A Little More Detail

Most of my blog entries are fairly short because I don’t want to waste your time or mine.  I usually jump right into what I’m thinking and get to the point.  However, I’m on an airplane on the way to Chicago this evening and have some time to address some major areas of investing.  After a rough fall for the stock market and pretty much a crash, buy & hold investors are off to a really rough start to 2009.  In just the first two months, many portfolios are down 20-30%.  That’s just in 2009.  Amazing.  Most of you that read my blog have hopefully traded around and kept your powder dry  in 2009 and aren’t in that crowd. 

Let’s look at a few topical areas and I’ll share my thoughts on each of them.

Stocks & Bonds – Too many investors are leaning one direction right now in the short run.  I expect a rally very soon.  Obviously, the question is how long will it last and will it be the real deal?  I don’t think it will be “the” bottom.  We’re still seeing the economy get worse and I don’t believe there’s real fear yet.  There may be talk that investors are scared and tired of stocks, but we’re not seeing the fear that we saw in October & November (see my blog from earlier today with the Crazy Investor Indicator picture updated).  If we get that type of fear, then we could set up for a rally that could last a few months.  But, for now, too many traders are covering their shorts, waiting for the market to rally, and then putting the shorts back on and pushing it lower.  That’s what I’ve been doing.  This is the complete opposite of the late 1990s.  That was a persistent bull market that rarely gave you a chance to get in.  You’d buy the dips quickly because the next day, the market would be up 2%. This is a persistent bear market that rarely gives you an opportunity to get out.  Until investors stop trying to pick a bottom, we won’t have one.  It’s interesting to talk about but I really don’t feel like investors have given up yet.  When they give up, that’s when we’ll take advantage of cheap stocks.  Until then, we’ll have bear market rallies.

I think the market would be rallying right now if it wasn’t for the deluge of anti-business policy coming out of Washington last week.  I covered my shorts last week but didn’t go as far as to long any positions.  I see no demand and profits for companies still plummeting.  Investors buy stocks based on future profits and the growth of those profits.  Those profits and global growth are in question right now.  In addition, the rules are changing every day.  So, how do you value stocks in that environment?  More uncertainty leads to lower equity prices.  

The two investment strategies right now that are working is trading in and out on a very short time frame and investing for income.  Trading in and out quickly takes skill and can be frustrating at times.  As far as investing for income, we have very low interest rates.  With rates so low, investors have to find alternative ways to generate income, especially those on a fixed income.  It’s a difficult environment but I still see value in various types of bonds, especially in corporate bonds & municipal bonds.

Gold – The pullback in gold we’re seeing looks to be profit taking after a really large run.  However, investors are starting to realize in the short run, deflation is a bigger issue than inflation.  Everything around us is going down in value and the dollar is going up in value.  That’s deflation.  Now, we all know that eventually inflation will be a big issue at some point down the road.  So, I expect gold to continue its uptrend over the next several months.

Commodities – I think commodities are very interesting right now and if there was one area I’d be looking to put money over the next several years and averaging in, it would have to be commodities.  We saw huge demand, some manipulation, & some speculation that came to a screeching halt last year in commodities.  Once the selling began, it didn’t stop.  The world was adjusting from global growth of over 5% perhaps to potentially going negative in 2009.  The price adjustment was a correct adjustment.  But, now that commodities have dropped over 70% in most cases, where do they go from here?  I believe we’ll have a second round of rising prices in commodities over the next 3-5 years.  Yes, it’s true that the global economy may not grow at fast rate for several years.  However, the world population continues to grow at a fast rate and the need for various types of commodities will remain.  Whether it’s oil or natural gas or it’s corn or wheat.  You still have a supply demand problem over the long run.  I’m really excited about agricultural commodities and water especially.  Those are two areas I see thriving no matter who the president is, what tax rates are, or which company is getting bailed out on Wall Street.  I would be careful buying too many commodity related companies as they may have the same problems as other publicly traded companies.  You don’t want to ruin your investment strategy by having company specific risk.  In other words, if you think the commodity will rise, buy the commodity.  There are times to buy the company instead of the commodity.  Often times, it’s similar to a braid.  They get out of line and you short one and go long the other.  That’s fine for trading but for investing in commodities, I like the underlying commodities.  That means you’ll have to learn how to buy the actual commodities, ETFs that track commodities, or structured notes that invest in commodities but will still protect your principal. 

Interest Rates – You have a tug of war going on with interest rates.  The government is buying all different types of bonds to push interest rates down to help homeowners buy homes and refinance the ones they have.  But, you have a competing force.  The demand for treasuries during the fall of 2008 was so huge due to outright panic and fear on top of foreign governments buying our treasuries, interest rates dropped to ridiculous levels.  The demand for our treasuries was so high it wasn’t sustainable.  Whether it was a bubble or not is debatable.  I think it was and may still be.  But, you now have the fear of future inflation causing investors to sell and even short treasuries.  In addition, those same foreign governments can’t buy the amount of treasuries they once could, thereby reducing the demand and pushing up interest rates.  I think the tug of war will be won by those betting on rates rising.  The biggest fear among investors I talk to is potential inflation.  I think that will continue to hurt bonds and push interest rates up.  There are ETFs that short treasuries and mutual funds that short treasuries to take advantage of this over the next several years.  That’s the easiest way to benefit from higher interest rates.    

Economy – We all know the economy is slowing down and getting worse.  Will it turn around 3 months from now, a year from now?  We really don’t know.  I think just like the housing bubble took time to create, the economy is going to take a lot of time to recover.  Eventually, I believe it will recover.  We’re not in a depression.  I think we’re in a very serious recession.  The economy is slowing at a rapid rate but we’re not having a depression.  The reason I think we’ll recover on a global basis is because there are still too many people in emerging markets that want the life you and I have and live every day.  But, to assume we’ll have an economy that recovers quickly and goes back to where we were two years ago is a fairy tale.  We’re in a new world.  It’s a world without so much leverage and that means slower growth.  Every country is relying on each other for future growth.  If you’re simply looking at the American economy, you’re not looking at the real economy.  All of the economies are dependent on each other.  Nobody was in a recession two years ago and now every country is in a recession.  Because of this relationship, it’s very important that the policies in each country are friendly to businesses to attract capital.  Our stock market in 2009 is adjusting for a non-friendly business environment.  Capital is leaving our U.S. stock market and moving to other countries.  Biz Radio host and my friend Jack Bouroudjian tells me he’s seeing a lot of foreign selling.  It’s not just Americans selling U.S. stocks, but foreigners as well.  Money will always go where it’s easier to make money for the risk being taken.  I’m very worried about the future of our country and policies being implemented as we speak.  As a high income earner and trader, I’m looking for the best opportunities for my capital every day.  Right now, it doesn’t look like American stocks are the place to be.  We’ll continue to take advantage of wild swings and the moodiness of investors, but making long-term investments in an economy that is sliding and policies that don’t help the situation doesn’t seem like the best use of my capital.  Over the next several months, I’ll be writing on just where that capital is being deployed.  Stay tuned.


I’ll be broadcasting my show from the Chicago Board of Trade tomorrow in between doing my trades and doing a few television hits.  You can see me on Bloomberg television at 6:10 a.m. CST, Fox Business at 8:10 a.m. & 8:30 a.m. CST, and I’ll finish up in the evening on CNBC Asia at 5:10 p.m. CST.  I’ll post the video clips on the blog tomorrow.

This post published at www.karleggerss.com

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