A Very Trashy Market

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The stock market had a hell of a rally in the first quarter of 2012. In fact, it was one of the best quarterly gains over the past 10 years. Stocks like AAPL, CMG, and PCLN lead the charge to steady gains and tens of billions added in market cap value.

Does that mean it’s now “safe” to get in and stay in the stock market? That there isn’t any more worry about a big sell off in the near future?

Not on your life.

Big quarterly gains like this happen once every few years (or once every few decades) due to one thing and one thing only: access to easy cash.

You see, it works like this: Eighty percent of the financial market is controlled by the 20 largest hedge and investment funds. They get money flows from big players. And when money comes in, it needs to be put to work.

For the super wealthy, they see the writing on the wall. And that writing says, “Cash is Trash.” With the governments of the world working their printing presses overtime, the value of fiat money continues to slide with every passing day. And as fiat money loses its value, it takes more and more fiat money to buy tangible assets. Cash truly is trash.

I’ve had a number of Forbes 400 list billionaires tell me that “leaving a couple hundred million dollars sitting in cash” is a crime. And it is a crime for two reasons.

First, they treat cash like an employee, and an employee that sits there and does nothing should be fired. They see no reason for cash to sit there and do nothing as well. Second, they have too much respect for cash to have such easy access to it. I thought that was particularly interesting. The super-rich want their money working for them and they don’t want easy access to it.

Why is that?

Because people with money get offered deals every single day. And they get asked for money every single day. Have you ever heard the expression, “I’d love to help out but all of my money is tied up in this real estate deal.” It sounds better than, “I’d love to help out, but all of my money is tied up in cash.”

Long story short, the super-wealthy, as well as the large corporations of the world, have enjoyed a windfall of cash over the last few years in the form of capital gains and easy monetary policy. That money had to be put to work. And a lot of it found its home in the stock market. This generated new buying. And now that new buying is done.

What I’m seeing now is a shift. Money has been put into stocks. Check. Now it is time for the big money to flow into other markets. In addition to “flight to safety” markets such as bonds and ten-year notes, there is cash flowing into agriculture.

This means farmland and, of course, commodities. There are also specialty stocks such as Liquidity Services Inc. (LQDT) that thrive in this type of environment. AAPL and AMZN are killing the brick and mortar retailers, and LQDT helps those brick and mortar retails (as well as other industries) liquidate their un-purchased inventory.

For now, look for the stock market to start selling off. I’m looking for a test of 1,300 on the S&P 500 as a start. I like the June $140 SPY put options at current levels. The SPY is trading at 138.00 and I’m looking for a move back to 130.00.

Yes, this market rally has been fun. It’s been great seeing AAPL blow through $500, and then $600 and then have all the analysts get excited and started adding $1,000 price targets.

But now it is time to get back to reality. Markets don’t go straight up forever. In this market, it’s the nimble that will win out over the next six months.

Successful investing,

John Frederick Carter

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