Ramblings of a Portfolio Manager

What’s the Next Big Worry?

“The market climbs a wall of worry” is the old saying on Wall Street, meaning stocks rise despite (or perhaps because of) the prevailing level of pessimism about the economy or stock prices themselves. If this old maxim is true then there has been plenty of fuel for the rally we have been having. Between Legislative & Headline Risk: Obamacare, banking reform, Cap & Trade; Liquidity Risk: tax hikes, Bush tax cut expiration, Fed tightening; Global Economic Risk: Chinese and Indian tightening, Greek meltdown, Dubai blowup, the other PIGS, the market has had ample reason to take a long and protracted nose dive. Instead, we are making new 12 month highs daily and the VIX is trading below 17. On the surface one would think investors are either insane or greedily oblivious to the obvious risks. In reality, the Markets are doing what they always do—discounting the noise and focusing on the fundamentals. So far, the fundamentals have been good.

With apologies to FDR, the real fear now is not fear itself but the lack of fear. The VIX (which is NOT a volatility indicator but a fear indicator), while not at ultra historic lows does indicate some complacency on the part of investors. We’ve just made it past Healthcare Reform, which has dominated the headlines for months, and the market is up smartly. If the old adage is to prove correct, then we need another “crisis” for the markets to continue their advance. Alfred E. Newman (of “what, me worry?” Mad Magazine fame) was not a good stock picker. So what should we worry about now? Well, believe or not we still have a lot to fear: We are still looking at potential financial regulatory reform, particularly with a newly emboldened Obama Administration, so we can expect the headlines on that issue to ramp in the coming weeks; we have the November mid-term elections, which though many consider a Republican come-back a positive fait accompli, remain a wild-card; there is the specter of additional weak employment data (this one should be the strongest impetus to new market gains as it will push out further any Fed tightening in investors’ minds); the Obama Administration is now picking a fight over trade policy with one of our largest bankers and trading partners who, arguably, also holds the fate of the Global economic recovery in it’s chop sticks, and, finally, there is the omnipresent threat of another terror attack on US soil. Of course it’s the bullet you don’t hear that is the one that gets you so there are myriad other risks and worries that can crop up, none of which we have yet to contemplate. What other tax and spend plans do the social engineers in Congress have up their sleeves? What other trading partners can we anger with our union-centric protectionist rhetoric? How can Obama’s Green energy policies ramp up to derail the recovery? The list goes on and is as large as your imagination. Heck, around here there is speculation that Elvis will land his Alien spaceship on the Pentagon, accidentally activating NORAD and plunging us into global thermo nuclear war. Could happen. Saw it on YouTube.

The point we want to make is that there are always risks lurking in the headlines but very few of them are truly impactful to corporate earnings and, by extension, long-term stock prices. Most of what we read, hear and see is truly non-impactful noise. But it is this noise that provides us with trading opportunities in a rising market. So the next time you hear the TV talking heads proclaim “this is a game changer” and see the markets react negatively in lock-step, consider the event an opportunity to buy rather than flee. In that situation you truly will have nothing to fear but fear itself.