Posted At : February 16, 2009 1:07 PM
– What is going on with the market- Is the economy going to get better or worse?
– What is an investor to do?
– Springer Turkey Challenge coming to a close – Please help us feed those most in need this holiday season (Investment Bankers are exempt!)
Today’s another crazy day on Wall Street. Although, it is in line with what I have been saying and writing for some time. I must say, my Economic Tsunami Special Report was pretty accurate. I hope you read it. It’s free to subscribers.
What’s going on?
The market continues to take a decidedly pessimistic tone. The fear of a more severe global recession is driving the markets, and fear is never good for the markets. The US stock market is headed for its worst year since 1931 and rates in the Treasury market, especially in the short end of the curve, are approaching historical lows. The markets are also trying to digest the repercussions of a government bailout of GM, Ford and Chrysler. In addition, the government is looking at whether insurance companies, other than AIG, will be eligible for Treasury equity investments. Throw in that American Express announced it was unable to continue operating as it had and was joining Goldman Sachs and Morgan Stanley by becoming a bank holding company, subject to Federal Reserve oversight. The fact that the government is being forced to bailout not only financial companies, but also other sectors, tells us that the economy is serious trouble.
As I discuss in my Economic Tsunami Report, as well as others, Demographics in this country are very unfavorable. I won’t go into depth here, but as the population ages, it spends less while also taxing the social services such as Social Security, Medicare and Medicaid. With 70% of GDP made up of consumer spending, the impact could be dramatic. So, is that enough to make the market go down? Well, how about now that consumers out of money from their home equity lines, their credit card will be the next source of funds. That will lead to an increase of defaults and potential problems for those companies. Then, with unemployment rising, home prices falling and capital gains non-existent, the Municipalities could be the next hit. Lower income taxes, lower property taxes and rising pension costs will put tremendous strains on Municipalities, leading to defaults. Think Municipal bonds are safe? Think again. Boy I feel like Dr. Doom!
So, what do we do?
As I have been saying, I believe the market will re-test the lows and then bounce, but very SELECTIVELY. Our “Tactical Asset Allocation” investment strategy should continue to do very well. There are still great opportunities, but you have to really understand what is going on, because it is going to continue to be very difficult but very profitable for those who are prepared. Even during the Depression, the market fell by about 48% in the first month, rallied about 48% over the next few months, and then had its big hit down. I am optimistic for at least a short term rally for these 3 reasons:
1. Widespread fear and pessimism – You can’t find a Bull on Wall Street to save your life. Practically everybody in Bearish and feels it’s “obvious” that the market has to go down. Well, the market never does what “everybody” thinks. There’s an old saying on Wall Street – “If it’s obvious, it’s obviously wrong!”
2. The Government Bailout is essentially a giant stimulus package – Like it or not, the amount of liquidity that is about to enter the world economies is enormous and it will bump the economy significantly, if even only temporarily.
3. The news is still bad – Stocks tend to rally while the news is still bleak, well in advance of good news, leaving most individual investors in the dust.
If you have a portfolio built for the last bear market, there should be decent rallies and hopefully a better place to sell to make asset allocation adjustments. However, it would be a serious mistake to ignore your investments as many people are doing today in the hope that this crisis will “blow-over” and bounce back quickly “like it always has”. It took the stock market 25 years to recover from the 1929 crash! If you’re thinking about investing in real estate, think again. It is likely dead for many more years to come. Even though it should finally be leveling off soon temporarily, it could be many years before it’s a good investment again. I wouldn’t touch it. Extra caution goes to those who are just “waiting it out”, for it could a very long wait and to those ignoring and “hoping” things will get better. Hope may have won the White House, but it is NOT a successful investment strategy…. Be the expert or hire one!
A Bright Spot:
FYI: Some short term corporate bonds I believe are very attractive right now. This morning I was looking at some American Express, only 4 years out with a yield to maturity of over 9%, which may be attractive to you depending on your personal financial goals.
If you would like to see how our “Tactical Asset Allocation” strategies can help you, just let reply back or give me a call at 916-925-8900.
Regards – Keith Springer