SeriousBull

Investing in Uncertain times.

Tags: Economy + finance + investing + Markets + money + wealth

It’s spring and optimism is in the air. The Fed is beginning to show proactive policy tendencies.  Bear Stearn’s shareholders are expected to get $10 a share instead of $2, and commodities are declining in price.  Soon first quarter earnings results will be out and results are, in our view, should not be expected to be terrible–

especially among exporters benefiting from the favorable dollar.

As investors, it is important to adhere to a couple of important guidelines for investing in turbulent markets. First, the economy is like a jet plan making a turn in the sky, not like a piper cub. That is, the economy changes gradually over time and in this case the current credit crisis is exacting a heavy multi-period toll on profitability and broad business outlook. As the economy slows, jobs are being lost. Business activity will slow more as companies guide their earnings lower despite having their earnings meet estimates.

Strong benefactors will be Consumer Staples (food and beverage), Advertising, Oil & Gas, Trucking, Rail, Technology, Farm Machinery, Chemicals, Export oriented Durables as well as Consumer discretionary price cost leaders and specialty retail. Those industries with poorer outlook include Autos, Banking, Insurance, Brokers, Healthcare, Consumer Durables, Household Furnishings, particularly furniture, Leisure and Real Estate.  Foreign travel to the US will help branded Retailers, Airlines, and Theme Parks but not enough to make them attractive until their prices fall further.

Secondly, investors must focus on both quality and yield. They must stay diversified and focus more on the safety of their savings than on return on investment. Bonds are ordinarily the strategic alternative to Stocks during a period of contraction, but inflation could easily be ignited causing the Fed to reverse course and raise interest rates.  Moreover with interest rates as low as they now are the US will face on-going pressure to finance its growing deficit at these crisis rates.  If international investors perceive that things are changing or that they can earn better, safer returns elsewhere they will abandon the US Treasury to go after it. This will require the Fed to raise rates to continue to attract these investors into the Treasuries.  So third, what this means to investors is that there is great risk that they could lose on their bonds holdings should interest rates rise.  Investors must manage this risk by staying short term in their maturities while keeping an open mind toward safety and real return. Companies like Coca Cola, GE, or P&G may very well  be better alternatives than Treasuries as the total expected appreciation plus dividend yield may outpace the actual return of all guaranteed investments–certainly over the long term this has been true historically.

Finally remember that much of the news is about trading not investing. Don’t confuse what kind of investor you are. Don’t get caught up in hearing that Gold is the best place to safeguard your money and invest it all in Gold or Precious Metals. Moderation is the key. Having a strategy and following it religiously is best. If you don’t feel comfortable making decisions on your own seek out help. But remember, it’s your money and basic principles of finance never change. Be proactive and don’t let yourself suffer undue losses. We are in a turbulent market because of the great uncertainty and losses can come suddenly.  If you have done your homework and have time on your side, you can take advantage of opportunities provided you are patient. Just don’t let yourself get caught up in the emotion of it all. Take profits when prices are excessive and cut your losses. Never forget that loosing too much money is a debilitating event and one which may require too much time and too much re-appreciation to ever bail you out.

March 24, 2008 - Markets