What You Can Do During a Slow Growth Recovery

I have been writing about a double-dip recession or a W-shaped recovery. Friday's unemployment figure may support my thesis. A W-shaped recovery basically shows the way of economic recovery. The first leg of the recovery is not sustainable and may fall back to a recession. Then a "real" sustainable economic growth comes on the second leg. But that growth is due to genuine organic growth based upon a stronger economic foundation, like a stronger U.S. dollar. I believe we are not even at the first leg of the recovery yet.

Friday morning's June unemployment report showed a loss of 467,000 jobs, which is far worse than expected a loss of 363,000 jobs. The unemployment rate rose to 9.5% from 9.4% in May. The stock market reacted by losing 223.32 in the Dow (2.6%). The S&P 500 fell 26.92 (2.9%). Basically there was no where to hide as the NYSE has 2,885 declining issues vs only 754 advancing issues. Thus, Friday was a broad based selling day.

So, why did the market drop so much? The market has been expecting a V-shaped recovery. Some commentators even expect the economy will be in full recovery by the beginning of next year. There are signs that the housing market is stabilizing and companies have been rebuilding inventories to generate some growth. But I believe the stock market is over-optimistic.

When the U.S. started its recession, companies cut costs by laying off employees and cutting down inventories. So, once they have sold off their inventories, they have to restock their shelves. This may give investors a false alarm about economic growth. Friday's unemployment figure continues to show more people are out of work. Consumers cannot buy things when they do not have jobs. So, the restocked inventories may stay in the stores for a while.

Also, hitting a housing bottom does not mean a recovery. We may be at the bottom for a while. As consumers continue to worry about their jobs, they will not spend. After Friday's report, we all will have been talking about job concerns over the holiday BBQ. Furthermore, consumers continue to de-leverage. So, if consumers have extra cash on hand, they will pay down their debts rather than spending the cash. Some economists have been expecting the current tax cut would help consumers to spend. But when consumers know these tax cuts are only temporary, they would use any tax refund to pay down debts.

Making things even worse, on Thursday, CNBC discussed Citigroup (C) raising interest rate on millions of credit card holders. This is actually nothing new. Most of the credit card issuers have been cutting down credit limits but now they are also raising interest rates. With lower credit limit and higher interest costs, consumers are not in the position to spend.

I expect the economic recovery to be slow and most of the growth from fiscal stimulus. We all know the U.S. government has been printing billions of dollars to support the economy. The billions in stimulus money will eventually trickle down to consumers and they will spend cautiously. This is why the recovery will be slow and gradual.

When the economy actually shows sign of recovery, the Federal Reserve will need to mop up the excess liquidity in the financial system. Otherwise, we will have significant inflation. This is why the dollar has been weak-- because investors have been worrying about future inflation. I am not too worried about future inflation as I assume the Fed will remove the excess liquidity. However, if the Fed takes action too late, then we will have high inflation.

Let me assume for a moment that the Fed will do the right thing when the time has come: The liquidity removal may cause the economy to fall back into slower growth and even into a mild recession again. But the next recovery will be sustainable as investors will have confidence in the U.S. dollar with organic growth .

What is the investment theme? Do not rush to buy stocks when you see the first sign of economic recovery. Oil and gold will continue to do well until the Fed removes excess liquidity. Remember, China is diversifying its foreign reserves by buying commodities, and China has not been buying much U.S. dollars lately. You may consider buying Australian dollar ETF (FXA) and China ETF (FXI). With the China government continues to support alternative energy along with Obama's energy plan, you may consider investing in a global solar ETF (TAN) and a continuing growth ETF for the Brazilian economy (EWZ).

Comments

[Maxe Paul:]

"The market has been expecting a V-shaped recovery", this is not realy true, the market is exibiting a classic bear market rally, which i expect to continue after a correction through July and early August. Nothing has changed, i expect a W, and so do most people apart from the CNBC perma bulls.

Expect oil and gold to correct, along with the Aussie dollar and the Brasil market. Now (this month) is not the time to go long these instruments IMO.

Jul 05 11:11 AM

[Mad Hedge F...:]

It's got to be a "W" or an "L". The non-farm payroll came in at minus 467,000. What a spanking! The monthly figure is 100,000 worse than the expectations of most suicide prone economists, and took the unemployment rate up to 9.5%. There are now 14.5 million unemployed, an all time high, at least 20 million underemployed, and who knows how many more who have taken pay cuts, unpaid vacations, and furloughs. That leaves an ever diminishing pool of employed who are going to spend us into a recovery. Commodities got slammed across the board, stocks got trashed, and for a minute I thought they were going to run out of red arrows. Traders shorting the long bond got stopped out of their positions, yet again. Looking at the data, it is clear that this is the worst case scenario. Even construction and government jobs, the beneficiaries of so much Federal largess, are still falling. Only employment in education and health care is rising. This comes on top of yesterday’s disastrous figures showing sales at Chrysler fell 42%, Toyota (TM) 34.6%, General Motors (GMGMQ) 33.6%, and Honda (HMC) 29.5%. At least this will put that annoying “green shoots” crowd out to pasture. The Obama crowd has to be sweating bullets now, having fired their best shot at the enemy, with no apparent impact. Here comes the “L”. Please see my “Sell in May and Go Away” report at www.madhedgefundtrader....

Jul 05 11:39 AM

[John100:]

It's utterly crazy how many ETFs are out there...

