With the stock market starting to make a correction back to somewhat normal levels that support the underlying fundamentals, folks like Gold, especially since it has done so well over the last year. Ah, I love those investors who buy high and sell low; keeping up the age old tradition that what goes up must go higher and what goes down must go lower. Last I checked, buying into the upswing and selling into the down swing generally loses money every time.
On the flip side, folks are getting into gold, because interest rates are so low that the only place is for rates to go up. But, the FED is committed to keep interest rates low, which allows for inflation to get a little bit out of control. If the threat of heavy inflation looms, the interest rates will have to be hiked to control inflation. This hedge against inflation is all well and good in a normal market or better phrased the market of the past, when everyone was using credit like crazy and living beyond their means. This is no longer the case.
The reason being is that spending is now being curbed by both the individual and the corporations. Unemployment is high and will remain high until 10% is considered the new 5% as far as unemployment is considered. People are saving and not spending. What is occurring is a massive correction to make up for all the overspending that has gone on for the past 30 years. What this is going to or rather has created is a long period of deflation. The deflation is still in its early stages, but eventually the price of gold will bust under the deflationary pressures.
I still believe gold is a solid long term investment, but do you want to buy in now or at a lower price later? Wait for deflation to chip away at the price of gold, but also be weary that this not a fool proof investment. Recent news showed McDonalds raised $30 million to expand its Asian venture which was financed through debt backed by the yuan. If this is the beginning of a trend for companies to finance operations through debt backed by currency other than the US Dollar, then the US Dollar is in for a beating. Should you start shorting the US Dollar against the yuan? I’m not sure about that just yet, but unless we start getting our act together and reducing our debt, then we could find the US Dollar going the way of the Mexican Peso. Better get your wheel barrow out for a trip to the grocery store!
Wednesday, August 25, 2010
DOW 8800....
As the DOW sinks below 10K for the first time in a while, I’d like to remind everyone that I have been talking about how overvalued the market is since the beginning of the year. Now that we’ve had about a 5% pull back over past couple of weeks, investors are trying to figure out what the next move should be. Tell you what, if you are investing in mutual funds exclusively, you might want to head for a stable value fund. I would not recommend heading to a bond fund at this point, since interest rates are nearly zero and have nowhere to go but up. When that happens, it will cause bond prices to fall. If you do not want a stable value fund to keep your principal safe before the drop in the fourth quarter, then go to an international fund that has holdings in Latin America (Mexico and Brazil especially).
If you are not investing in mutual funds exclusively, then there still good individual stock buys. The energy sector is down and could continue to fall, so be weary of selecting trades there and keep an eye on it for long plays. Homebuilders are still down and have been down for a long time and will still be down for a long time. This is an industry that you can build a large position in over time.
Since this is a global economy, diversification is paramount. With the market ready to take a tumble, getting a good mix of international, domestic and emerging markets is the key to weather the storm. Reallocating money to a stable value/money market fund, even with low interest rates, might be the best bet in the short term as we see how the market will react. I recommend checking out the beaten up sectors to see if you can find good companies who have been beat up simply because of the business they are in. Once the drop happens in about 6-8 weeks, we’ll see who has the testicular fortitude to dive into the market during this time. Be prepared to take early paper losses and don’t be too quick to bail out. Good luck.
If you are not investing in mutual funds exclusively, then there still good individual stock buys. The energy sector is down and could continue to fall, so be weary of selecting trades there and keep an eye on it for long plays. Homebuilders are still down and have been down for a long time and will still be down for a long time. This is an industry that you can build a large position in over time.
Since this is a global economy, diversification is paramount. With the market ready to take a tumble, getting a good mix of international, domestic and emerging markets is the key to weather the storm. Reallocating money to a stable value/money market fund, even with low interest rates, might be the best bet in the short term as we see how the market will react. I recommend checking out the beaten up sectors to see if you can find good companies who have been beat up simply because of the business they are in. Once the drop happens in about 6-8 weeks, we’ll see who has the testicular fortitude to dive into the market during this time. Be prepared to take early paper losses and don’t be too quick to bail out. Good luck.
Monday, June 28, 2010
BP and Foreign Oil
In light of the last two months of coverage of the BP oil spill, I have decided to bring into the spotlight some misconceptions about BP and foreign oil. I have heard several comments on TV and read several comments in the paper about the BP disaster. Mainly, the comments revolve around how we should tap our own oil in order to break free from our dependence on foreign oil. It is true that we need to break free from our dependence on foreign oil, but many of us believe that tapping our oil is the answer. First, our oil is being tapped as we all saw with BP drilling in the Gulf of Mexico. Second, corporations are in business to maximize revenues. US oil is being harvested and sold to highest bidder. Much of our oil is being sold abroad. The corporations have a duty to the shareholders to increase the value of their shares, so selling American oil to Americans is not always in the best interest of shareholders.
