Sell the News Market
Research for Online Investors

by John Dalt

1/10/11

We start earnings announcements this week.  Alcoa (AA) reports after market close this afternoon.  The company’s stock has bounced higher in the last month, in anticipation of a good report.  News keeps telling us the economy is improving, and AA should benefit from increased manufacturing activity.  Are we entering a “buy the rumor, sell the news” reporting season?

It troubles me; the market has climbed almost 21% since the end of August.  What has changed?  The Fed hinted at and then formalized what we now call QE2, or another round of quantitative easing.  This round of money printing is expected to run into the second quarter.  So when the money runs out, what is going to happen in June?  My guess is the same thing that happened last April/May.

The Fed is betting that economic news will show increased activity and begin to feed on itself.  If business begins to; make capital investments, increase sales and hire new employees perhaps the Fed can put a plug in the ‘free’ money faucet.  So far, they have been blessed by good news out of the U.S. and less-bad news out of the rest of the world.  That is and will change over the next few months.

The one thing you can count on is bad news to develop somewhere, when you don’t need it.  Even when you are not looking for it, bad news has a way of finding you.

The eurozone credit crisis came back to the consciousness of investors at the end of last week as Portugal’s interest rates spiked.  Portugal wants to sell debt this week, and the ‘bond vigilantes’ started withdrawing from the market.  Although they deny it, it is widely suspected that the European Central Bank (ECB) was active buying Portuguese, Greek, and Irish debt last week.

The U.S. dollar has staged a rally since the first of the year.  What does that mean?  Try as they might, the Fed cannot destroy the dollar.  At least not while the eurozone is marching towards another bailout.  If you don’t like the dollar, where are you going to go?  Japan’s economy is buried under debt.  Precious metals are moving higher today on jitters over the eurozone.  It seems that when investors are scared, the dollar benefits, and then on reflection of the problems in the U.S., they go to precious metals.

We wonder how much longer the precious metals bull market will last.  We like the story.  We believe the story.  But with all of the additional liquidity the Fed has pumped into the economy, inflation seems to only affect food and energy.  The problem with precious metals is the rest of the world doesn’t play along.  The eurozone applies discipline to country’s budgets to get spending under control.  If a country experiencing credit problems won’t sign on to austerity measures, they don’t get the rescue package from the International Monetary Fund (IMF) and the European Central Bank.  The U.S. Federal Reserve is pumping money out, but the eurozone is contracting.

It may be Monday, but the market just feels funny today.  It feels like everyone is ready to “sell the news.”

To the mailbag:
I enjoyed your article “Beware of Your Rat Brain.”  I have closed trades at a loss, only to see them come back in value.  Also, your article on Penny Stocks was spot on.  I have lost all of my money when trading was stopped when fraudulent practices were found.---paid up subscriber G.C.

John’s reply:  It is very rewarding to hear from subscribers when something we write helps them to be better investors.  Thanks.

Timely article on penny stocks.  I just gave a custodial account to my adult son…He asked about penny stocks.  I attempted to dissuade him and forwarded your article.  Thanks---subscriber G.P.

John’s reply:  I am not against gambling.  But, I only do it with money I am willing to lose.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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