THURSDAY MARCH 18, 2010

Risk trade Game on!

One would think with all the uncertainty in the world, the stock market would be struggling.  Weak employment, poor housing numbers, still improving but stalling economic numbers, Greece, state fiscal budgets, U.S. deficits, ugly healthcare debate, budding trade wars...the list goes on, the proverbial Wall of Worry.  Yet, the S&P 500 is up 11% since Feb. 5th.  Go figure!

It seems the driving factor behind the strong stock market is the continued prospect for low interest rates.  On Tuesday, the Federal Reserve kept interest rates unchanged despite significant improvement in the economy.  The PPI and CPI numbers were fairly benign the last two days.  While the economy still has issues, it is a long way from the crisis environment that was used to justify negative real interest rates and inflation is behaving.  So, with the Fed stating that rates will remain low, the market is awash in liquidity and that liquidity is looking for a home.  The Fed's policy prohibits the fixed income market from being that home.  It is difficult to find a 3.65% 10 year Treasury attractive unless you have a really bad outlook for the world.  So, where is an investor to go?  Into the risk trade... Equities, junk bonds, emerging market equities, commodities.  This trade is working.  The problem with liquidity driven trades is that at some point, the liquidity dries up.  Either the Fed raises interest rates or a crisis shuts down the liquidity.  Then the risk trade needs to be able to stand up on its own right, not just on low cost funding.  For the subprime mortgage market, it could not stand up. 

Fortunately, U.S. corporations are posting impressive earnings reports, are flush with cash (cash is at a 12 year high) and are poised to leverage any revenue growth into more profits.  With interest rates low, stocks are the best game in town.  A least for the moment, these factors appear to be driving the market higher.

POSTED AT 1899-12-30 10:46:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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