This post is a guest con­tri­bu­tion by Ben­net Sedacca*, Pres­i­dent of Atlantic Advi­sors Asset Man­age­ment.

Long time stu­dents of the mar­ket will tell you that “the crowd is usu­ally wrong at the extremes”. Judg­ing by what I see, hear and read in the media, the cur­rent con­sen­sus is that stocks bot­tomed on Novem­ber 20th-21st, an eco­nomic recov­ery will begin in the sec­ond half of 2009, cor­po­rate bonds are a buy, stocks are cheap and the stock mar­ket is now dis­count­ing all the bad news. This is surely a sign that the worst is likely behind us.

Even though I was look­ing for a low in the S&P 500 around 750 (it bot­tomed around 740 on Novem­ber 21st only to close at 800 the same day), I con­tinue to believe that was a low point, but not THE low point for this bear mar­ket. We were large buy­ers of Mort­gage Backed Secu­ri­ties dur­ing the Wall Street de-leveraging and have been rewarded with hand­some gains, although we began to take some prof­its on Fri­day where appropriate.

Cor­po­rate bond spreads have tight­ened dur­ing a slow hol­i­day sea­son as well as spreads in CMBS (Com­mer­cial Mort­gage Backed Secu­ri­ties). Cor­po­rate spreads may or may not tighten fur­ther as I believe there will be a wave of issuance at every level — Gov­ern­ment, Emerg­ing Mar­kets, Cor­po­ra­tions, Munic­i­pal­i­ties, etc. Trea­sury yields have crashed as the Fed has taken the Fed­eral Funds Tar­get Rate to a range of 0–0.25%.

Stocks have ral­lied even more to S&P 931 and could pos­si­bly make a run at 1,000–1,100 if “per­for­mance anx­i­ety” sets in among those port­fo­lio man­agers that are afraid to miss the rally. We are not afraid of miss­ing the rally because we are absolute return investors and have the lux­ury of hav­ing missed the big down move from nearly 1,600. The man­agers that are sub­ject to per­for­mance anx­i­ety are the same group that man­aged to a mar­ket bench­mark only to get tat­tooed dur­ing the downturn.

The Fed is pun­ish­ing savers and the Pru­dent Man by manip­u­lat­ing inter­est rates to zero. You can sit in cash and earn zero or you can be forced out on the risk spec­trum just so you can keep up with infla­tion or your bench­mark. Forc­ing money into risky assets is per­haps the most dan­ger­ous exper­i­ment ever done, and is so large in scale and so unprece­dented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The fun­nel­ing of assets into risk is mask­ing the dete­ri­o­rat­ing fun­da­men­tals and giv­ing the appear­ance of a mar­ket that has bot­tomed. But this is sleight of hand, an illusion.

The Fed has declared a war on savers, a war on pru­dence and pro­vided the ulti­mate Moral Haz­ard Card — and with our money no less. They are also set­ting up the ULTIMATE BULL TRAP — a trap so large that when it is sprung, per­haps as early as the end of the first quarter/beginning of sec­ond quar­ter, there will only be sell­ers left.

Click here for Bennet’s full report.

* Pres­i­dent of Atlantic Advi­sors Asset Man­age­ment, Ben­net Sedacca brings with him more than 26 years of secu­ri­ties indus­try expe­ri­ence. From 1981 to 1997 he worked for sev­eral major invest­ment banks, spe­cial­iz­ing in high-grade fixed-income secu­ri­ties mar­ket­ing, trad­ing and port­fo­lio man­age­ment. In 1997 he formed Sedacca Cap­i­tal Man­age­ment focus­ing on port­fo­lio man­age­ment for high-net worth indi­vid­u­als and small to mid-sized institutions.

Ben­net grad­u­ated from Rut­gers Uni­ver­sity in 1982 with a degree in Economics.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

Comments

2 Responses to “Setting the Bull Trap”

1. KERRY Says:
   January 8th, 2009 at 11:31 pm

   CD'S DO NOT HAVE 0% INTEREST RATES. MONEY MARKETS DO NOT EITHER. PEOPLE ARE NOT GOING TO BE FORCED INTO WHAT THEY PERCIEVE AS RISK ASSETS.

2. GreenLight Advisor Says:
   January 10th, 2009 at 11:10 am

   Kerry,
   Investors will have to choose between earn­ing noth­ing on a risk-free basis, or opt for some­thing along the risk spec­trum in order to get any kind of return, if CDs and money mar­ket instru­ments are pay­ing effec­tively zero interest.

   They may indeed choose to still earn­ing next to noth­ing on a risk-free basis, or rather a return-free risk. Either way, the Fed is forc­ing their hand isn't it?