It’s Obama’s Economy Now! How Do I Invest?
By: Bob O'Brien at MyWealth.com
Well the first 100 days of the Obama Presidency have come and gone.
Regardless of your political leanings you have to give the Obama
administration some credit. We will avoid the next Great
Depression!
After a scary start in which the Obama administration did not
appear to have a real handle on the economic crisis, the
administration has settled in and has thrown every piece of
stimulus that they could find at this economy in order to avoid a
really severe economic meltdown.
Give Ben Bernanke a lot of credit for supplying most of the oxygen
for all those sighs of relief out there, his fearless printing
press has really made the big difference.
Unemployment is slowing, the stock market has stabilized, and the
Nasdaq is up 10% on the year. In addition, consumer confidence has
increased and that light we see at the end of the real estate
market tunnel is not an incoming train. That’s the good news!
The bad news is that major inflation and/or stagflation signs may
be starting to appear. Oil is up nearly 50% off its lows, the
dollar is starting to weaken, and interest rates are starting to
rise. These will be the major hurdles in this economic recovery,
and we cannot go on printing money forever.
We are still a long way off from a Healthy Economy!
What
can you do to protect yourself? Our Stock Investing
Advice is:
Be
careful in this stock market. Realize that this rally is a “government
generated rally” by historical amounts of stimulus. This is not the
time to go back on automatic pilot with blind optimism. There will
still need to be real economic growth and real profits from a lot
of sectors. This is where the education that you get in our
investing course really pays dividends.
Favor
small/medium cap stocks. Smaller companies tend to have more flexibility
than larger companies stocks and can bend much easier in the storms
ahead. Heavy inflation and new regulations will require a lot of
flexibility that the larger companies generally do not have.
Lean
towards emerging markets. China will most likely lead the world out of this
global recession, and there is a lot of money being poured into
these economies. The BRIC countries are loaded with opportunities
and having some money in the ETF’s EEM) and (VWO) should make for
great long term plays in your discretionary portfolio.
Protect yourself with
TIPS. Treasury Inflation
protected securities, (TIP) will be very popular when the heavy
inflation starts to hit, and we have already seen them jump when
Ben Bernanke revs up the printing presses. The inflationary threat
is very real, and on its way!
The longer term investor has seen the majority of carnage already
in this stock market, but there may be another big stock market
tumble around the corner. This recent rally has really been about
government stimulus and not about long term profits and economic
growth.
It’s easy to say that these profits and real economic growth will
be there in time, but only time will tell for certain as to how
quickly this economy will re-invent itself.
Bob O'Brien
Head Instructor
bobrien@mywealth.com
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What To Do In This Stock Market Rally?
Contributing Writer
instructor@mywealth.com
I wrote recently about the stock market and ETF’s. At the time of the first post (3/23) the S&P was around 750, and I recommended that the long term investor get back in the market. At the time of the second post (4/6) the market was at 820, having surged almost 10% in a matter of only two weeks. My comment on the market back then was: “At this level, I think the market is still relatively a good value”.
Now the market is up even more. Currently the S&P is at 870. That means it is up about 30% from its bear market low of 670 on March 9. Quite a rally and the question is:
Is this sustainable?
You can’t get a straight answer to this question from anyone. Some people will tell you to get out and others will tell you that we are in the early phases of a major bull run. What this illustrates is how hard it is for the average investor to “beat the market” and time when to get in and out of stocks.
Many active money managers will claim they have superior skills and magic crystal balls that tell them when to buy and sell. But the fact is
For those who like to study the market in a historical perspective, one of the most prominent valuation tools is the so-called 10-year Shiller P/E, named for Professor Robert Shiller at Yale. This measure smoothes out the earnings cycle over a 10-year period and this way avoids the bumps that the 12-month trailing or forward P/E has. The 10-year Shiller P/E is around 60 on S&P operating earnings.
So with the market at 870, you have a P/E of 14.5 That is a quite reasonable number; in fact it is slightly under the 200-year average of 16.
Historically, for those who invested at times when the Shiller P/E is below 16 the returns have been good. Professor Shiller ran the numbers and in this respect “good” means a 7-10% yearly return, which is what you can probably expect in the long run.
