Investor sentiment about the economy and the market is eerily reminiscent of those evil days of 2008. Even Johnny Carson’s Carnac the Magnificent would be having trouble reading this economy. No one feels good about what’s going on right now, and between the Euro crisis, our stagnant economy with rising unemployment, the rising deficit and the Bozos in Washington (our beloved politicians of both parties) who are completely disconnected from their constituents, who could blame them? It reminds me of what I wrote just days before the bottom in March of 2009: “There is a meteor hurtling towards earth and it’s just seconds from impact… we have to be close to the bottom, if even only temporarily.”
Although sentiment is nowhere near as pessimistic as it was then, it is pervasive enough to be setting us up for a positive surprise. There are certainly plenty of negatives out there, including the last statement by Ben Bernanke and the Federal Reserve – “We are still years away from a complete recovery and there is significant downside risk to the economic outlook including strains in global financial markets,” which is even enough to scare the bejeesus out of Winnie the Pooh.
Yet, there are also several positives. The continued easing programs, such as QE Mini-Me, will continue to provide substantial liquidity and will likely keep us out of another full-blown recession… even if it feels like one! However, several reports, such as the continued increases of the Leading Economic indicators, better-than-expected retail sales, yesterday’s report that the demand for capital goods increased more than predicted and today’s GDP and jobless claims aren’t great but are encouraging.
Let us not forget that 3rd quarter earnings will start to be released soon, and the combination of overwhelming pessimism along with the trend of repeated positive earnings surprises could very well be setting us up for a pretty good 4th quarter. After all, it’s earnings that moves stock prices, and if earnings are good, even if the economy is bad, prices will rise. However, it could get ugly until earnings season begins, and I would not be surprised to see a breach of the August 9th lows.
That is not to say that the headwinds I discuss in "Facing Goliath: How to Triumph is the Dangerous Market Ahead" are gone…no way. But a reprieve could be upon us. We just have to be sure not to get caught up with a false sense of security and stand ready with our portfolio exit strategy. There will definitely be a time in the near future to be in cash. The question is can the administration keep it together until after the election.
Investors need to be careful here and avoid the “all in or all out mentality” of investing in the market as a whole. If you’re not investing for dividends and income, you are just gambling. Stick to investing in the sweet spot, which continues to be income stocks and select corporate and tax-free bonds. The current volatility has brought bond prices down and they are a tremendous value right now with 8%-10% (and higher) yields and appreciation potential.
Solo Cup Corp 8.5% of 8/15/14 – yielding 15%
HCP – Healthcare Properties REIT – Yielding 5.6% - Owns and operates hospital services for seniors, and there’s about to be a lot of them.
Ally PrA – There are three very attractive Ally Bank Preferreds (ALLY-PA) yielding around 10%. Ally is 91% government owned, so they’re not going anywhere.
Ally PrB, - Another Ally Bank Preferred
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.