Why Is Federal Reserve Chairman Ben Bernanke So Lonely?

I want to know, why is Federal Reserve Chairman Ben Bernanke so dang lonely? Seriously, how else can you explain his actions? I mean it was just 2 weeks ago that several of the Fed governors finally admitted that the stimulus was doing little to help the economy and common man, and that it should be ended. That, of course, sent the stock market plummeting.

Well Helicopter Ben must have had a glimpse of losing all of his friends if he ceased the free flow of money, because in the Fed minutes released last Wednesday, he stated that he might actually increase monetary easing! His message couldn't be any clearer even if he stood on a chair in the NYSE and screamed out "buy stocks!" This of course was music to trader's ears, and now the market is making new highs. I guess you "don't fight the Fed Chairman!"

As you know I have been concerned that the "sell in May and walk away" would hold true again. Apparently I was not alone, as Bernanke's statement just happened to coincide nicely with the European Central Bank cutting the Euro interest rate by 25 basis points. They also indicated that negative Euro interest rates might be in the future. Toss this in with the record stimulus the Japanese are initiating, and it looks like a worldwide effort to keep global markets artificially inflated even as the world over is experiencing slow to no growth.

In case you are not aware, the age old "sell in May" scenario implies that stocks decline from May to November. Over the last 62 years, the market was down in 25 May-October periods, negative in only 13 of the November-April periods, and down only three times in the last 20 years! There have been just three times when the "good 6 months" have lost more than 10% (1969, 1973 and 2008), but with the "bad six month" time period there have been 11 losing efforts of 10% or more.

Why you ask? Well my friend Mr. John Thomas, the Mad Hedge Fund Trader summed it up best:

"Up until the 1920's, we had an overwhelmingly agricultural economy. Farmers were always at maximum financial distress in the fall, when their outlays for seed, fertilizer, and labor were the greatest, but they had yet to earn any income from the sale of their crops. So they had to borrow all at once, placing a large cash call on the financial system as a whole. This is why we have seen so many stock market crashes in October. Once the system swallows this lump, it's nothing but green lights for six months."

Of course, the Feds are fighting an uphill battle as practically the whole world's population is aging, and people spend less as they get older. However for now, liquidity rules the day... but for how long?

Investor Strategy

With the commitment by global banks to continue the money printing, and with cash and CDs giving a negative return after inflation, investors have to be invested. I still expect a significant correction this summer, which I thought could start in May. However, with so many expecting the "sell in May" scenario, it is unlikely to happen on cue. The market does not crash when everybody expects it to. That said, now is not the time to throw caution to the wind and be all in. Simply look to get decent returns, based on your personal needs, and ignore the averages. If you want all the upside, you consequently also get all the downside, and when this market corrects, it's not going to be fun.

Favorite Quote of the Day:

"Bonds are priced artificially because you've got some guy buying $85 billion a month. That will change at some point, and when it does, people are going to lose a lot of money," -Warren Buffett.

at 7:57 PM
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