Make sure you have a Financial Plan and the Personal Finance Course will help you do just that!
Some investors sold out in a panic around the beginning of March as the market tanked. Those people are now sitting on heavy losses and on top of that have missed a 30% market rally. The lesson is age old and yet investors keep missing it: Do not let the market’s mood swings dictate your investment strategy!
The market is like an irrational drunk who stumbles along in the alley trying to get home from the pub. He will make wild swings back and forth but he will eventually get home. Keep that in mind as you grow your own investments!
For developing a sensible investing strategy make sure you check out our investing course.
If you put money in the market at regular intervals (so-called “dollar cost averaging”) and stay properly diversified (by using ETFs) and stay away from expensive active managers and mutual funds who promise to “beat the market” you are well on your way to a sensible investment strategy.
This brings us back to the initial question:
What to do with the rally? I can tell you what I have done. Mostly, I have done nothing. I simply do not believe I have superior market timing skills so I am not going to bet my portfolio on that assumption.
As you know, I recommend the average investor (with a million or less in liquid assets) use low cost ETFs to diversify. For those who like to speculate in individual stocks I recommend you limit this to a very small part of your portfolio. I have a small portion set aside myself for individual trades and here I have sold a little bit.
I had one stock which I thought was getting thrown out with the bathwater during the mayhem in the beginning of March. Whether due to luck or skill (probably luck), this stock has now quintupled and I sold it all. But it only represents about 5% of my portfolio and that is the only trade I have made.
I sold the particular stock because it is a financial stock and I am still uncomfortable with the health of the US and European financial sector. I also think the housing market has another nasty leg down (more on that in my next article) and banks will suffer in that scenario. In the rest of my portfolio I stick to ETFs which are low cost, diversified and let me sleep at night.
Overall I keep buying a diversified basket of stocks in my 401(k). Every month I max out the contribution to get the tax deduction and employer contribution. This is money that I won’t touch the next 20-30 years and with the market at a current P/E of 14.5 I am confident it will provide a nice return. This is my way of staying disciplined and following the three rules:
1. Use dollar cost averaging (add a fixed amount every month or so).
2. Diversify by using low cost ETFs.
3. If you look at valuations, use the Shiller 10-year P/E and buy when below trend
Do you have an opinion about the current market or don't agree with the author? Send us your stock investing articles.
Office Depot Stock Gains 177% in Three Weeks and There's More to Come!
A few weeks ago I had my eyes on Office Depot, Inc. (ODP) priced at nearly $0.70. On April 16th, 2009 the price is $1.94. That's a 177% RETURN!
Take a look at the stock chart from early March to mid-April:
The great thing about this stock is that it still has a lot of
upside potential left, even in the short-term because it has been
knocked down so far.
The reason why Office Depot's stock was (and still is) so cheap is
because they took a huge write-down on impaired assets four Q4
2008. I would bet that they decided to take these write-downs in
the midst of all of the financial company write-downs. This way
they look really good when things start to turn around in both the
stock market and the real economy.
The only problem with this stock is that the company and the office
supply industry as a whole has reached a high saturation level, and
it is not expected to grow significantly in the next two
years.
However, this stock is way undervalued for a solid household name
like Office Depot. Compared to its competitors, Staples and Office
Max, it is very undervalued, and has huge price discovery potential
for the future.
The investing advice to take from this stock analysis is that
Office Depot (ODP) can be a great short term play if you expect
earnings to be dismal for the Q1 2009 results that will be reported
on 4/28. It could also be a long-term (2-4yrs) investment; the
stock could potentially go back up to its 52 week high of
$14.40!
How
would you like to have a 640% return on your investment in 2-4
years?
There are very few
investments in the world that exist with this kind of return. As I,
Warren Buffett, and many other investors believe, this market has
presented opportunities of a lifetime.
If you would like to get started trading in your own online
account, try TradeKing or Zecco.com. They are both great services, so give one a
try.
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Honda Will Benefit from GM, Chrysler in Trouble
While there’s nothing wrong with that, my mind always has “the wheels turning” and wondering how I can profit from what’s going on in the media. So many people watch the news for everything from “entertainment to information”. However, I watch it to derive an investing idea out of it.
