Acting versus Reacting

August 12, 2011by Hoy Grimm0

We add value as advisors by having a reasoned plan of action in place that allows us to act instead of react to market gyrations. As economic indicators softened in May and June we reduced risk accordingly. After the 17% decline in the S&P 500 stock index our gut reaction is to buy the dip. Doing so without some factual underpinning would be akin to spinning a roulette wheel and our clients don’t pay us to play games of chance where the odds are against us.

The Feds announcement on Tuesday confirming that rates will stay near zero well into 2013 is a positive barometer and the market reacted accordingly.

As corporate profits rebounded this year, companies banked the proceeds and have been mum on their intentions for it. As this cash hoard nears a trillion dollars, politicians and prognosticators are pontificating on where it would be best deployed. According to Bloomberg, many companies are using the steep decline in their stock prices to spend millions buying back their own stock. On Monday, Peter Huntsman, CEO of Huntsman Industries used a bit more than 1 million of his own money buying his company’s stock.

Blackrock, Inc. the prominent New York money manager announced they are selling gold and bonds to pick up cheap stocks. This matters because BlackRock manages 3.6 trillion in investment assets for their clients. If they are buying or selling it’s not without reason.

Wednesday’s report from the Mortgage Bankers Association revealed that mortgage applications increased 21.7% in the past week and 75% of the applications were for refinancing existing loans. This is a mixed signal. The downside of this is the realization that many of the homeowners who are refinancing were potential step-up buyers who are throwing in the towel and by refinancing now have decided to stay put for several years. The upside is that as these homeowners lock in historic low rates, they will have more disposable income to pump into the economy.

These are but a few data points that signal a reasonable re-entry point back into the “risk trade” that we pared down in May and June. The devil is in the details but we are more comfortable buying while stocks (and select bond sectors) are trading with a sale tag on them.

Hoy Grimm

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