Insights & Advice

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The Same Old Song

When markets behave in this fashion—trend less, low volume, meandering—it is hard to come up with something intelligent to write. Sure there was a bit of excitement here and there like the move in energy on Thursday (up 4.9%). And yes, other commodities followed suit but much of that was given back on Friday. So, you might ask, what’s the point? There is no point or money to be made unless you are good enough to day trade those short, violent moves. For us little guys the better part of valor is to move to the sidelines.

Lest we forget, I should mention this week’s array of record breaking bad news, Here’s a smattering of statistics: the Conference Board’s index of leading economic indicators had its largest drop so far this year, the Producer Price Index, which measures wholesale prices, increased 9.8% year over year (readers may recall my forecast back in February that the PPI would hit 9.7% by summer). Overseas, the news is no better.

Britain’s economic outlook is weakening. The prospects for European Economies in general are bleak. Over in Asia, Japan posted its worse economic quarter in several years and is also slipping into recession. Even mighty China is faltering. This week their government proposed a stimulus package to jump start some of their own sputtering sectors.

And no column would be complete without an update of mortgage giants Freddie and Fannie Mae, this year’s dastardly duo. Their shares were cut in half again as they went hat in hand begging investors for fresh capital. So far there is nary a buyer to be found for this new stock offering as investors bet that the government would ultimately have to bail them out. Given their importance to the economy however, I would not be surprised if some white knights from the private sector appeared from the wings prompted and encourage by none other than the U.S. Treasury Department.

Now granted in these last dog days of summer markets are typically given to pessimism and down –in- the- mouth forecasts but even Ben Bernanke, the Chairman of the Federal Reserve Bank, was not much help in dispelling the market’s gloom. He testified before the House Financial Services Committee on Friday and basically reiterated what every American already knows. The financial crisis “has not yet subsided” while the economy is slowing and unemployment is rising as a result. Inflation, he admitted, was a problem but he expects the inflation rate to moderate over the next year.

Reading between the lines, Bernanke, in my opinion, is saying the economy is slowing so quickly that the demand for commodities (and therefore prices) will drop as a result. That doesn’t give me much hope for a strong move in the stock markets anytime soon. It could mean that we may be in for a no growth economy into 2009 and at best a flat stock market this fall. Given the recent past, however, flat might be a good thing.

If so, the best way to ride out this period is in interest and dividend- bearing securities with a small exposure to the stock markets. Putting your cash in money market funds won’t help because most funds are only paying 3.5%. Certificates of Deposits (CDs) aren’t paying much more unless they are long-dated. Even then, most CDs of this kind are paying less than the inflation rate. A properly structured portfolio of debt and income could generate returns of 6-7% which isn’t bad given the alternative of either no-growth or continuous losses in the stock markets.

As for the market’s performance this week, the Dow, NASDAQ and S&P 500 settled on Friday less than a percent from where they were last Friday. Volume petered out as the week progressed. I’m still looking for a re-test of the lows so don’t chase the markets here. As for oil, gold and other commodities, they have had a nice little bounce but have not bottomed yet so don’t get suckered into chasing them either. Stay defensive and on the sidelines. Your patience shall be rewarded.

Posted in A Few Dollars More, At the Market