the next few quarters... and you won't want to be in stocks at that point, that's' for sure.

The aging bull market is finally starting to show its age. We are over 3 years into this bull market, which is old by any standard. The fact that it has been liquidity induced and not consumer driven tells us that we are clearly in a bubble, so when it ends, it's going to be ugly...really ugly, like 2001 and 2008 bubble ending ugly.

The classic early warning signs are just emerging. Small caps, which have been leading the way for many months, are starting to diverge and not do as well as larger cap stocks. This is common at the end of bull runs as bigger capitalization stocks are generally the last stocks to turn down at the end of a bull market. Typically, once this deterioration begins, it tends to spread from small-caps through the mid-caps and finally to the weaker big-caps, as profit-taking panic ensues and support fades.

A confirmation of this new dangerous trend in the market would be confirmed by new highs in the Dow and S&P 500 but not in the smaller indexes. This stage typically lasts 3 - 6 months, which would coincide well with the normal strong fourth year and weak first year of a presidential cycle.

Of course it will come very quickly, without warning and there will only be a very few places to hide and prosper, so prepare in advance and stand ready with your personal exit strategy. When this bubble bursts, it's going to be déjà vu all over again.

Investor Strategy

Nimble traders can take advantage of this rally, but the key is to be "Tactical" and avoid buy-and-hold (buy-and-hope) at all costs. Moderate and low risk investors, most of us average people who would rather not have to work until the day we die, or lose sleep at night because of market volatility, should continue to have a managed portfolio in the market's "sweet spot" which is currently income investments such as corporate bonds, preferreds and MLP's, many yielding 8-10%. If the market does continue to rise, you'll likely get the best of both worlds of appreciation along with a healthy dividend, but with less risk.

For those that want a guarantee of principle with a decent yield or a guaranteed income for life, they do exist, if you know where to look, many with upside potential based on the market but with no risk of loss. If your portfolio can live with this option, take advantage of it. Why lose sleep the next time the market crashes.

Keith Springer is the author of "Facing Goliath: How to Triumph in the Dangerous Market Ahead", radio host of "Smart Money" on Talk 650 KSTE, editor of the "Smart Money Newsletter", a financial planner, a market technician, a financial writer, multinational philanthropist, founder of Top Down Tactical™ and President and founder of Springer Financial Advisors in Sacramento CA, an SEC Registered Investment Advisory Firm. He has developed a proprietary process for successfully building tax-efficient and retirement portfolios and has been providing specialty wealth management services for over 27 years. He can be reached at 916-925-8900, keith@keithspringer.com, or http://www.keithspringer.com

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