Black Knight At The Black Jack Table

There is a black knight at the black jack table. At first this statement might seem a little obscure. But stay with me on it and you’ll see it.

If you’ve been listening to this show for a while, you’ll know that I’m a big believer in economic fundamentals. I’m a believer that 1+1=2 and the math needs to balance at the end of the day. I have this strange belief that in order for an investment to return a profit, the company needs to generate positive net income. For an investment to go up in value, that income needs to increase. If the income drops, so too does the value of the company.

The power of the purse is vested with the federal reserve. This year the Fed made a commitment in March to deploy hundreds of billions of dollars to prop up the economy. The Fed promised to buy corporate bonds and exchange traded funds that invest in portfolios of corporate debt. The Fed can’t buy the debt of individual companies. But they can buy funds.

The central bank tapped BlackRock to help advise it and buy the bonds and funds on its behalf, though the central bank retained ultimate authority over what to purchase. So while they met the letter of the law to ensure they’re in compliance, they’re certainly not living up to the spirit of the law. I’ve said this before, if you went to Las Vegas to play a game of black jack and one player at the table had the ability to add cards to the deck at will, some thugs would take that player out back and break their knees. But that’s exactly what the Fed is doing. They’re printing money and using that funny money to skew the card game in the favor of whoever they designate should be the beneficiary.

The Federal Reserve had budgeted up to $750 billion for these asset purchases. In the end, the thaw in markets meant the Fed only spent about $13 billion of the $750 billion it had designated for corporate-bond and ETF buying. The positive signal sent by the Fed was enough to bring capital back into the market. Investors believed that the Fed would buy all this toxic equity and provide an effective backstop to investors from losing money.

Whether that was true or not is immaterial. The fact is, investors believed it to be true and that was enough to have money pour back into equities.

For the past three weeks we’ve seen an 8% pullback in stock valuations, including a 3% drop just today. But the problem is that none of these valuations are connected with the profit producing capacity of these companies.

The folks at Blackrock have amassed another $57 billion in new investment during the past quarter and how have 7.3 trillion dollars worth of assets under management.

Just because everyone is piling into the stock market without regard for company fundamentals doesn’t mean you should do it.