Even for the most seasoned of pros, picking the right stocks and funds during these difficult times is, to say the least, a challenge.
Uncertainly, which is the natural enemy of a bull market, has caused panic and anxiety to ripple across global markets. Just a few questions running through investor minds. Are we in a prolonged so-called “economic soft patch," or are we heading into another recession (if we ever truly escaped the first one)? If we are heading toward recession, what possible actions can the Fed take to stave off another economic crisis? Are corporate earnings – which have been a pillar of strength – finally about to become aligned with the economic reality in this country? And is Europe/euro going to fall apart at the seams, crumbling under the wait of bad sovereign debt? With so many confounding and troubling issues in front of investors, stock and asset picking has rarely been so difficult. With this in mind, I thought now may be a good time to review and opine on a few widely held stocks and ETFs.
Boring Can Be Appealing
Investing in Microsoft (NASDAQ:MSFT) lost its “sexiness” some time back in the late 1990s. Today, the technology behemoth is looked at as a stodgy corporate software developer whose best days are well behind it. It’s hard to argue against that point, as MSFT has fallen well behind its competitors on the consumer electronics product front. However, in times like these, I prefer to look for value and consistency – and MSFT offers a lot of both.
After dropping by roughly 10% since early July, the stock is carrying a minuscule 1-year forward P/E of ~9.4x and P/S of 3x. Additionally, MSFT is sitting on a massive pile of cash, as its balance sheet currently holds over $51 billion in cash. From a technical standpoint, I would also note that the stock has recently bounced off a key support area around the $24 level. Should MSFT continue its upward track, its 50-day moving average will come into play around $26. For a more detailed technical analysis, I urge readers to review our trading report on MSFT by clicking on its symbol above. In conclusion, I give MSFT a “Buy” rating.
Should You Follow Buffett’s Lead?
By now, everybody is well aware that on August 25, Warren Buffett invested $5 billion in Bank of America (NYSE:BAC) by purchasing 50,000 shares of preferred stock, with warrants to purchase 700,000,000 shares of common stock at an exercise price of ~$7.14. Prior to this deal, the vultures were circling above BAC, as many waited for the company to announce some kind of capital raise. Naturally, BAC shares reacted quite favorably to the Buffett investment, but the question is, should everyday investors follow his lead? On one hand, the capital infusion strengthens its balance sheet and takes some risk off the table. But, to be clear, this deal was done because it was a good deal for Mr. Buffett – not because it was a “vote of confidence” in the bank, or the U.S. banking system in general.
It is also worth pointing out that just prior to Warren Buffett announcing this investment that he had conversations with President Obama with regard to the U.S. economy. It’s not taking a leap of faith to assume that the president nudged Mr. Buffett – who is a major benefactor for the president – toward making this deal. So, to summarize, everyday investors can’t cut the same kind of lucrative deals that Buffett can, so it doesn’t always pay dividends to follow his lead. In this case, I wouldn’t feel overly confident buying BAC as the housing market continues to deteriorate and as the economy teeters on another recession. On the flip side, I wouldn’t be looking to short BAC either, as the stock has fallen too far, too fast, and as Buffett’s capital infusion could lead to a short-term rally, forcing a short squeeze. Therefore, a “Hold” rating appears appropriate.
Gold Has Gone Parabolic
On a weekly chart, SPDR Gold Trust (NYSEARCA:GLD) has shot straight up since early August. True, GLD did violently snap-back early last week, but it recovered a good portion of that sell-off last Friday. Any trader worth his salt will tell you that this weekly, parabolic pattern is not sustainable, and that a short-term pull-back looms on the horizon. Due solely to the over-bought nature of GLD, I believe that the ETF is a short term “Sell." With that said, from a more fundamental viewpoint, I continue to like gold as an investment choice. The same drivers that were true a year ago remain true today. Currencies around the world are being de-based, there is an overwhelming amount of uncertainty and anxiety in the broader markets, and the prospects for higher inflation continue to weigh on investors’ minds. Additionally, the prospects of further stimulus/quantitative easing have heightened, as Fed Chairman Bernanke stated that the Fed “stands ready to act.”
Play Some Defense
If the concerning headlines regarding the economy are keeping you up at night, one way to ease your mind would be to hedge yourself against economic disaster. There are a couple of popular, widely-used ways to do so. For instance, if you believe that volatility will continue to ripple through the markets – as I certainly do – you could choose to buy a position in the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX). This financial instrument appreciates in value when volatility in the broader markets escalates, or is expected to escalate. Not surprisingly, VXX has surged in August. Another avenue to consider would be to buy the ProShares UltraShort Fund (NYSEARCA:SDS), which is a bear market fund that corresponds to twice the inverse of the daily performance of the S&P 500.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.