The market selloff yesterday was overdone. Crazy overdone. I am buying into this. I like Intel (INTC) down here and I like Marvell Technology (MRVL) a little lower, to name just a couple.
Yesterday I talked about China and how its currency devaluation was adding to deflationary pressures. I have also been talking about how U.S. Federal government spending, while up year over year, has been slowing. That's not a good thing to see, but it's not a killer either, especially since overall spending is up vs. last year.
Some of this selling is also related to the "pricing in" of a Fed rate hike, even though the minutes of the last meeting, which we saw a few days ago, seemed to suggest that the Fed was still on hold. Investors "sense" what I have been sensing, and that is that the FOMC is totally uncomfortable with zero rates. Their irrational worries become investors' irrational worries. Whatever. Fade irrationality.
Last November, after the Republican landslide victory in the midterm elections, I said that the market would rally into March/April of 2015 and then stop going up. You can look up what I said in my Real Money columns at the time.
My reasoning was that the Republicans would not raise the debt ceiling come the March deadline and that would cause the government to go into "balanced budget mode" of operating. This would limit spending and cause a slowdown. Basically, that's exactly what's going on. The rate of spending is slowing. Luckily, however, it hasn't been catastrophic because Treasury has been taking in record amounts of tax revenue.
You can thank Obama and Congress, who raised taxes on middle class working people when they allowed the payroll tax to go back up at the beginning of this year, for the revenue bonanza. (Meanwhile, most of the Bush tax cuts for the wealthy have been preserved. And we wonder why there is wealth and income inequality?)
The increased tax flow has been instrumental in allowing the government to function and pay bills while still under the current debt ceiling and not needing to raise it. Nonetheless, the fact that spending is now slowing is evidence that the gap between the amount of revenue coming in and the debt limit is narrowing. That's a caution sign.
I'd like to point out that the peak of the Dow this year was very close to where I had predicted it. There was a peak in March and then another new high in May, just marginally above the one in March. The S&P also peaked in May. So I called this back in November of 2014. It was a near perfect call.
At the present time, I think this is just an emotionally driven correction. I think it is okay to buy down here, for reasons I have explained. The economy is not being "drained." The amount of spending (money) flowing in via that Federal spending "pump" is actually greater than last year. That's not a bad thing. The water level of the "swimming pool" is higher; it's just that the flow of water has slowed somewhat. Not even a crazy slowdown, just a little bit slower.
Yes, China's move the other day was bearish, and I said that, but not to the point where you have to worry about abandoning that country. If China is offsetting that misguided currency devaluation with more domestic spending, then it's a wash. That's what China said it was going to do and I believe they will follow through on that.
This is not the end of the world. Good names are on sale and every savvy consumer knows that you buy when good names are on sale. So...go shopping!