Thursday, April 1, 2010
I knew there was something wrong.
"Come in," my friend John yelled at me from inside his house. "We're in the kitchen."
I opened the door and discovered my friends' meticulously perfect home had been replaced by a Beirut bomb target. Sofa cushions were on the floor. One leg of the antique rosewood dining table had collapsed. The table lay tilted, with one corner piercing into the hardwood floor below and the other pointed into the air – like the Titanic just before its final plunge.
The shattered remnants of a Baccarat vase sparkled from a pool of water that was slowly soaking into the 100-year-old Persian rug. In the hallway, droplets of deep red blood stained the carpet along one side, and a mixture of yellow and brown feces stained the other.
John was in the kitchen with his wife, Mary. Their faces were pale.
"What happened?" I asked.
"I opened the door to let the dogs out into the backyard," John began, "and then I came back upstairs to help Mary with the packing for our spring vacation. The next thing I know, all hell broke loose."
The dogs, two prize-winning golden retrievers, had chased a squirrel into the house.
"One minute, we're packing and looking forward to a pleasant vacation. The next minute, we're staring at $40,000 to $50,000 in damage."
There's no telling the chaos a nervous squirrel can cause.
Investors would do well to keep that thought in mind as we enter the second quarter of 2010.
The first quarter was like a relaxing springtime vacation. Outside of a couple rough weeks in late January, stocks have gone steadily higher. Each week finished with stocks slightly higher than the week before.
Investors are complacent and have no problem leaving the back door open so the dogs can play in the yard.
But there's a giant, tick-infested rodent lurking in the garden outside.
Beginning today, the Fed is supposed to end its quantitative easing program. The program allowed the Fed to use your tax dollars to buy about $1.3 trillion of mortgage-backed securities (MBS) from troubled banks.
That action provided an artificial stimulus to the market. It helped strengthen banks' balance sheets and it funneled liquidity into the economy.
Now we'll get to see how the markets work without the artificial stimulus.
Who knows? Maybe everything will be just fine. The markets will pick up the slack the Fed leaves behind, and investors can go on packing and looking forward to a pleasant vacation.
Or maybe the squirrel will destroy the house.
It wouldn't hurt to be insured against the latter, just in case.
Best regards and good trading,
Foreclosure worries wane... mortgage insurers MGIC, Old Republic, and Radian spike to new highs.
Gold heads for sixth straight quarterly climb... ends March above $1,110 per ounce.
Malaysian stocks soar... country fund EWM hits 18-month high.