Here's What World Markets Are Telling Income Investors to Do

A Mid-Month Review of What Forex, Commodities, and World Stock Indices are telling high dividend stock investors:

It's the Economy, Stupid

This was the famous summary of Bill Clinton's presidential campaign theme that helped him seize the White House from George Bush Senior in 1992. Then too, the U.S. economy was suffering a decline that started with…surprise!!... irresponsible bank lending and a resulting Savings & Loan banking crisis that threatened the health of even the largest U.S. banks.

Sadly, the U.S. Government did not learn from this painful bit of recent history that the profit motive and banking don't always mix, at least not for the common good.

Because we didn’t learn from history, we were indeed destined to repeat it, and we have.

Since June began, doubts about the strength (or existence) of the world economic recovery has been the underlying cause of events in world stock indices, commodities, and currencies.

A. The Big Question

Is the assumption of ongoing recovery, in fact true? Let's look at the following international asset classes: Forex, Commodities, and Stocks Indexes.

Most instruments have generally followed a similar pattern (timing has varied a bit) over the past two weeks:

1. Continued their existing rally into June

2. Brief multi day reversal

3. Settle into horizontal trading range in the past days

Forex

The same recent pessimism and decline in commodities has helped demand for safer currencies like the USD and Yen at the expense of the commodity currencies like the AUD, CAD, and also of higher yielding currencies like the NZD.

Virtually all major currency pairs have spent the past week or more in a trading range.

The USD got extra help over the past weeks from a chorus of support from both the U.S government and its creditors. These creditors have alternately expressed both frustration at the recently declining value of their dollar holdings, and support for both the dollar's status as the world's reserve currency and for continued purchase of U.S. Treasury bonds.

The common theme among their conflicting remarks: sheer self interest. After all, these same creditors need to protect both their USD denominated foreign currency reserves, AND the U.S. consumer's continued demand for imports from these creditor countries like Japan, China, Brazil, and Russia.

Playing its part, the U.S. has added its own comments of support for the dollar. After U.S. Treasury Secretary Geithner met with the Chinese in early June, Fed Chairmen Bernanke declared the U.S. needed to reduce it's money printing and it's debt. How do you say "amen" in Chinese? Assorted Asian officials also reiterated willingness to buy Treasury bonds even if they lost their AAA rating.

Commodities

Crude oil has followed the same pattern as pessimism about growth and oil demand reversed, stopped and briefly reversed a roughly 100% climb since January from around $36/barrel to about $72/barrel. It has been trading between $68 to $72 a barrel. Here too, there are opportunities for those able to establish positions at reliable support or resistance.

Gold has ceased its multi-month rally and has been trading recently between $930 and $960 as pessimism about growth has eased inflation concerns, despite exploding supplies of virtually all currency groups. The consensus seems to be that as long as world economies continue to contract and/or fail to grow, inflation is not a near term threat despite new currency pumping out via high pressure hoses throughout the world. When job growth returns and consumers are able to spend, then watch gold fly.

World Stock Markets

Since early June world stock markets mostly stopped rising, traded in range, have recently pulled back and are now settled into trading ranges as they await further signs that there is enough real economic improvement coming within the next year to justify their 20-30% climb since early March. These same doubts are reflected in the below asset classes.

The coming FOMC meeting may provide key hints about the US, as may the coming second quarter bank earnings reports. Remember, it was trouble in the banking sector that really ignited both the current crisis and the March rally.

Stocks are currently in a mostly horizontal trading range, that may provide lucrative opportunities for those able to catch moves at solid support or resistance levels.

So What do Income Investors Do?

It depends how you prefer to invest. To paraphrase King Solomon:

“Everything has its season, and there is a time for everything under the heaven”

A. Short Term Trader’s Delight

If you like to trade in and out of stocks, forex, or commodities, this is your time. The range-bound nature of these markets will provide opportunities galore for those adept at picking reliable support and resistance levels, and who are able to catch the desired instruments at these levels. Best of all, these levels allow the smart, disciplined traders/investors uniquely low risk, high reward situations. Well defined support and resistance levels allow traders to know quickly if their theory about support or resistance is correct, and thus to place stop loss orders a short distance beyond these levels and get out with a small loss. The markets remain skittish and news driven, hence prone to unpredictable moves beyond near term support or resistance levels.

B. Long Term Buy and Hold High Dividend Stock Investors Stand Aside & Prepare

If you prefer to buy and hold high dividend stocks, stand aside for now, or limit purchases to partial positions. Place orders for stocks we've recommended around March lows.

As detailed in earlier articles, there is too much potential bad news waiting to happen, especially considering stocks have risen 20-30% since March in the absence of any signs of anything close to actual economic growth, never mind 20% or more growth.

In case you forgot, remember just a few minor details:

Worries about the financial system started this crisis, signs of bank profits in Q1 of 2009 started the March rally.

