By Panos Mourdoukoutas
After delving into the abyss during the financial crisis, Wall Street had everything going its way: An accommodating FED trying to reflate assets; a friendly Congress expanding spending and renewing the Bush tax cuts; roaring emerging markets that do not seem to have enough U.S. products. Corporate profits are back and major indices have been racing towards the old new highs; energy and precious metals have been logging for the moon.
Unfortunately for Wall Street, things cannot go its way forever. The FED cannot be accommodating forever, and even if does, it isn't effective in supporting equity prices. The Bank of Japan did just that for almost 10 years and the Japanese stock market is significantly below the levels it was at when the Bank of Japan launched its several rounds of QE. Congress cannot be accommodating forever, either. The Greek government did just that for a number years and now is facing the music. And emerging markets cannot keep the foot on the gas forever without facing bloody protests on the streets against runway inflation.
Simply put, the world economy cannot grow on easy money and government debt forever, and central bankers and politicians have come to realize it. The FED has stated clearly that there will be no QE3. China and Indian central bankers have been raising rates. And the U.S. Congress is getting serious of addressing the country's soaring debt. What does it mean for investors?
- The commodity rally is over, as a weak economy will taper off for energy and raw materials. This means that investors holding ETFs like SLV, GLD, and OIH (oil) may want to take profits rather than accumulating positions as these investments bounce back from the recent sell-off.
- They may want to hold on to technology positions, as this industry will continue to benefit from innovation, a replacement cycle, and a favorable tax code. Semiconductor equipment, in particular, like Applied Materials (AMAT), Teradyne (TER), KLA Tencor (KLAC), Kulicke and Soffa Industries (KLIC), and Novellus Systems (NVLS) look promising, as they didn't participate in the rally.
- Get defensive. Accumulate positions in pharmaceuticals like Pfizer (PFE), Bristol-Myers Squibb (BMY), Eli Lilly (LLY), Merck (MRK), and Novartis (NVS) that pay good dividends.
Disclosure: I am long BMY, PFE, LLY, AMAT. I'm short on GLD, and OIH. As an active investor, I may quickly change positions in the ETFs mentioned.