Don’t Fight the Tape

There’s no escaping it: The stock markets are on a tear.

I’ve often written about how the loose monetary policy the U.S. Fed started as we entered this new century was causing ample liquidity in the market — more than we’ve ever seen before. Because interest rates are low (they are still low historically), because of the leveraged buyout craze, and because of a simple aggressive expansion of the money supply by the Fed, there’s a lot of cash chasing very few good deals. Hence, the low investment returns investors can expect today.

Yes, there are visible cracks in the economy. Government and personal debt continues to trend to record highs, the housing market is still in trouble, and the U.S. trade deficit and the falling U.S. dollar are big concerns. In fact, the U.S. National Association of Home Builders just reported housing starts for 2007 will hit a 10-year low, which is sure to put a damper on U.S. growth this year.

Economic booms are followed by economic contractions. Busts follow booms… throughout human history, the concept of supply and demand has never changed. All the concerns I write about everyday? Eventually, they will hit the stock market like a brick wall.

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But for now, the big market averages continue to plow along as if the economy is booming, not contracting (which I believe is the true situation in the U.S. today). Investors shouldn’t miss the run- up in stock prices, but they should be careful not to get caught in classic bear market trap. Don’t fight the tape… but stay away from speculation and monitor your stock positions often and diligently.

In other words, enjoy the market run-up, but be very careful and don’t borrow to join the party. Short selling might be risky at this juncture, too. I wouldn’t be surprised if any sudden erosion in the stock market uptrend leads to quick mini-crashes because of the fragile U.S. economy. Hence, the concern for caution.

NEWSFLASH — After a six month search, H&R Block has found a buyer for its money-losing subprime lending unit. H&R Block will take a $300-million loss and happily sell its troubled division to Cerberus Capital Management, L.P. of New York. My comment: Let’s hope the deal closes!