Broker Check

Looking Beyond Sequester

Concerns are building about the automatic budgetary cuts that are coming on March 1st set by Congress and President Obama last year. Questions are rising about what the effects of the sequester will have on economic growth this year. No doubt, $85 billion of automatic cuts will hurt certain industries and departments of government but will it derail the economic growth expected this year and next? Opinions vary as you would expect. To be honest, I am not sure this should be viewed as a huge casualty. However, my instincts tell me Washington will again push the ball forward with another wimpy compromise. No necessary budget cuts, no changes in corporate tax policy, and no light at the end of the Washington stalemate.

Thinking about the stock market, I was interested in an article in Sunday's New York Times referring to the work of market watcher Laszlo Birinyi. I have mentioned before that I worked with Laszlo at Salomon Brothers many years ago and have always found his analysis of markets worthwhile and thought provoking.  Birinyi uses a combination of quantitative and subjective data to analyze the stock market. He monitors money flows into and out of stocks and scours business coverage in newspapers and magazines that gives him a picture of popular sentiment. Money flow comes from the algorithm developed at Salomon Brothers that monitors every trade taking place. Trades made on a price uptick are treated as buyer-initiated and on the downside, they would be seller-initiated.

In simple terms, Birinyi's work is telling him what traders and investors are actually doing with their money. The money flows from January told him that investors poured $15.6 billion into stocks of the S&P 500. This compares with an inflow of $10.4 billion last October, just before sentiment began to change. Birinyi believes we are in the last phase of a long term bull market which began in 2009. He believes this last phase will last between one to three years (not a market timer) and take the S&P 500 much higher.

Birinyi believes that investors are moving from "grudging acceptance" toward exuberance. He believes investors are realizing, "The market isn't like the New York subway system. There isn't another train coming right after this one. This is it, this is the last train. You'd better get on board." You gotta love that quote. Fear of missing out on a big bull run is just as powerful as the fear to get me out of all stocks now.

What about Washington and all the budgetary fears? Birinyi is simply stating that they are largely discounted in the market already. The market is telling us that 2013 will be a profitable year for most companies. That is the message of the market from Birinyi's work. If you want to know where the markets are going, study the news, but always "follow the money."

Have a great week,


Roger N. Steed

February 19, 2013


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