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What investors need to do now: Buy the sweet spot… but hedge for Jackson Hole

Since the recovery began, I have recognized a trend in the market where stocks rise during earnings season, which have been stellar, and fall once it’s over. The concept is that earnings have been better than expected in every quarter so investors get excited, but when the announcements are over there is no more ‘good enough’ news left to push stocks higher. It’s certainly not one of the major market indicators, as I have heard absolutely nobody else talk about it, which is a good thing because one thing is clear on Wall Street – If it’s obvious, it’s obviously wrong!

To make the situation worse this time around, the economic data is getting worse… fast! Although, it’s no surprise here, as the government’s stimulus programs not only cannot make progress but can’t even keep up with the massive headwinds our economy faces. The QE1 stimulus ended in May 2010, with economic growth bottoming around August/September 2010, 4 or 5 months later. QE2 is now dissipating, especially after the Japan and oil shocks. If the Fed does stimulate again, then it would wear off by next spring or summer. Keep in mind that although more stimulus would help the stock market, there is no way it will be enough to offset the continued natural decline in Baby Boomer spending into 2012 and beyond as the overwhelming majority pass the major landmark in aging of 50 years old in late 2011.

Very simply, we need more spenders, as an economy needs people to spend money to grow. Demographics tell us that people overwhelmingly spend more in their 30s and 40s. Unfortunately, we as well as most of the developed world, have a rapidly aging population well past their peak spending years. Add to that a massively over-leveraged/over-indebted consumer and you’ve got a headwind… a Gail force perfect storm kind of wind. This is what "Facing Goliath: How to Triumph in the Dangerous Market Ahead" is all about, so read it carefully and be prepared. We are approaching the point that John Mauldin calls "The End Game” and which HS Dent calls “checkmated” (pdf).

Up until now, the Federal Reserve’s stimulus programs, QE1, QE2 and QE-Mini Me have kept the ship afloat. I have long thought that Bernanke would announce a new such plan next week in Jackson Hole, as he did last year. However, the recent dissention of four Fed governors (the most ever) and the announcement by two of them, Plosser and Fisher, who said the central bank may be creating a misperception that its goal is to boost stocks, has me and most likely the market worried. Although, I do think we will get it eventually, but it could get ugly until we do. Hedge your portfolio pending the news from Helicopter Ben.

Investor Strategy:
There are still many places for investors to make money without a lot of risk. The key is always to get the best possible return with the least amount of risk, what I like to call invest for need, not for greed. Participating in this market is as dangerous as ever, especially with a blind buy-and-hold (buy-and-hope) approach. However, you can’t just sit in cash earning nothing on your money either. Inflation and taxes will eat that away. You must be tactical, and take advantage of what the market gives us when it gives it to us. Right now that “sweet spot” is in income and dividend investments. MLP’s, preferreds and Corporate bonds are providing yields of 8-10% and higher.

Action:

Buy - GMAC Pfd. It’s the preferred for the old GMAC, which is now Ally Bank. It yields about 8% and it’s over 90% owned by the U.S. Treasury so it’s not going anywhere.

Buy - MLP’s such as BBEP, LGCY and VNR, with yields of 8-10%

Buy - Corporate Bonds such as Edgen Murray 12.25% of 2015 and Edison Mission 7.75% of 2016, both yielding over 14%.

*For the next week, hedge your portfolio until we see if there is a QE3. If there is, we’ll be seeing new highs before you can blink so be prepared to remove them quickly. If we don’t, and there is a very good chance we won’t, then stocks could get crushed.

Action: To hedge your portfolio, buy inverse funds such as ProShares UltraShort QQQ ETF (NYSEARCA:QID), Direxion Russell 1000 Bearish 3X ETF (BGZ) and Direxion Russell 2000 Bearish 3X ETF (NYSEARCA:TZA). These go up if the market goes down and vice versa. It’s easier to own these rather than buying and selling your portfolio each time we get a new signal. In times like these, I am happy to be market neutral and simply collect the income and dividends.



Disclosure: I am long TZA.

Source: Earnings Season's Ending And Risk Season's Beginning