Markets Still Twisting in the Wind

06/25/2012 7:00 am EST

Focus: MARKETS

Genia Turanova

Editor, Leeb Income Performance

No QE3 for now, but look for equities-especially income stock-to get a boost from the extension of Operation Twist as Treasuries' returns remain low, writes Genia Turanova of Leeb Income Performance.

It had been a very busy week. The Greek elections, the Fed meeting, the G20 annual summit, and, of course, the slew of economic data have all had their impact on the markets. All and all, however, stocks have been reacting positively, today's action notwithstanding, continuing their tentative recovery from the slump of the first two months of the quarter.

But in fact, two events dominated the headlines: the elections in Greece this past weekend and the meeting of the US monetary authority, the FOMC. Both went more or less the way most economists and market observers had expected.

In Greece, the conservative party-with a pro-bailout stance-claimed victory and formed a pro-euro coalition government. While an immediate crisis has been averted, and significant progress has been made, reforms still need to be addressed in order for the European Union to remain sustainable. Signifying the radical changes that are needed, some observers have called for Greece to leave the euro in order to insert some urgency into the debate and move forward to implementing the much-needed reforms.

Last week, we told you about a call for euro reform that came from down under. This weekend, the Group of 20 Summit in Mexico also addressed the crisis that threatens to derail the world economy.

The leaders of emerging countries, however, are pitching in to help. Responding to the call to "do more", the G20 is boosting individual countries' contributions to the IMF resources that could be channeled to Europe. This is a big deal and an indication of the level of concern the developing countries have over the debt crisis.

Now is the Right Time to. Diversify Away from the Dollar
The continuing devaluation of the US dollar and its replacement as the world's reserve currency is all but inevitable at this point, driven by the ambitions and hostility of other countries (China especially), as well as our own moneyprinting and out-of-control spending policies.

In the meantime, the market's reaction to the extension of Operation Twist here in the US was muted. To be fair, this Fed action was widely anticipated, and an expectation rally has already priced in some of its benefits.

The FOMC maturity extension program-commonly known as Operation Twist-is now extended through year-end. That the Fed went the "twisty" way this time around does not mean that the quantitative easing is off the table. Rather the opposite.

The language of the Fed policy statement has now changed. The Wednesday statement says that the FOMC is prepared to "take further action as appropriate", whereas before the policy language was to "regularly review...its securities holdings and is prepared to adjust those holdings as appropriate." A subtle difference, we admit, but one that makes us confident that the Fed wants to keep its powder dry in case growth slows down more and/or debt crisis in Europe worsens.
 
The potential for the Fed to unleash QE3 is even more valuable in the context of the economic news that point to unexpected slowing via a decline in the Philadelphia Fed manufacturing survey index, which puts it at the lowest level since August 2011. The US is clearly not immune to the Europe's woes.

In this environment, stocks from both Leeb Income Performance portfolios that provide decent dividends-that tend to be financially strong, cash-rich, large-capitalization companies-do provide a safer way of investing in equities.

And, incidentally, this way of investing generates income that is now significantly higher than that of Treasuries. With longer-dated interest rates, as direct result of the now-extended Operation Twist, can be expected to remain depressed, more investors will look to equities for income.
 
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