Blue Chip Stock Investing: Sir Alan Says "Get Out?"
By Adam Lass
In this article
Economy in danger of advancing too quickly, stimulating inflation.
The current Fed board has implemented no changes over the past 12 months.
There's still time to buy, but don't buy the hype.
One of my favorite old cartoons (published possibly in either The New Yorker or Playboy, it's been 30 odd years, and I quite honestly no longer recall) featured a bartender complaining to a patron that “this used ta be a nice joint till those damned economists (seen brawling in a cloud of dust and flying fists and feet) started drinking here!”
Today's tiff is between the current Fed Chairman, (in the almost translucent white trunks) Ben “The Invisible Man” Bernanke, and the big seat's previous occupant (sporting trunks plastered with bright red warning signs), Alan “Irrational Exuberance” Greenspan.
Just a few days ago, we were honored to receive the margin notes from the most recent Federal Open Market Committee meeting, wherein Mr. Bernanke's team reiterated for the umpteenth time that the economy was caught between Scylla and Charybdis, both in danger from advancing too quickly and stimulating inflation and from being dragged down into recession by the failing real estate market.
Blue Chip Stock Investing: Is this Fed Paralyzed?
Their solution? Do nothing. Don't row, don't steer, don't cheer or exhort too loudly, and just maybe things will turn out okay. Indeed, the current Fed board has implemented no changes of its own whatsoever over the past 12 months. (I am discounting the two quarter-point rate hikes of early 2006, as they were simply the inevitable completion of the previous chairman's policies.)
They don't think of the current economy as the best of all possible worlds. Even that sort of misplaced optimism would be too hearty an emotion for these wan Gray men. Instead, they call it the least worst, and go home to tea.
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Sir Alan Greenspan on the other hand (he really was knighted back in 2002, and while an American citizen ought not to use the honorific “Sir,” he is welcome to emboss KBE on his calling cards), has never met an economic boom that he liked.
Blue Chip Stock Investing: Nothing good to say - ever!
Now perhaps it is simply that he takes such a broad economic view of such things, but all he can ever see is the seeds of a rally's downfall. And just as he was seldom prone to leaving well enough alone when he was chairman, he is still quite able to stir up an economists' brawl with a few well-placed epithets.
His latest little anarchist's bomb arrives via a satellite link-up to the VeryGC Global Business Insights 2007 Conference in Hong Kong, wherein he warns that the very economic “successes” that his successors have been touting as indications of continued economic prosperity well into 2008 are actually the very ingredients that will most likely engender a recession by the end of 2007.
Really Mr. Greenspan's fears are twofold. First, he fears success itself: “When you get this far away from a recession it invariably forces build up for the next recession, and indeed we are beginning to see that sign… For example in the U.S., profit margins have begun to stabilize, which is an early sign we are in the later stages of a cycle.” (via our friends at the Associated Press).
Blue Chip Stock Investing: The End is Out There - Somewhere
And secondly, he fears the fact that almost no one is even truly looking into the possibility of Mr. Bernanke's “not the worst of times” may be coming to an end: “While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008... with some slowdown.” (Also via the AP. Come on, I'm good, but I am not good enough to be tapped into VeryGC's satellite network.)
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Now one must wonder whether to buy into this former economic commodore's mutinous talk, or accept instead the smooth platitudes coming out of Washington. To help you with your decision, I should like to point out that while I am no great fan of Mr. Greenspan, he does know an iceberg, er ah, recession when he sees one coming, seeing as how he steered the U.S. economy into at least two.
Does that mean that it's time to start queuing up for life vests and a place in the boats? Soon perhaps, but not quite yet!
Blue Chip Stock Investing: Still Time to Buy, But Don't Buy Hype
Keep in mind that Sir Alan is prone to extreme farsightedness. His most famous declaration that the go-go 1990s would end in disaster (you probably only remember the now-infamous phrase “irrational exuberance”) was delivered in a speech to the American Enterprise Institute on Dec. 5, 1996.
The Dow Jones Industrial Average closed that day at 6437. It would go on to climb more than 5,000 points over the next three years, before the public accepted Greenspan's threats as real and salient, and began to exit the market en masse.
My recommendation: just because there are clouds on the horizon is no reason not to make hay while the sun is shining. Continue to go long the Blue Chips while excess momentum renders them unassailable.
But stay clear of the hype: this market can and will eventually retrace. Out and out hedges (such as Diamond trust puts) will not work right now. But one can still protect one's long assets with puts against select Dow losers. We will recommend exactly such a put in tomorrow's issue of WaveStrength Options Weekly.
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Related Resources
Greenspan warns of U.S. recession risk: Former Fed chief says downturn possible by year's end. - MSNBC
Remarks by Chairman Alan Greenspan: Historical transcript of Alan Greenspan's “Irrational Exuberance” speech. - The Federal Reserve Board
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