Don't Fight the Fed, But Be Ready

06/17/2013 7:45 am EST


Peter Miller

, Independent Market Analyst

Peter Miller of Barron's is technically bearish on the markets, but is seizing short-term opportunities provided by easy money.

Nancy Zambell: I'm talking with Peter Miller, the Director of Statistics at Barron's. Thanks so much for joining me, Peter.

Peter Miller: Thanks for asking me to join you.

Nancy Zambell: What did you think of the last unemployment number?

Peter Miller: I thought they were very interesting, Nancy. The 7.6% increase in unemployment and the market flying up on that good news-which is kind of contrary to what I would think.

Then again, you know how our market seems to be today. Good news is good news for the market, and bad news is still good news for the market.

Nancy Zambell: Exactly. I read that maybe now people aren't so afraid that the Fed is going to be tapering off, and that was what was shaking the market, making it a little bit more volatile in the last week or so.

Peter Miller: As most addicts are, they're always anxious to get more drugs. Another one of my analogies: the market is on some kind of a supplement.

Since you do bring up the employment, I think something that would maybe make people understand a little bit more about what's going on in the market would be to better observe the employment rate. We always focus on the unemployment rate.

The employment rate is not doing nearly as well as you would think, compared to how it has gone in the past after a recession. It's (the rate) nothing more than the proportion of potential workers that are actually working, compared to the population ratio.

Nancy Zambell: Plus you have to take out of that the people who have just given up looking for work.

Peter Miller: Absolutely. I have a couple of reasons why they'd give up looking for work, because why do they want to take jobs when they're getting government entitlements?

As well, if you were also to consider why the employment rate is flat in a time when it should be increasing, it would be because businesses are getting much more out of the employees they've retained. When you see the unemployment rate dropping, you should see the employment rate increasing, as has always been the case...but not this time.

Nancy Zambell: It's interesting. You hit the nail on the head—people are working more hours, taking on more responsibilities, yet the corporations are supposedly sitting around with these trillions of dollars worth of cash today that they're not using to employ people.

We're having stock buybacks. We're seeing a lot of dividends and dividend increases. But what do you think is actually going to be the catalyst that will make people start hiring again?

Peter Miller: I really think they have to see the economy grow. There really is no growth, and GDP is anemic.

These companies see this and they also see that their earnings are not where they should be, so they're scared. They see a lot of government policies. They're afraid of how Obamacare is going to affect their bottom line. So they're sitting on a lot of cash.

Basically, I think GDP would be a good place to start if we saw real growth. Historically, we're not seeing growth at all for a recovery.

Nancy Zambell: Even factory orders were less than expected. But on the other hand, you see some really good housing numbers coming around.

Peter Miller: Well, housing numbers...I have my doubts about those as well. My good friend Alan Abelson passed away a couple of weeks ago. He always said to me, "Doubt everything."

To just carry on his torch would be to not believe much of what I read. Yes, the house prices are the highest they've been in a long time, and sales are going up, but the problem with that is, how come the price is going up? How come the sales are increasing?

I have this notion that the banks are behind it all. They're sitting on the inventory. They're sitting on the number of foreclosed houses. They have driven the prices up because they control the inventory.

The main folks that are buying these homes are definitely not the people, you and me. They're house flippers. I don't know if you've seen the numbers—the places where the housing crash was the worst, Arizona, Las Vegas, and California, are having a record number of house flippers.

It's the people with the cash—the investors, financial institutions, and foreclosure players—that are really, really causing this increase in pricing.

Nancy Zambell: Yes, it's not really the consumers, and that leads back to the whole consumer confidence idea. When I talked to people at the MoneyShow last month in Las Vegas, they felt a lot of people that are still market-shy, and they're spending-shy. They're sitting around holding whatever little cash they've managed to hang onto.

Peter Miller: That is correct, and I got that same feeling at the show. That's one thing that I use quite often in my presentation: actually getting a feel for the people, what their reaction to the market is.

There really is no confidence among the attendees, and that is not surprising at all. It's typically a more mature crowd. They're looking for yield on safe vehicles, not risky investment vehicles. They're typically burned by low interest rates.

Nancy Zambell: It's kind of interesting that the whole housing market is being propped up by these investors and flippers, and it's the same on the stock-market side. We still don't have a lot of individual investors that are saying this is a great market. What's your latest reading on investor sentiment?

Peter Miller: I agree 100% on that. I think every bit of this market is driven by a group of folks that would be the top 10% of our country who invest in stocks. The lower 90% do not.

This is where that disconnect between a good Wall Street and a very bad Main Street comes into play. You see that the top 10% has increased their net worth by 24% since this bull market started in 2009. Whereas for the lower 90%, their net worth is down 14%.

To see the market driven to these extreme highs—even if they're not records based on averaging and inflation—it's still quite a bull-market run for the last three-and-a-half years.

Nancy Zambell: We had a really good rally in May, and then we've sort of gone into the summer doldrums-although today again the market's reacting very differently to how I thought they were going to react when the employment number came out. What do you think for the near term in the market? Are we going to see more volatility?

Peter Miller: I think volatility is the bear's friend. I still firmly believe we're in a bear market. We're in a cyclical bull market within a bear market.

When you see the numbers that I crunch, as far as bonds are concerned, they have been killed. Their prices are dropping, and across the board people are losing money.

I've always been a believer that bonds lead the market while stocks get the headlines. If I were to go on that notion, I think bonds are starting to run their term here on that bubble that they've been riding.

This is fear that I'm sure the Fed is going to stop doing what it's doing. But as I said earlier in the conversation, the Fed has got to pull out on the liquidity.

Nancy Zambell: What do you think the Fed is going to do? It doesn't look like Bernanke is going to re-up for another term, and some people are saying there's nothing going to happen until he gets out of office next year. What is your thought on that?

Peter Miller: I have to believe that would be correct. I do believe this Fed is going to continue to put its foot down on what I would call unconventional monetary policy. That's good for the markets. I've said it before: you can't fight the Fed, rule No. 1. Rule No. 2 is remember rule No. 1.

Nancy Zambell: Maybe there's still some life left in the market, even though it may be totally artificial life, through Bernanke's terms; is that what you're saying?

Peter Miller: Absolutely. This is how I kind of confuse my attendees while they hear my bearishness from the underlying numbers and my belief in what's going on.

You still have to play the game. By the game, I mean you've got to watch what's going on. You've got to be invested, because it's crazy not to be in a market like this. But you've got to be watching the fundamentals and be prepared to pull out your money at any time.

Nancy Zambell: No more buy and hope, right?

Peter Miller: I would say that's the case, yes.

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