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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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.
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-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
Geithner Reenacts Jim Carrey’s Fun with Dick & Jane!
However, what he ended up doing was opening up more questions than answers. The market promptly showed him what it thought about it too. It reminded me of the movie Fun with Dick and Jane where Jim Carrey gets on T.V. to talk about Globodyne’s stock as he watches the stock chart plummet from $100 a share to a penny while he’s on T.V.
It seems like Geithner didn’t know any more than Carrey did at that moment too.
Basically, Geithner ducked the tough questions that investors wanted answered like: Will banks laden with toxic debt be forced to fail? How will illiquid assets be removed from the bank balance sheets? What will be done to arrest the decline in house prices?
The risk now is that the plan could fail before it even gets off of the ground because the Treasury basically said, they are going to do something in the coming weeks to months. We don’t know what exactly that’s going to be yet. And we’re going to partner with investors to do it. However, investors are the ones they are leaving in the dark. How are they supposed to step up to the plate when they don’t even know if some of these banks will be allowed to fail.
So Geithner really missed a shot at sending a stronger signal, which would have been a great time to distinguish himself from Paulson.
The Dow dropped 382 points. Bank of America dropped 19%. Citigroup dropped 15%!
Geithner makes his first rookie mistake! I guess we’ll get ready for round two as Geithner testifies before the Senate to see if he has anything noteworthy, but don’t count on it. This guy is already making rookie mistakes.
While we don’t know the first detail, at least he painted some broad brush strokes though. The government will be injecting fresh capital into some of the country’s biggest financial institutions. They will establish a public/private fund to buy up to $1 trillion of bad bank assets. They will also start up a credit facility of up to $1 trillion to promote lending to consumers and businesses.
So unfortunately, we know some basics but no details. He should have kept his mouth shut until he really had something concrete to say. The market wants details of a "defined plan of action" and the market did not get that yesterday.
This rookie mistake is about as bad as Maria Bartiromo getting information out of Ben Bernanke. I think she must have gotten him sauced and batted her eyelashes at him or something because he lost his mind just long enough for her to get the information she needed. Well, just as he had his rookie mistake, we’re now seeing it in Geithner.
In the mean time, it could end up being months before a final program is in place. However, right now each day is like dog years to the market. Every passing day means so much right now. The market has been in a holding pattern while Obama and Geithner get it together. However, if they wait too long, the market may sell off to new levels.
However, if some rays of hope could come soon enough, the market could break out of its range into new highs. Until we get some light as to which way this will all go, the markets will continue to be choppy and erratic.
At least, we may know if the stimulus package gets truly passed by the end of the week or middle of next week. If so, that might buy the market some time while Geithner gets his head out of his butt.
-Head Course Instructor at www.mywealth.com
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The Fed Cuts Interest Rates Again, Target: 0%-.25%
The discount rate was cut by 75 basis-points or .75% to .5% from 1.25%. The Dow Jones Industrial Average rallied up to 3% right after the announcement, and then it dropped several minutes later to up over 2% or 185 points.
This is the lowest level that has ever come out from the Federal Reserve since it was established. They are going to have to seek other means of easing this beaten up and suffering economy. After lowering rates meeting after meeting, the Fed is running out of tools and is going to have to get creative if they are going to help. The Fed's balance sheet has more than doubled from $900 billion to almost $2.2 trillion.
Cutting interest rates is not at all close to a "cure-all". Japan's interest rates stayed at 0% for years, and they have undergone one of the longest recessions any country has seen. They have been in a recession since the 1980s. One thing that we have done right that Japan didn't is mark-to-market accounting. They refused to write-down their inflated real estate portfolios with the hope that the market would turn around soon, but then again that has absolutely nothing to do with the Fed.
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At some point, we have to realize the Fed is not going to save us. We have to let these things work themselves out. With automakers and banks still on the brink of failure, the only thing we can do is wait to see what happens, and then move on.
Living in Florida, it reminds me of something we do when disaster hits. During a hurricane, all you can do is hunker down and make it through. You have to wait for the storm to pass to assess the damage. Only then can you start to get everything back to normal. Trying to repair things in the middle of a storm is almost always a failed effort.
UPDATE: House Approves $700 Billion Buyout: Congress Reaches Agreement for Bailout Deal
Image courtesy of: www.daylife.com
UPDATE: The House of Representatives has approved a modified $700 billion government assistance plan. One major difference is to raise the FDIC insurance for banks from $100,000 to $250,000. Also, the middle class will get a tax delay on the so-called Alternative Minimum Tax. Other tax breaks including alternative energy provisions are included in the bill.
Through the long hours of Saturday night and early Sunday morning, US Congress reached a tentative agreement on the proposed bailout deal led by Secretary of Treasury Henry Paulson. The $700 billion deal has not yet been finalized, but the essentials of the bailout have been outlined. But how will this affect us, as taxpayers?
The agreement so far says that taxpayers would:
- Get an ownership stake in companies that receive bailout help.
- If any of those companies fail, taxpayers would be first in line to recover assets.