The way to get off of foreign dependency on oil is to get off oil and find an alternative fuel. If that is not accomplished, then we will continue to depend on foreign countries (as well as foreign and domestic) companies to provide it. I'm not a fan of government control, but the only way to utilize American oil is to create a government owned company that drills and harvests the oil.
As far as BP goes, the amount of money it is going to cost to clean up the spill varies greatly depending on a number of factors. Regardless, the financial hit the company will take and the subsequent destruction of their share price makes BP an attractive take over target. The company does have a large cash hoard, but a huge amount of that is tied up to settle lawsuits filed by residents affected by the spill. If you have BP stock, hold it. If you do not, then refrain from buying until more reliable information about the cost to fix this mess. However, even if BP can come out of this still intact, the damage to the company's reputation may be too much to overcome.
The way to get off of foreign dependency on oil is to get off oil and find an alternative fuel. If that is not accomplished, then we will continue to depend on foreign countries (as well as foreign and domestic) companies to provide it. I'm not a fan of government control, but the only way to utilize American oil is to create a government owned company that drills and harvests the oil.
As far as BP goes, the amount of money it is going to cost to clean up the spill varies greatly depending on a number of factors. Regardless, the financial hit the company will take and the subsequent destruction of their share price makes BP an attractive take over target. The company does have a large cash hoard, but a huge amount of that is tied up to settle lawsuits filed by residents affected by the spill. If you have BP stock, hold it. If you do not, then refrain from buying until more reliable information about the cost to fix this mess. However, even if BP can come out of this still intact, the damage to the company's reputation may be too much to overcome.
Thursday, June 24, 2010
Adjusting To The New Market Rhythm!
Since the market has appeared to stablize (somewhat), how can we capitalize on that? Well, if your only investment vehicle deals with mutual funds, bond funds, etc., the best thing you can do in the short term is to put your contributions into a stable value fund and wait for the housing market to take another turn for the worst, interest rates to increase and the market (as a whole) to react accordingly (meaning to drop). Once this happens, you can gradually redistribute the contributions from the stable value fund to other funds offered by your deferred compensation plan. Basically, it is a manual rebalancing of your proceeds. However, it is also a form of market timing, which is carries more risk. In order to mitigate the risk and keep you from reallocating too soon or too late, you should set some rules. An example of rule setting is saying I want to have about 30% large cap, 30% bonds, 30% stable value and 10% international (a.k.a global, foreign). If you set rules, you more closely fit the rebalancing type of strategy rather than market timer. Depending on the vendor servicing your deferred compenstation, you can set it up to periodically rebalance automatically. This will completely eliminate the need to do it manually and you will avoid trying to time the market. Just a reminder, when the interest rates are hiked up, the bond fund prices will go down and will offer up a buying opportunity.
If you have an brokerage account or an IRA that allows you to invest in individual stocks, then you can still buy stocks at a bargain price, even if you think the market is overvalued. Natural gas and oil stocks are pretty beat up currently and once the economy recovers, they should start to recoup the losses they have sustained over the past six months. Again, if you are looking to trade, rather than invest, this is not going to help you make a quick buck. These are plays for the long term. After more than a year since my last trade, I have picked up Petrohawk (HK), Transocean (RIG) and Duke Energy (DUK). Oil prices are low and should increase. Petrohawk is a small cap company that has solid financials and a lot of room to grow. Transocean has been beated to death lately because of the BP oil spill. Transocean is the vendor hired to perform the deep sea drilling. This company is fantastic and I believe their stock price is overly depressed. I am not certain when it will have an upswing, but as long as I think it is low, I will continue to buy in at realtively small amounts. Duke Energy has been around for about a hundred years. They are a utility stock that has its hands in natural gas and electricity. It supplies energy globally, which should help its stock price increase as the global economy recovers, not just the US economy. Duke also has an attractive dividend yield about close to six percent, which is mainly due to the low stock price. Lastly, Duke just announced a dividend increase, which always is good news for the future outlook by management.
Even though I think the overall market is overvalued, I have found enough good buys to keep me 85% invested in stocks with 15% of my portfolio in cash (that will increase as I keep adding cash). I typically like to keep anywhere from 25% during bull markets and 40% during bear markets. That is my personal preference as I think you can make money in any market, if you search hard enough.
Please keep in mind that the stocks I have recently purchased are not indicators that you should also purchase. Everyone has a different financial situation, investment horizon and goals. These stocks or any individual stock may not fall in line with your goals and risk tolerance. If you are up to trying something risky, make sure you do your research first and only invest as much money as you can easily afford to lose.
