As many hedge funds continue to unwind their short positions, the market marches higher. All of the talk about the "goldilocks" economy is getting a little old. So old, that I actually went back and read the story of "Goldilocks and the Three Bears."
As I keep hearing the name "Goldilocks" whenever the economy is mentioned, I couldn't remember what happened to "Goldilocks" at the end of the story.
"Goldilocks", if you remember, went for a walk in the forest and entered a home that was owned by three bears. Being hungry, she noticed there were bowls of porridge on the kitchen table. After tasting all three she found one that was too cold, one that was too hot, and one that was just right.
After she ate, she got comfortable and fell asleep (like investors now). As she was sleeping, the three bears came home. Goldilocks woke up and saw the three bears. She screamed, "Help!" And she jumped up and ran out of the room. Goldilocks ran down the stairs, opened the door, and ran away into the forest. And she never returned to the home of the three bears."
With hedge funds running for cover, and oil stocks rallying in advance of a potential rebound in energy prices, I am wondering if investors are actually in the home of the bears.
While I cannot count out further market advances in the days ahead, I've got to believe that earnings in the coming quarters are coming down.
Todays Fed announcement was a waste of time since the Fed had no intention of raising rates just before an important election. The lone dissent in today's Fed decision was Richmond Fed president Jeffrey Lacker. Lacker believes inflation is still a problem, and further tightening may be needed to bring it back into the 1-2% range.
In addition, we still have a risk of a hard landing in the economy because of the pullback in housing. The yield curve is draining liquidity from consumers, and geopolitical concerns are still present, but muted.
The argument for a stronger economy is the pullback in energy prices. Yes, energy prices have pulled back from their peak, but energy prices are still very high.
If one of the attempts to fight terror is to end our dependency on foreign oil, what incentives do consumers have to use less energy if it becomes cheaper? I say none!
This being said, unless we have been lied to, energy prices must remain higher to explore for new energy, develop alternatives, and to get consumers to buy expensive hybrids. If energy prices drop, all of these initiatives will go away.
For this reason, and a few others, I believe we will see a rebound in energy prices after the mid-term elections, and we will see an 8-10% drop in the major market averages. If investors panic on this pullback, you will see Goldilocks investors "opened the door, and run away into the forest."
