Making Money Alert: The Fed-Fueled Market Rolls on

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

The Federal Reserve Open Market Committee (FOMC) acted as just about everyone expected, serving up a dovish dose of more of the same when it comes to monetary policy. The Fed kept its $85 billion per month quantitative easing (QE) program, while leaving interest rates unchanged.

The only thing different about this Fed meeting was the actual makeup of the FOMC. There are four new voting members on the committee — James Bullard, Eric Rosengren, Charles Evans and Esther George. The new voting members replace Jeffery Lacker, Sandra Pianalto, Dennis Lockhart and John Williams.

Interestingly, the makeup of the FOMC, in terms of members considered to be dovish vs. hawkish, hasn’t changed with the rotation. In fact, Esther George took over the Jeffrey Lacker role as the lone dissenter on keeping rates unchanged. George warned that the Fed’s policies are setting us up for inflation, which in my opinion is the single biggest no-brainer of the century.

All of the easy money provided by the Fed is at the root of the recent market surge to new five-year highs. The chart here of the S&P 500 Index tells the tale of a market on the rise over that period.

The Fed’s easy-money policies have been good for Wall Street. But in terms of the real economy, things haven’t been so great. Today’s news of the 0.1% decline in Q4 gross domestic product (GDP) tells me that the real economy is divorced from Wall Street. It also represents an ill canary in a potentially toxic coal mine for investors down the road.

The bottom line here is that stocks are, in my view, way too risky an investment at current levels, especially considering the anemic economic growth numbers here at home, and a relatively unimpressive Q4 earnings season that’s seen more than its share of poor reports.

As of last Friday, we had received results from 47% of the S&P 500 companies. According to a Goldman Sachs’ midterm Q4 earnings analysis, earnings so far are tracking about 6% below consensus estimates.

If the current trend continues, earnings in Q4 2012 will be about 1% better than they were in Q4 2011. That’s not much upside year over year, especially when you consider that Q4 2011 was when Europe was in a tailspin, and when central banks around the world were running to the rescue trying to stimulate us out of another meltdown.

So I ask you, can stocks keep powering higher if both GDP and earnings are contracting?

The ETF Turns 20

This week, we celebrate a birthday. This birthday is for the exchange-traded fund (ETF).

It was 20 years ago that a smart group of innovators from State Street Bank came out with the first ever ETF, which was the SPDR S&P 500 ETF (SPY). The “Spiders,” as they became known, now are touted by State Street as “the one that started it all” and that view is spot on.

Most of us in the industry back in 1993 probably didn’t think that from these humble ETF beginnings, a $1.4 trillion industry would emerge some two decades later. We never would have thought this industry would offer more than 1,400 different funds of nearly every variety, sector, risk tolerance, country, etc.

As you likely know, I am a big fan of ETFs, as I think they will continue to grow in terms of assets, offerings and innovations. And as more and more investors shun underperforming asset managers and opt for index-type investment strategies well-suited to ETF use, I expect that in another two decades, the ETF landscape will be gigantic when compared to today.

So, happy birthday ETFs — long may you run!

Fiscally Fit for the New Year, Part IV

For the past several weeks, we’ve outlined the steps toward becoming fiscally fit for 2013. This week, we have Part IV of our series, which is all about getting a grasp of your expenses.

When it comes to expenses, many of us act like an ostrich and put our heads in the sand. That’s because tallying up your expenses can be both disconcerting, and quite revealing. I recall that just a few short years ago, many of my friends, acquaintances and colleagues were on spending binges like you couldn’t believe.

I saw many upper-middle class people behaving like they were Arab sheiks, throwing money around lavishly (and in my view, frivolously) on cars, boats, vacations, home improvements and other goodies. A few years ago, expenses didn’t really matter, because the economy was booming and home values and stock portfolios were sky high.

As we all know, times have changed. And even though the economy and the markets have made headway during the past year, the lesson most of us learned is not to overextend ourselves, and to keep expenses down.

The first step in getting a handle on expenses is to do a simple list of what you owe, to whom, and at what interest rates you’re paying. Doing so allows you to identify where you can make adjustments, and making the right adjustments can help you increase your wealth.

For example, if you have toys like a boat, a sports car or a motorcycle that you aren’t using very much, why not consider selling them and shedding those payments? Also, if your home mortgage is north of 6%, then you need to consider refinancing. I know it’s almost impossible to refinance if you’re underwater in your home. But if you do qualify, you can save thousands and thousands of dollars during the life of the loan by getting that rate lowered.

If you have high-interest credit cards, then consider putting a plan in place to pay that debt down to manageable levels. There’s nothing worse than constantly paying each month on purchases with high interest, because you end up increasing the overall cost of those purchases. The longer it takes to pay them off, the more money you’re losing.

When it comes to protecting your net worth, think about how you can keep more of what you make by reducing expenses. If you’d like to hear more about how you can get a handle on expenses, or if you’d like to get my take on all of the latest market action, then I invite you to sign up here for my weekly audio podcast.

Wisdom from Another Ben

“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.”

– Benjamin Graham

I think Ben Graham has it a lot more right than Fed Chairman Ben Bernanke. In the quote above, noted value investor Benjamin Graham offers us timely advice, especially given the latest run higher in stocks. Remember, crowds usually get in too late, and get trapped inside too long. Don’t be part of the herd. Think for yourself, and make sure you always act in defense of your own money.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

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