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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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.
