Market Strategy for an Uncertain Economy

Dear Fellow Investor,

On May 1st the big question for all of us will be “what happens now?” - for on that date the President’s traditional 100 day honeymoon will end. (At this writing, it appears that it might be ending a bit sooner.)

So far, the markets have treated our new leader with due respect: on Jan 20, the Dow closed at 7949. Since then it has traded intraday between 8446 and 7796, always struggling manfully to stay above 8,000. On February 5, it closed at 8063.

How much of this support at the 8,000 level can be attributed to Treasury’s PPT (Plunge Protection Team), that clandestine group which more than occasionally props up the market with late-in-the-day futures trading, is anyone’s guess since they operate with more stealth than the CIA. But no matter what level they choose to support, their game cannot go on forever.

Eventually, investors worldwide will come to realize that the U.S has de-forested itself to the point that all these new paper dollars with Tim’s name on them are worth about as much as our President’s promise to “change the way Washington works”.

Obama’s eloquence is magnificent, his delivery superb. He is an exceedingly skilled orator with a gift for delivering hope. But when the honeymoon ends, the public - and the world - will begin looking for tangible results. 1980’s “Where is the beef?” will become 2009’s “Where is the change?”

Already our new POTUS has been a bit of a disappointment:

• waffled on his promise to exclude lobbyists from appointments linked to their previous connections;
• gave us a Treasury Secretary blemished with tax evasion (“just an honest 5 digit mistake”);
• supported (“absolutely”) Tom Daschle, another DC politician with a major 6 digit tax evasion problem;
• has shown little strength or inclination to control Pelosi and Reid;
• has forgotten his pledge to scan spending bills line by line.

Now Congress has the bit in its teeth. Obama is looking more like a figurehead than a leader, and the minority Republicans have few, if any, trump cards to play.

Meanwhile, the world markets continue their downward slide, along with interest rates; and confidence flows to gold and gold-backed currencies, such as the Swiss Franc. What is an investor to do?

A few suggestions might be in order. First, keep in mind the big picture: U.S true national debt is more on the order of $56 trillion, not the widely reported $10 trillion. ( “2008 Financial report of the U.S. Govt ” ). Current Fed Funds rate is in a range of 0.25% to 0.00% - how long before we see negative interest, where the government pays us to borrow? And on Thursday night we read that the Bank of England has set its interest rate to the lowest it has been in some 300 years. Sovereign bonds might appear safe, but their redemption in a non-sanforized currency is a risk prudent investors will evade.

Thus the flight to gold which began in October, 2007

click to enlarge

Given this picture, astute investors will have diversified enough to have a percentage of their portfolio anchored in metal, not paper.

Another factor to consider is what disasters will befall our economy as Congress cranks out their stimulus package, replete with goodies for all their long-time friends and supporters. The TARP program seems to have been lost as a learning experience: something near a trillion is coming out the spigots.

(That is 12 zeros, people)

It would be far better for the government to follow up on a suggestion made in jest by Helicopter Ben Bernanke: send each of us a check for $10,000. Some of it will find its way back into the banks; and taxpayers, not politicians, will be doing the spending. But let’s get real - that is not going to happen.

Instead, the future holds more uncertainty than this writer can ever recall, mostly because we cannot control the economics and politics beyond our shores.

Thus, some degree of safety can be found in commodities that all of us depend on daily, the first being oil. Yes, it is only $40 bbl right now. But sooner or later (we suspect sooner) Tim’s paper will seen for what it is, and $100 bbl will again be in the news.

Obviously, the volatility of OIL requires careful study to find the right Entry Zone; but it also offers swing-traders opportunities to add to their principal.

Investors seeking greater diversification should add Agriculture to the above categories. RJI, GCC, and GSC all deserve consideration.

Lastly, we suggest SDS, an ETF that offers significant trading opportunities as well as a supportive anchor to windward when purchased in smaller quantities each time it reaches its Entry Zone.

This economic downturn is unlikely to be either as short as we would like it, or as short as our politicians promise. Problems on the horizon are almost beyond comprehension. Item in point: U.S. and European bank losses are estimated at $2.2 trillion. Thus, we suggest re-positioning of your portfolios to include some of the suggestions above, making timely purchases as prices reach the Entry Zones.

Find more commodity ETF’s here.

Disclosure: Long SDS, GLD

Comments

[mc2406:]

Obama is showing that he is just another tax and spend professional politican and the Congress obviously has no clue as to how to deal with the current economic problems. How many times do we have to hear them saying that the package they are working isn't all that good, but "we've got to do something". Yeah, like look out for themselves and their special interests and give away the farm to the people who caused this mess in the first place (those who won't take responsibility for their own actions.)

Feb 08 10:56 AM