Jul 05 01:23 PM

[Alphameister:]

Except for a few cheerleaders like Kudlow, I don't see many economists predicting a v-shaped recovery. Nor do I believe that's what the market has been discounting with its v-shaped recovery between March and June. It's been discounting the disappearance of the Armageddon scenario so widely feared at the March lows. No reasonable bull expects a continuation of that upward trajectory.

Jul 05 02:40 PM

[oldman:]

might this be the time to put most everything into fixed income funds for the next 9-12 months?

Jul 06 09:18 AM

[James Kar:]

Hi "Oldman": As the interest rate is as low as it is now, the interest rate cannot go much lower since the Fed already target the fed fund rate close to zero. The chance is higher for the rate to go up instead. As the interest rate goes up, bond price goes down. At this time, I would not put most investment in bond. May be you can consider dividend paying oil stocks like ConocoPhilips (COP) paying $1.88 dividend with the current yield at 4.60%. The stock pays you something while you are waiting for the recovery. Also, the stock will participate in market recovery plus giving you some inflation or USD depreciation. Hope this helps.

Jul 06 10:59 AM

[Ted Hurlbut:]

The recovery is likely to be somewhere between a "V" and an "L" - we don't have a letter in the alphabet for it - although it may be closer to an "L" than a "V". I agree the spring bounce back was due to the worst case scenario being averted, as well as an improved earnings picture due to all the cost cutting. there a lot of obstacles out there, as all the shorts love to remind us, but we're likely at or near the bottom now, and we'll start the process of slowly coming back by the end of the year.

Jul 06 11:19 AM

[donzelion:]

Concur with Mr. Kar's comments: I like dividend stocks directly or indirectly linked to commodities (BP is a good alternative to COP; you might also try CAT, DE, and JOYG - each has its warts, but similar pays you while waiting, has significant upside potential, and spreads risk through global operations).

China is more interested in securing access to commodities over the long-run than in buying the commodities themselves: I see that as favoring a long-haul strategy for my own positions.

On Jul 06 10:59 AM James Kar wrote:

> May be you can consider dividend paying oil stocks like
> ConocoPhilips (seekingalpha.com/symbo...)
> paying $1.88 dividend with the current yield at 4.60%. The stock
> pays you something while you are waiting for the recovery. Also,
> the stock will participate in market recovery plus giving you some
> inflation or USD depreciation.

Jul 06 12:55 PM

[RE Broker:]

There was an article recommending european telecoms in Barron's. They are near their lows for the year and pay high dividends.

Jul 06 09:11 PM

[Old Trader:]

Mr. Kar,

Didn't the language of the last FOMC minutes indicate that rates will "remain low for an extended period of time", or words very close to that? Actually, good quality corp. debt is not the worst place to park some money for say, the next 9-12 months, maybe longer.

Given that Biden 'fessed up to the fact the current administration totally missed how severe the downturn would turn out to be, and there's talk of the "next" stimulus plan, I don't see rates rising for some time, though obviously, at some future point, they will, as the Gov. tries to unwind the mess.

donzelion; I agree with you on the quality dividend paying stock play, as well. Some of the healthcare stocks are good, and as RE Broker mentions, foreign telecoms work, too.

Disclosure: Long JNJ, FTE


On Jul 06 10:59 AM James Kar wrote:

> Hi "Oldman": As the interest rate is as low as it is now, the interest
> rate cannot go much lower since the Fed already target the fed fund
> rate close to zero. The chance is higher for the rate to go up instead.
> As the interest rate goes up, bond price goes down. At this time,
> I would not put most investment in bond. May be you can consider
> dividend paying oil stocks like ConocoPhilips (seekingalpha.com/symbo...)
> paying $1.88 dividend with the current yield at 4.60%. The stock
> pays you something while you are waiting for the recovery. Also,
> the stock will participate in market recovery plus giving you some
> inflation or USD depreciation. Hope this helps.

Jul 06 09:52 PM

[James Kar:]

Hi Old Trader:
The FOMC meeting language basically telling investors that the Fed would accommodate the economy and would keep rates low as long as possible. But this is what the Fed's planning but the global currency and commodities markets may not let the Fed has its way.

The Fed thought the fiscal stimulus along with the monetary policy would get the economy going. We know this fails so far. Now, the gov even talk about second stimulus. This no doubt will make global investors losing confidence in the US$. They may even think the US gov is engaging in reckless fiscal policies that will sink the dollar value. Thus, the US gov may have to offer higher rates to attract bond buyers. If China has its way about the global reserve currencies issue, the US$ may start to trend downward again. With higher commodities prices and lower US$, investors will demand higher rates before lending to the US government.
Remember now China starts to settle global trade in RMB, which in turns will reduce demand for US$. This would make the US$ even weaker. Once investors lose confidence in US$, the Fed has no choice but to raise interest rate even the Fed does not want to. What do you think?


On Jul 06 09:52 PM Old Trader wrote:

> Mr. Kar,
>
> Didn't the language of the last FOMC minutes indicate that rates
> will "remain low for an extended period of time", or words very close
> to that? Actually, good quality corp. debt is not the worst place
> to park some money for say, the next 9-12 months, maybe longer.<br/>
>
> Given that Biden 'fessed up to the fact the current administration
> totally missed how severe the downturn would turn out to be, and
> there's talk of the "next" stimulus plan, I don't see rates rising
> for some time, though obviously, at some future point, they will,
> as the Gov. tries to unwind the mess.
>
> donzelion; I agree with you on the quality dividend paying stock
> play, as well. Some of the healthcare stocks are good, and as RE
> Broker mentions, foreign telecoms work, too.
>
> Disclosure: Long JNJ, FTE

Jul 07 09:09 PM