- There would also be possible profit-making opportunities for taxpayers if the troubled assets render profitable down the line.
The plan will also allow small community banks, pension plans, and local governments to sell troubled assets to the US Government. Executives of companies that seek the aid of the government will have closely-monitored compensation and will not be able to walk away with giant severance packages that some CEOs have enjoyed while being ousted from their suffering firms.
The Wall Street Journal
"3 Phases of a Financial Rescue with Strong Taxpayer Protections
* Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street
* Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets
* Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes"
-Office of Speaker Nancy Pelosi
Now I am not a huge proponent of bailing out large firms that took on too much risk, nor do I believe homeowners that took on a home mortgage that they couldn't afford should be saved from foreclosure, but you have to allow for some leeway. The government is who pressured mortgage bankers to underwrite unqualified loans in the first place (to increase home ownership), and the mortgage brokers took advantage of people they knew would not be able to afford the house they wanted (they get paid when the contract is signed). It comes full circle; it is too difficult to blame one party.
I doubt the Treasury Secretary, Hank Paulson, would push this deal so hard if he didn't believe that our country's economy might completely collapse if something is not done.
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Golden Age of Wall Street is Over: Goldman and Morgan to Become Traditional Banks
Image courtesy of
publicradio.org
The
Wall Street Journal reported Sunday night that Goldman Sachs
(GS) and Morgan Stanley
(MS) must abandon their independent brokerage status
and become traditional bank holding companies. When the two most
profitable and renowned investment banks on Wall Street are forced
to abandon their business model, you know the Golden Age of Wall Street is
over.
The independent brokerages have enjoyed exorbitant profits over the
past couple decades by employing huge amounts of leverage and
little deposits to show for it. They will now have to answer to the
Federal Reserve, meet their requirements, and accept that they
might never make the same type of profits that they enjoyed for so
many years.
Although it is sad to see icons of American capitalism fall to
their knees, this is all a part of the risk-return game that the
markets are all about. They took too much risk on top of too much
debt, and they are now paying dearly for the risks they took.
Bear
Stearns collapsed,
Lehman
went bankrupt, and
Merrill
Lynch was bought by
Bank of
America all within the past
year. With Goldman Sachs and Morgan Stanley leaving their brokerage
model, there is no big independent left for Wall Street.
Whatever happened to risk management? Whatever happened to
liquidity and solvency?
Surely these firms employed some of the most intelligent people in
the US; some of them knew that their companies were walking a tight
rope that may have been frayed. What will happen to New York (the
financial capital of the world?)? And will there be a Wall Street
comeback in the future, or was this truly the end of a Golden
Age?
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What's Slowing the US Economy?
As a real estate agent in the state of Florida, I have seen the
extreme of what he describes. The housing bubble popped, and
subsequently the whole financial world suffered. This is one large
real estate and lending market correction.
People were paying
too much for houses, and those same people were getting mortgages
that they couldn't afford or didn't qualify
for. Now foreclosures are
high and lending is tight.
If I would suggest one piece of investing advice or personal finance advice, it would be that the next 12 months will
probably be one of the best times to buy a house for the next few
decades. I have seen home
prices drop very low, quite quickly; and just like in the stock
market these prices will not stay this low for very
long.
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Americans Respond to High Gas Prices
Image courtesy of
flyboyz.wordpress.com
According
to a recent US Department of Transportation report,
Americans drove 9.6
billion miles less this past May compared to May of last
year.
With the US
consuming about 25% of the
world's oil, the reaction to high gas prices could have a
significant impact on oil prices worldwide. Since the US uses a
quarter of the world's oil supply, people in the States have been
impacted hugely by the recent spike in oil prices. This has caused
the average American to curb their gasoline appetite; switching to
more efficient means of travel, driving less, and postponing
vacations.
Regular Unleaded gas still costs about $3.95 a gallon even after a
quick drop in oil prices from around $145 to $124 a barrel. For
most SUV drivers, that means $75-$85 a fill-up.
Although many Americans believe these prices are outrageous, they
are not near as bad as most other countries in the world.
Also, I believe that we needed a spike in prices to wake the US up;
we need to be more environmentally friendly and more conservative
in using up our planet's resources. We cannot continue to pollute
our world with cheap fossil fuels. There are better, cleaner, and
possibly cheaper ways of transportation.
This is also a double-edged sword because analysts are saying that
oil prices may go back below $100 making gas cheaper once again.
This may increase the chances of an economic recovery, but there
may be a catch. We forget to soon how painful it is to fill up the
tank, and then gone with the ideas of being "green" and conserving
what we have.
We
must find new ways of creating our energy; homes,
cars, buses, jets, machinery, and the list goes on.
If gas prices go back down, do not
forget what must ultimately be done about energy.
Update!: US Congress PASSES Housing and GSE Bill
Picture courtesy of
themortgagereports.com
UPDATE
7/26/08!:
The US Congress has passed the housing and
GSE bill according to a Reuters report that came out Saturday
morning. The Senate as well as President Bush have voted and signed
respectively for passage of the bill. The bill allows for a $300
billion fund for troubled homeowners and a monetary lifeline to
GSEs Fannie Mae and Freddie Mac.
