Not so fast says the Fed as the FOMC released the minutes this week from its last meeting. Now why would the Fed want to throw cold water on a stock market recovery that would eventually be followed by the overall economy?
This is a simple one. It's politics. If the economy recovered too rapidly, the power brokers behind the new President would have a tough time explaining how things got so good so fast. In fact, to ensure Obama gets full credit for the recovery, things may have to get bad again to guarantee he gets full credit.
The jury is still out, but we may be looking at a scenario where the market works off its over bought condition, and then resumes its uptrend into the summer. If the S&P can break briefly above the 1000 mark, I would expect this would be a great time to sell and take profits.
There is still a very high degree of skepticism in the markets, enough so to keep many on the sidelines and very frustrated. If the markets never break significantly lower, sideline cash will pile into the market in fear of missing a "new bull", and greater fears of under-performing the indexes. This piling on effect may be the catalyst to drive the S&P above 1000, at which time the small investor will join in just at the wrong time. This is when we will probably pull the plug and head for the sidelines.
After the Summer Rally
After the summer rally we will sit back and wait. After a meaningful sell-off, we will want to re-enter the market to position ourselves for the manufactured bull period that should begin in 2010.
The 2010-2011 bull market has to be viewed as a major selling opportunity for investors. You really don't want to be invested in the stock market when massive inflation begins to hit the economy. Higher interest rates will eventually lead to another collapse in the real estate market, followed by higher oil and commodity prices.
The key to investing success during periods of high inflation is to have enough cash to take advantage of unique opportunities. Here is what I would do to protect yourself, and eventually profit.
1) Right Now/ 2009- Sell enough stock to maintain a comfortable cash position. Look for a 7-10% correction, with the possibility of a sideways correction. There is an outside chance of a retest of the March 2009 lows, but only if unemployment rate shoots into double digits. Some are already projecting the unemployment rate could hit 14% by year end.
2) Fall of 2009: Buy into the dip/retest, and ride the market up into the 2010-2011 rally. Favorite sectors include Oil, Commodities- Raw Materials, Precious Metals, and Inverse interest rate and U.S. Dollar ETF's.
Investors have waited before piling in to these sectors. The big run up has not proven itself yet, so momentum traders are waiting for a confirmed uptrend.
3) In 2010- 2011, while other investors are getting increasingly optimistic over the new bull market, sell into the rally. Get your portfolio positioned to a point where you are "under invested" in stocks and bonds, and over invested in money markets, CD's, and cash.
4) In 2012, you may have to be patient and wait. Invest in short term CD's until the news gets bad- IE- higher inflation, higher interest rates, and a tanking stock market.
5) In 2013, buy bonds across the board locking in higher yields. Ladder your maturities from 1-30 years out. Hold these bonds through 2014, and only sell if you can lock in gains of 20% or more.
6) By 2014, take any profits/ proceeds from selling bonds, and redeploy the cash back into the stock market. Invest in interest sensitive stocks first, with the highest yields and best quality.
Consider buying high quality Utilities, REITs, and Banks.
7) By 2015, you should have a 50/50 mix of interest sensitive stocks and bonds. Continue selling bonds, but retirees, or those approaching retirement should keep the proper allocation of bonds for their "golden years".
8) In 2016, consumers/voters will be looking for another change. The economic environment will be similar to 1988-89 where investors will be reluctant to giving up bond yields for stocks. This will be the exact reason you should begin looking for a renewed bull market that will last 10 years.
9) 2016-2026, IMO, will be the next great wealth building opportunity in the stock market. Until then, it is a traders market. Long term investors may have to get use to buying and selling volatility until a sustained uptrend presents itself.
Here are our Top 10 ETF's for the week of May 26th:
1) DBA: Powershares DB Agriculture Fund
2) EWZ: Brazil Index
3) DBE: PowerShares DB Energy
4) USO: U.S. Oil Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) PGJ: PS Golden Dragon China Fund
8) SSO: ProShares Ultra S&P500 Trust
9) CASH
10) CASH
Here are our Top 10 Fidelity Sector Funds for May 2009
1) FSPTX: Technology Portfolio
2) FSRBX: Banking
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSCPX: Consumer Discretionary
6) FSCSX: Computers & Software
7) FSCHX: Chemicals
8) FNARX: Natural Resources
9) FSENX: Energy
10) CASH
For the Week:
Last week, investors began to realize that the future will bring a weaker dollar and more commodity inflation. To prove that inflation is on the rise, gold rallied above $950 and oil prices rose above $60 a barrel.
As part of the recent stress test requirements, some financial companies diluted their shares by issuing more stock. Bank of America (BAC) issued 1.25 billion shares of stock raising $13.47 billion. BAC was told it had to raise $34 billion, and will sell off some divisions and subsidiaries to make up the difference.
I happen to like BAC, and I think the shares will be substantially higher once they payback the TARP money.
The dollar declined to the lowest level versus the euro since January, and as a result oil and commodity prices have headed higher. The Fed has been holding interest rates down by printing more dollars to buy our own debt. For the time being, consumer price inflation is being hidden, but there is no doubt that food and energy costs are now rising due to the fact that the U.S. dollar is getting more worthless by the day.
This move by the Fed has the Chinese government very upset. In a recent meeting with officials from the Chinese government, Richard Fisher, president of the Dallas Federal Reserve Bank, said;
"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,"
Last week, Standard & Poor's lowered its outlook on Britain to "negative" from "stable," and may eventually cut the nation's top AAA rating. Since the U.S. has a budget deficit that is higher than Britain's, the U.S. is at risk of losing its AAA credit rating as well.
The U.S. dollar has further to fall as the idiots in Washington try to spend the country's way out of a recession and banking crisis. All this spending will add to the $11.3 trillion debt as next years budget deficit of $2 trillion is four times larger than any previous deficit.
After watching the stupid moves here in the U.S., nations like China are no longer supporting the dollar. China is tired of watching their trade surpluses deteriorate as the U.S. dollar declines. At this stage of the game, China is more interested in buying copper and other commodities rather than U.S. debt.
-Gold
-The U.S. Dollar
Our current asset allocation is as follows;
95% Equities: (Normally 95%) Aggressive
80% Equities: (Normally 80%) Moderately Aggressive
60% Equities: (Normally 60%) Moderate
40% Equities: (Normally 40%) Moderately Conservative
20% Equities: (Normally 20%) Conservative