There are serious doubts that these were sustainable. Q2 disappointments will hammer stocks and commodities as pessimism returns in force.

Even if the banks survive Q2, there remains, still growing unemployment (already around 9.2%, well beyond the 8.9% "worst case" scenarios of the recent stress tests), this will:

1. further erode consumer spending to sustain both residential and commercial debt portfolios.

2. coming residential mortgage rate resets (read: massive increases) will further accelerate the deterioration of bank residential mortgages.

Let's not even get into consumer credit card debt.

Meanwhile, take note of March lows in stocks we've recommended. These are buy points.

While energy and precious metals get hammered as pessimism reduces demand for energy and the inflation fears that feed gold demand, take positions in related income stocks.

Disclosure: The author has positions in the above recommendations.

Comments

[SageNot:]

Sorry Cliff, but you're missing the point badly. Until these banks begin to earn money w/o the public Tarp aid, any gains in net income w/b short lived. These banks caused millions to lose billions & yet they are considered too big to fail, what B.S.!

This rally you've invested heavily in is a Bear trap, millions more home, businesses & individuals will go belly-up w/o doubt. Once our many creditors decide to really dump their dollar holdings, inflation will really take off, & what then happens to this bear rally, if you know Cliff?

Jun 21 08:51 AM

[ksmithdc:]

Interesting read, thanks.

Jun 21 09:54 AM

[axelrod608:]

I understand that there are many investing/trading strategies, and what you've outlined here is a cautious one. Personally, I agree since my objective is capital preservation way more important than potential profit. No market has ever gone so far so fast as the current market since March. So it is logical to expect a turndown market correction in the near future.

Dividend investors clearly realize that it takes years of dividends to recoup capital losses. Your advice to take partial positions is good. I would add the requirement of tight trailing stops to defend against losses if the market heads south.

Using the March lows as buy points makes sense for dividend investors. But even if we revisit those lows, trailing stops should still be used if for no other reason than market uncertainty. While many pundits have pronounced the current rally as "a new bull market" I'm skeptical. And I don't have unlimited years left to make up for losses.

I'm up to about 80% cash now, having taken profits from the recent rally. Might I lose some upside potential ? Sure. But I'm satisfied with +30% year-to-date (and I wish I'd done the same last year).

Another good article for dividend investors, Cliif. Thanks.

Jun 21 10:06 AM

[elliot_mllr:]

Also, don't forget the coming large scale decline in commercial real estate, with major commercial foreclosures a la General Growth Properties. This, coupled with high unemployment, wage and salary cuts throughout the industrial and financial sectors, and very low capacity utilization rates (which largely eliminate the need for capital spending) means inflation is not around the corner notwithstanding massive government money creation.
As a Buy and Hold income investor I am concentrating on midstream MLPs/LLCs ( such as ETE,ETP,EPD,TPP, NRGY,etc.) and one upstream LLC (Linn Energy).

Jun 21 10:08 AM

[Cliff Wachtel:]

who said I've invested in this rally?! Check anything I've written and try to find anything I've said to support going long this rally.


On Jun 21 08:51 AM SageNot wrote:

> Sorry Cliff, but you're missing the point badly. Until these banks
> begin to earn money w/o the public Tarp aid, any gains in net income
> w/b short lived. These banks caused millions to lose billions &
> yet they are considered too big to fail, what B.S.!
>
> This rally you've invested heavily in is a Bear trap, millions more
> home, businesses & individuals will go belly-up w/o doubt. Once
> our many creditors decide to really dump their dollar holdings, inflation
> will really take off, & what then happens to this bear rally,
> if you know Cliff?

Jun 21 12:17 PM

[untrusting ...:]

If you believe the market may retest the March lows and the recommendation is to put in buy orders at the March low prices, the much smarter strategy is to sell put options at whatever price/strike price you think it might fall to. At least that way you collect the put/insurance premium instead of just waiting to see if it happens. And you would be buying the stock at that low price anyway. Personally I do think the market will correct downwards, probably over the next few months, but it may well not get back to the March lows. Best guess would be S&P 750-800 on the correction. But selling put options at least makes you some return while you wait and if it does not get to the low you project then you would not be buying the shares anyway.


On Jun 21 10:06 AM axelrod608 wrote:

> I understand that there are many investing/trading strategies, and
> what you've outlined here is a cautious one. Personally, I agree
> since my objective is capital preservation way more important than
> potential profit. No market has ever gone so far so fast as the current
> market since March. So it is logical to expect a turndown market
> correction in the near future.
>
> Dividend investors clearly realize that it takes years of dividends
> to recoup capital losses. Your advice to take partial positions is
> good. I would add the requirement of tight trailing stops to defend
> against losses if the market heads south.
>
> Using the March lows as buy points makes sense for dividend investors.
> But even if we revisit those lows, trailing stops should still be
> used if for no other reason than market uncertainty. While many pundits
> have pronounced the current rally as "a new bull market" I'm skeptical.
> And I don't have unlimited years left to make up for losses.
>
> I'm up to about 80% cash now, having taken profits from the recent
> rally. Might I lose some upside potential ? Sure. But I'm satisfied
> with +30% year-to-date (and I wish I'd done the same last year).
>
>
> Another good article for dividend investors, Cliif. Thanks.