As the auto industry got hit from the global slow down, GM (GM), Ford (F) and Chrysler took it on the chin the worst. However, Honda, Toyota and Mazda had something haunting them too…it was the strong yen. As the yen rose, it eroded their profits even more.
However, lately the Asian automaker stocks (symbols: HMC, TM) have stabilized. Why? If your main competitors aren’t “breathing down your neck” and they are “licking their wounds” and trying to just stay afloat, that gives you an advantage that you didn’t have before.
If the yen was unusually strong before (USD/JPY exchange rate was at 87.00 but is now closer to 99.00 on a weaker yen), and it’s much weaker now…then that helps them as well.
So coupling a weaker yen with a potential GM/Chrysler bankruptcy....that equals great advantages for Honda and its shareholders.
Therefore, it doesn’t even matter whether GM and Chrysler go into bankruptcy for Honda to keep that advantage. Either way, it’s going to take them time to regroup and to get back on track. All the time that it takes them to do this (and it will take a while with a new CEO, etc.), will give Honda a great “lead time” over Detroit once again.
As stocks stabilize and turn upward as we come out of the recession (finally) in the upcoming months, the yen will weaken materially. This will give Honda and Toyota a “wind to their back”.
All of this combined will get the Asian automakers a boost in the next 12 to 36 months. Those that realize this now and buy stocks like Honda while its price is still cheap could see gains of 50% or more in that time. See the chart below.
Honda could gain 50% in the next 1-3 years from these levels!
Keep in mind that this is an “investment idea” and so it shouldn’t
be a “margined trade”. I say that because it will take “time” for
this to occur and margin interest would eat you alive. Also, if the
stock did retest its lows in the short run, it would eat up your
account balance. If you have bought with cash and plan on holding
for years, then this won’t matter.
Bottom line: Detroit’s loss is Asia/South Korea’s gain. The
weakening won in Korea and the recently weakening yen in Japan will
also work in these automaker’s favor.
An investor can take advantage of this in a couple of ways. They
can buy Asian automakers that trade on U.S. exchanges like Honda
(HMC) and Toyota (TM) and they can also buy currency pairs in the
forex market that take advantage of a weakening yen (like USD/JPY
and EUR/JPY).
If buying USD/JPY or EUR/JPY, it might be best to allow them to
solidly trade and close above their 200 Simple Moving Averages.
(Find out more about moving averages and other technical/chart
reading techniques here).
Looking
for more ways to polish your investing skills and
strategies? Stay on top of the game
with InvestorPitStop.com's stock investing strategies
and tips. Also, try the
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Economy Recovering? This Indicator Seems to Think So!
So you won’t know when the economy is turning by listening to the nightly news. So what can you look to?
Well, here is one widely watched economic barometer that institutional investors have used throughout the years. What is it? Copper
Now you may think, “What in the world does the price of copper tell us about the economy?”
With other leading indicators “ticking up” recently such as Housing Starts and Building Permits, I took a new look at copper as well to see what I saw. Here’s what it looks like.
Copper breaks its downtrend and heads higher for the first time in almost a year!
As you can see from the chart above, copper has not only broken its
downtrend but also its sideways range and is preparing to head
higher. Now how can that happen if there’s not more “copper buying”
going on around the world.
On top of this, it seems that crude
oil prices have finally stabilized too, and once oil prices
finally hold above $50 a barrel again, it should be another
“confirming sign” that the global economy has BEGUN the process of
turning around.
I say “begun” because it takes time for the U.S. and global economy
to be in “full bloom” once again. Therefore, the news will continue
to be dire for a while longer.
But
what does this mean for you? It means that if you
are a long term stock investor, these could be better times to be a
buyer (with cash, no margin buying) of ETFs and mutual funds if you
have at least a 5-10 year time horizon for the investment.
For
the currency investor, it means that you
need to be on guard for the “dollar party” to come to an end once
the world finally does realize that the global economy is turning.
This could help the AUD/USD, NZD/USD and EUR/USD for instance as
dollars are sold and commodities and inflation bloom once again.
The former two pairs do best when commodities stabilize and boom
once again…and the latter does good simply when the U.S. dollar
does not do good since it acts as the best “anti-dollar” out
there.
