Danger Will Robinson, Danger!

-Earnings season ending, risk season begins

Written by Keith Springer
August 18, 2011 

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Since the recovery began, I have recognized a trend in the stock market where the market rises during earnings season, which have been stellar, and falls once it’s over. The concept is that earnings have been better than expected in every quarter so investors get excited, but when the announcements are over there is no more ‘good enough’ news left to push stocks higher. It’s certainly not one of the major market indicators, as I have heard absolutely nobody else talk about it, which is a good thing because one thing is clear on Wall Street – If it’s obvious, it’s obviously wrong!

To make the situation worse this time around, the economic data is getting worse… fast! Although, it’s no surprise here, as the government’s stimulus programs not only cannot make progress but it can’t even keep up with the massive headwinds our economy faces. The QE1 stimulus ended in May 2010 with economic growth bottoming around August/September 2010, 4 or 5 months later. QE2 is now dissipating, especially after the Japan and oil shocks. If the Fed does stimulate again, then it would wear off by next spring or summer. Keep in mind that although more stimulus would help the stock market, there is no way it will be enough to offset the continued natural decline in Baby Boomer spending into 2012 and beyond as the overwhelming majority pass the major landmark in aging of 50 years old in late 2011.

Very simply, we need more spenders, as an economy needs people to spend money to grow. Demographics tell us that people overwhelming spend more in their 30’s and 40’s. Unfortunately, we as well as most of the developed world, have a rapidly aging population well past their peak spending years. Add to that a massively over-leveraged/over-indebted consumer and you’ve got a headwind… a Gail force perfect storm kind of wind. This is what Facing Goliath: How to Triumph in the Dangerous Market Ahead is all about, so read it carefully and be prepared. We are at the point that John Mauldin calls “The End Game” and which HS Dent calls “checkmated”.

Up until now, the Federal Reserve’s stimulus programs, QE1, QE2 and QE-Mini Me have kept the ship afloat. I have long thought that Bernanke would announce a new such plan next week in Jackson Hole as he did last year. However, the recent dissention of four Fed governors (the most ever) and the announcement by two of them, Plosser and Fisher, who said the central bank’s may be creating a misperception that its goal is to boost stocks, has me and most likely the market worried. Although, I do think we will get it eventually, but it could get ugly until we do.

Investor Strategy:

These are scary times, however, you can’t just sit in cash earning nothing on your money either. Inflation and taxes will eat that away. The key is to get the best returns with the least risk possible. The sweet spot continues to be with dividend stocks and corporate bonds. Although corporate bonds have been going down, as hedge funds are forced to liquidate bonds to meet margin calls to cover the money they’re losing on stocks, bonds should be held and added to. Even if their prices drop along with the stock market. I know it’s no fun to see them down in your account, but at current prices they represent tremendous value and offer a very good possibility for appreciation in addition to the interest payments.  After all, even if they don’t appreciate, all you have to do is wait a couple of years until maturity. Plus, they are always very liquid.

Regards -Keith Springer

P.S. If you have CD's coming due, cash earning little or other accounts that are underperforming, let me know. There are some great CD alternatives and I can still get yields over 8%.