If you have an brokerage account or an IRA that allows you to invest in individual stocks, then you can still buy stocks at a bargain price, even if you think the market is overvalued. Natural gas and oil stocks are pretty beat up currently and once the economy recovers, they should start to recoup the losses they have sustained over the past six months. Again, if you are looking to trade, rather than invest, this is not going to help you make a quick buck. These are plays for the long term. After more than a year since my last trade, I have picked up Petrohawk (HK), Transocean (RIG) and Duke Energy (DUK). Oil prices are low and should increase. Petrohawk is a small cap company that has solid financials and a lot of room to grow. Transocean has been beated to death lately because of the BP oil spill. Transocean is the vendor hired to perform the deep sea drilling. This company is fantastic and I believe their stock price is overly depressed. I am not certain when it will have an upswing, but as long as I think it is low, I will continue to buy in at realtively small amounts. Duke Energy has been around for about a hundred years. They are a utility stock that has its hands in natural gas and electricity. It supplies energy globally, which should help its stock price increase as the global economy recovers, not just the US economy. Duke also has an attractive dividend yield about close to six percent, which is mainly due to the low stock price. Lastly, Duke just announced a dividend increase, which always is good news for the future outlook by management.
Even though I think the overall market is overvalued, I have found enough good buys to keep me 85% invested in stocks with 15% of my portfolio in cash (that will increase as I keep adding cash). I typically like to keep anywhere from 25% during bull markets and 40% during bear markets. That is my personal preference as I think you can make money in any market, if you search hard enough.
Please keep in mind that the stocks I have recently purchased are not indicators that you should also purchase. Everyone has a different financial situation, investment horizon and goals. These stocks or any individual stock may not fall in line with your goals and risk tolerance. If you are up to trying something risky, make sure you do your research first and only invest as much money as you can easily afford to lose.
Friday, May 21, 2010
Wall Street Reform.....Not Really.
Before anyone gets all warm and fuzzy feelings about "Wall Street Reform", please read what the bill contains. To sum it up in a sentence, the bill attempts to increase the regulation of Wall Street. As with every bill that comes out, it fails to address the real cause(s) of the problem it is attempting to fix. Basically, it is a dog and pony show of BS. The main causes of the problems we are facing today is that Wall Street firms are allowed to contribute money to political campaigns, which obviously creates a conflict of interest. Also, Bill Clinton engineered the repealing of the Glass-Steagal Act of 1933, which allowed depository banks to own financial institutions. These two factors have allowed things to get out of hand. Now, the politicians are trying to take advantage of the volatile situation by putting the squeeze on Wall Street in order to cash in by extending Washington's reach, which is never the answer. The reason why this will not work is because the guys on Wall Street are far and away much smarter than the guys in
Washington.
Until the structure and not the regulation of Wall Street changes, things will not get any better. Since that will not happen any time soon, the best you can do is pay down your debts and build up your savings. Keep a healthy amount of money in reserve to take advantage of the dips in the market. Track your holdings and not the broader market, even though the swings in the broader market will affect your individual holdings in the short-term, they shouldn't affect them to the same degree in the long-term. If you own solid companies or mutual funds that have solid management, you should profit in the long-term (15+ years).
Finally, stop listening to the media. The media reports on events that have already occurred, which does not help investors. Currently, they are talking about the market "heading for a correction" after the DOW has come down 10%. I've been calling for the correction for last couple of months. The market is still about 10% overvalued at this point, but it might be a good idea to look at the energy sector (especially oil) as it has gotten beaten up a bit and it could be a good idea to start buying into the dip. If the DOW dips below 10K, we could see a big move through 9500. I'm still holding that the DOW should be around 8800 to be fairly priced, but as we know, the market is never fairly priced. Good luck and keep researching your holdings and tune out the press.
Washington.
Until the structure and not the regulation of Wall Street changes, things will not get any better. Since that will not happen any time soon, the best you can do is pay down your debts and build up your savings. Keep a healthy amount of money in reserve to take advantage of the dips in the market. Track your holdings and not the broader market, even though the swings in the broader market will affect your individual holdings in the short-term, they shouldn't affect them to the same degree in the long-term. If you own solid companies or mutual funds that have solid management, you should profit in the long-term (15+ years).
Finally, stop listening to the media. The media reports on events that have already occurred, which does not help investors. Currently, they are talking about the market "heading for a correction" after the DOW has come down 10%. I've been calling for the correction for last couple of months. The market is still about 10% overvalued at this point, but it might be a good idea to look at the energy sector (especially oil) as it has gotten beaten up a bit and it could be a good idea to start buying into the dip. If the DOW dips below 10K, we could see a big move through 9500. I'm still holding that the DOW should be around 8800 to be fairly priced, but as we know, the market is never fairly priced. Good luck and keep researching your holdings and tune out the press.
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