Economists call this the worst real estate slump since the Great
Depression.
This past week the House of Representatives voted for a bill that
allows $300 billion for people facing foreclosure who can refinance
with Fannie
Mae (FNM) and Freddie Mac (FRE). The bill also gives Fannie and Freddie a
lifeline through government funds.
In a Dow Jones
Newswire article,
Connecticut's Senator (D) Chris Dodd was quoted saying, "This is
the most important piece of housing legislation in a generation."
He expressed his concern along with many other Congress members
that housing is at the core of the US' prosperity.
The US House of Representatives have voted in favor, and the bill
now awaits the Senate's decision as well as President Bush's
signature. President Bush has also shown concern for the well being
of these important Government Sponsored Enterprises (GSEs).
Passage of the bill will instill confidence in the housing market
and could ignite the turnaround in the real estate market. If
Fannie and Freddie receive the government backing, their equity
shares will be more appealing and debt issues will be as safe as US
bonds.
Although this could create a
larger budget deficit for the US in the short-term, the benefits of
providing these GSEs with a lifeline will make the US a more
investable and prosperous nation.
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Where Oil Prices Are Going
Simmons, "Our usable inventory is the United States is at record low levels." He goes on to say the world supply is now in a definite decline. Although this supply squeeze is bringing Americans to our knees, Simmons stated that the rest of the world is "laughing at us" because they are experiencing astronomical prices. In Istanbul, Turkey, there was a report of $11.67 a gallon for gas!
The stock market is at odds with oil prices. Every time oil prices advance, the stock market takes a dive. This inverse relationship is driving most of the volatility we see in the financial markets, making it difficult for investors. You can make money from this situation. How to Profit From the Oil Run is an article about getting returns on this wild oil boom. Through stock investing, different investments can yield great returns with oil prices going higher and higher. I'll show you how.
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Are Stocks Going Nowhere?
In a recent article in Active Trader Magazine, a very successful money manager named Vitaliy Katseneleson states his case on why he thinks the market will continue to be range-bound. A range-bound market is where stocks bounce up and down quite frequently, but overall the market does not largely advance or decline (neither a bull market or a bear market). In other words, a volatile stock market that lacks direction.
As an active value investor, Katseneleson has done extensive research on the markets over the past century, and he has found that there were three major, long-term range-bound markets in the 1900s. All of those periods of time lasted 13 to 18 years. Many people that take note of this potential situation cite the 1970s' lack of significant growth/momentum. Vitaliy sees a beginning of one of these historical periods brewing right now.
What is some good investment advice or stock advice if this turns out to be a range-bound market?
- Volatile markets are a good thing if you can learn how to capture a swing in one direction
- Invest in Low-PE stocks. Stocks with a low-PE historically outperformed high-PE stocks in every range-bound market.
- Short High-PE stocks. High-PE stocks tend to tumble during range-bound markets.
- Look for stocks that continue to have strong earnings and prioritize the earnings number.
- Buy stocks that analysts hate (this one I caution, but it is one of Vitaliy Katseneleson's strategies that has made him a lot of money; you really have to understand what you're getting into)
I believe if we are facing a range-bound period, it won't last all of 13-18 years; the world just doesn't move that slow anymore. We now have systems and speed of technological advancements that can turn around a range-bound market much quicker than in the past. A range-bound market is likely for the next few years, but with our fast-paced society, something will spark a new economic growth story.
Believe me, when you Google for investment advice while the market is going crazy like it is, you won't readily find answers about what is going on in the market like here. People will debate over and over again. If you take these few tips on investing in this stock market, you will do much better than the majority of investors.
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Where is the Stock Market Headed?
Many reports come out and say that the economy looks gloomy. Businesses report that earnings are down and morale is low. Consumer confidence is low as well. Because the credit market is tight, businesses are not borrowing as much to invest, expand, or fund new projects. This all affects the bottom line. With that said, times are not good right now. There's a cliche for that, "We can only go up from here." However, it is hard to call an actual bottom on the market, so we don't know for sure if it will go lower. One thing we do know is that the market will go up from here in the not-so-distant future. I have heard many experts including Bob Doll of BlackRock Asset Management (BLK) say that we have seen a bottoming process and that the worst is behind us.
I believe there are some stocks that have more to fall, but overall I think we have come to a substantial bottom. Companies that have not yet been affected by the credit and consumer problems may experience some spillover in the next quarter or two. Also, be careful of companies that have high P/Es, because once their EPS and growth rates take a hit, that stock could take a tumble down a high mountain. Something that seems to be a trend during recessions (especially ones sparked by financial trouble), is that the Financials sector seems to be the first to fall, the first to bottom, and the first to recover.
Be careful timing the market, and it's never a bad idea to sit on some cash if you are uncertain. Remember, all things held constant, the market will go up over time.
