The investment climate is incredibly simple at the moment. It’s not earnings, inflation or economic data investors are looking at right now. It’s words they are waiting for. At the moment, all eyes are on Ben Bernanke and his financial puppeteers to see what he will say on Friday when the Jackson Hole summit wraps up. Can Super-Ben save the world again (albeit temporarily) or is he just rearranging the chairs on the Titanic?
It was last year, at this time that he embarked on a new round of stimulus and saved the stock market. At that time, the market had dropped over 16%, and the announcement of QE2 ended that slide in a hurry and drove the market higher. So the situation is pretty simple: they do another stimulus program, which is what traders want or they announce more “wait and see but we stand ready to act” rhetoric, which would only piss them off. The market is addicted to the stimulus, but the Feds are going to have to let our “free market” economy go free sooner or later. They are truly caught between a rock and a hard place.
The reality is these stimulus programs have done nothing to help the economy or the average guy on the street. However, it does help the large corporations and big investment banks, which supposedly will trickle down to us eventually. The economy is in a tough place right now and will be for the next few years. I explain the reasons why in last Friday’s Fox appearance and in depth in the electrifying new book Facing Goliath: How to Triumph in the Dangerous Market Ahead.
Unfortunately, there is little the Federal Reserve or the government can do to prevent this situation. It has to run its course. Naturally, they have to give the appearance that they are doing something, but the longer they fight it, the longer our economy will simply slog through the mud and prevent a true recovery. Kicking the proverbial can down the road.
The funny thing is that some of the recent economic data has been pretty good. Durable goods orders came in much better than expected this morning and last week the Leading Economic Indicators were strong as well. It is these reports that lead me to believe that we could have a temporary reprieve in the 4th quarter, and stocks may actually be making a temporary bottom here.
This data, along with the dissention of four of the Fed’s governors on more stimulus, leads me to believe that they will not embark on another QE3 and stick with the “wait and see but we stand ready to act” attitude. The market could look at this either way: upset at no more stimulus or happy that things are not bad enough to need more. I said simple, not easy.
Investors need to be careful here and stick to investing in the sweet spot which continues to be income stocks and select corporate and tax-free bonds. The current volatility has brought bond prices down and they are a tremendous value right now with 10-12+% yields and appreciation potential.
Investors should consider hedging their stock positions with inverse funds such as the Drexion 3x Small Cap Bear fund (TZA), which go up when the market goes down and vice-versa. It’s easier than repeatedly buying and selling positions each time we get a new signal. In times like these, I am happy to be market neutral and simply collect the income and dividends. Keep in mind to view this position as only a hedge and not a long term individual investment. For this one you actually want this one to go down, because it means other holdings went up.
I have been professionally managing money for 27 years and these times are as tough as they come. Right now, it is imperative to be the expert or hire somebody that really knows what’s going on and what they are doing… and that’s where I can help. Our active hands-on approach to managing portfolios can help you manage risk and deliver returns. Call me for a free consultation today at (916) 925-8900.
Regards – Keith Springer