It's been a rough week for Wall Street, bringing major averages down for the year. A big reason for this panic has been proposed legislation by the Obama administration to crack down on profit-making at big banks and fear that China, the growth engine of the world's economy, is putting the breaks on global growth.
Fear begets fear. So, when investors see 2% drops and read scary headlines like these, they are inclined to follow the herd and sell too. But this is exactly the wrong thing to do.
If you look at the fundamentals of the market, they look great. More than 75% of companies reporting earnings now are beating analyst estimates. They are showing tremendous profitability and top line, revenue, growth, which means consumers were spending more last quarter. Profitability outlooks across major industries also are looking rosy.
Let's break down the two causes of recent market fear. Obama's plan to crack down on big banks. Certainly, this can cause ripples in the market, reduce lending and risk taking. But, look at the recent election in Massachusetts. Obama is losing support and he'll need the backing of Congress to get such a plan through. Who do you think has some of the highest paid lobbyists on K St.? Big Banks. I see this plan as a non-factor and simply window dressing by Obama to appeal to angry Americans who've lost jobs, income, etc. The plan itself does little to penalize the institutions (Fannie Mae, Freddie Mac, AIG) that caused the mess.
As for China, their central bank is tightening monetary policy to slow the tremendous (10%+) rate of growth in the country. Such a move is prudent and necessary. Doing nothing could lead to the world's biggest asset bubble bursting, higher inflation and a debilitating recession in China.
So, I'm using this pullback (and it may last a week or so) to position my portfolio for more buying. I've got puts on the SPY at 107. Right now it's at 111.7. So I'm planning for another 5% correction before I start buying again.
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