Jun 21 09:26 PM

[MarvinMBA:]

I've been selling the dollar short and buying gold for the long pull. This is the only strategy that makes any sense at this moment in time and probably for the next few years...MarvinMBA

Jun 21 10:19 PM

[Al-USA:]

Good article Mr. Wachtel.

Selling (shorting) put options is a good strategy but, it must be stated, there is the possibility of UNLIMITED losses, if the stock/market heads up instead, so only the very skilled options trader should attempt this. Readers, always do your homework when someone advises a particular strategy, good luck to all

Jun 22 02:26 AM

[ilc:]

"the profit motive and banking don't always mix, at least not for the common good" - That depends entirely on what bankers you are taking about and what powers they have. Bankers should seek profits, like anyone. We're all better off, when they do. The problem with the U.S. asset bubbles / banking crisis was that the *central* bankers (the Fed) kept monetary policy far too loose for far too long, and, essentially insured / socialized away the downside risks of banking, that would otherwise force bankers to be prudent. When you have a central bank that wants to print money and do bailouts to reward its buddies - then, and only then, you can say "the profit motive and banking don't always mix, at least not for the common good."

Jun 22 02:59 AM

[TANGO DANCER:]

have some of you lost yor minds?????......buy stocks for income but use close stop losses sjust in case......of course you knew the march 6th bottom was a bottom???i did but did you and how did i know???
buying corp bonds in the 5=8 year range in the only sane thing to do now folks......a bull market should not start until 2013-14 and thats historical.......as every 7th year of every decade since 1857..yes 1857 market has corrected average of 30% from high that year????..did you get out dec of 2007????
of course you knew!!!!!!!!!yeh????an... who states comment with phoney name is just that phoney and an mba would be questionable to me...of course that s only a personal opionion.......if youknow a subject be an investor....if not buy bonds and forget or be in the position you find yourself now.....
[e-mail]
tucson arizona

Jun 22 03:15 AM

[johnbee:]

Its pointless trying to rationalise the markets other than in political terms since its Government actions that are manipulating them.

Jun 22 09:45 AM

[Mmarrkk:]

Can you clarify this statement for me? I thought if you sell a Put option, you have the obligation to BUY the stock at the option price? So how can the losses be "UNLIMITED"?

If I sell a GE August $9 Put option, I could be forced to buy 100 shares of GE at $9 anytime between now and the August expiration date. So, if GE drops to $1, I still have to buy it at $9. In this scenario, my MAXIMUM loss is the $9 minus what I sold the option for. The loss can get no larger as GE can only go to zero!

If GE goes to $25, then the counterparty who bought the Put would be insane to exercise a Put option that allows them to sell their shares at $9.

Am I missing something or are you?


On Jun 22 02:26 AM Al-USA wrote:

> Good article Mr. Wachtel.
>
> Selling (shorting) put options is a good strategy but, it must be
> stated, there is the possibility of UNLIMITED losses, if the stock/market
> heads up instead, so only the very skilled options trader should
> attempt this. Readers, always do your homework when someone advises
> a particular strategy, good luck to all

Jun 22 11:44 AM

[khaz:]

You are correct Mmarrkk. Mr. Wachtel must have been thinking of a naked call.

Jun 22 01:59 PM

[khaz:]

Correction: It was Al-USA's comment, not the author. My apologies.

Jun 22 02:32 PM

[William James:]

I really don't think you are reading the same article that I am!

Mr. Wachtel seems to be pointing to the likelihood that this IS a bear market rally and that buy and hold folks should probably not dip their toes in at this point. Perhaps you should read some of his other articles before you jump in so readily with an inaccurate critique.


On Jun 21 08:51 AM SageNot wrote:

> Sorry Cliff, but you're missing the point badly. Until these banks
> begin to earn money w/o the public Tarp aid, any gains in net income
> w/b short lived. These banks caused millions to lose billions &
> yet they are considered too big to fail, what B.S.!
>
> This rally you've invested heavily in is a Bear trap, millions more
> home, businesses & individuals will go belly-up w/o doubt. Once
> our many creditors decide to really dump their dollar holdings, inflation
> will really take off, & what then happens to this bear rally,
> if you know Cliff?

Jun 23 01:35 AM

[one eye:]

Mmarrkk: My "Clap Trap" is still waiting for an apology.

However, Its nice to know that you can read.

Jun 24 02:38 AM