Looking
for more ways to polish your investing skills and
strategies? Stay on top of the game
with InvestorPitStop.com's stock investing strategies
and tips. Also, try the
investing courses for only $25 at www.mywealth.com.
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What Stocks Are Prospering In these Sluggish Times?
It’s no secret that credit is tight right now and loans are hard to come by. It’s also no secret that car sales are diving off across the board. In fact, it’s been no respecter of persons. It’s punished Detroit as well as the Japanese auto makers a like.
Not only has this been a credit issue but it’s been a “jobs” issue as well. The unemployment rate has grown so much lately (currently 7.6%), that either you’ve lost your job or you know someone who has. This frightens the employed and hinders the unemployed from new purchases. So both parties hold back in new “big ticket” purchases.
This has been a night mare so horrid for the auto industry that unless the government bailed them out, we probably wouldn’t have an auto industry left. That would be sad since (as Obama put it last night) we invented the automobile. (Did the US really invent the automobile?)
However, there is a bright spot in all of this for the investor to consider. If you and I are holding on to our cars longer and we’re not making any new purchases, then we are more likely to repair the ones we’ve got in order to make them last longer.
Therefore, this has caused the auto parts industry to soar recently, as Americans all over the place repair their vehicles rather than get new ones.
3 Auto Parts Stocks That Are Flying High Right Now!
So with that thought in mind, I’d encourage you to look into a few auto parts stocks like:
- O’ Reilly Automotive (ORLY)
- AutoZone Inc (AZO)
- Advance Auto Parts Inc (AAP)
In fact, check out the chart below. AutoZone is on top. O’Reilly is the middle chart and Advance Auto is the bottom chart.
These Stocks are Thriving in
this Recession!
As we heard from Obama’s speech last night, the recovery will be
gradual and slow. It will not happen quickly. Knowing this, there’s
a great chance that individuals and corporations alike may be
repairing their cars and “fleet” instead of new purchases until we
get out of this recessionary slump.
Bernanke told us yesterday that it may take until the end of 2009
or into 2010 until the recession has ended and we’re out of the
woods. Therefore, these stocks could still “have legs” for quite
some time knowing that things aren’t getting better tomorrow. So
since things aren’t getting better in the short run, investors
might as well seize the opportunity to help their ailing portfolios
by buying companies that are prospering NOW.
There are other industries and companies that are doing well in
these tough economic times. We go over things like this in more
detail in our online investing course. To get more information
about this online
course, click here.
It's only
$25.
Stock investing may be as difficult as ever right now, but there
are always opportunities. You just have to work hard to find stocks
that are and will be prospering.
Order Barron's Magazine and save over 40%
off the newsstand price.
-Head Course Instructor at www.mywealth.com
U.S. Dollar Forecast for 2009
Specifically, I think the dollar will gain against the Japanese yen (USD/JPY pair will rise) throughout 2009.
While formerly, the yen and dollar rose as the Dow crashed, you will notice that the yen is backing off quite a bit even as the Dow sits on its lows as of this writing. Yet the dollar still rises as the Dow falls.
Therefore, I think for the dollar/yen pair, the bias will be in the favor of the dollar and against the yen overall throughout 2009 no matter what the stock market does from here.
HOWEVER, when it comes to how the dollar does against most other currencies such as the Euro, Australian dollar, etc. it will very much hinge on how stocks hold up.
If the Dow breaks to fresh lows and holds below them, then it is likely that the dollar will continue its strength against these foreign currencies BUT if the Dow and other U.S. indices halt their slide and head higher overall from here, then I think risk aversion dies down and that will hurt the U.S. dollar and cause foreign currencies to rise up against it once again.
So right
now, I'm bullish on the USD/JPY pair and even bullish on gold.
However, stocks are on the fence right now. They can't stay there
forever. So we'll have a break one way or the other, sooner rather
than later.
Once we get a decisive breakout, then we have our
new found direction on the dollar. Therefore, my focus will remain
on being long (buying) the USD/JPY pair until stocks get off the
fence and make a distinctive move to either side. Once this
happens, then the trend will be in place for the dollar for the
remainder of the year minimally.
-Head Course Instructor at www.mywealth.com
