Things looked so rosy … for almost a whole day. Last Thursday Big Papi, no not the Red Sox slugger but George Papandreou the prime minister of Greece is playing hardball, but finally agreed to a deal with the European Union sending stocks soaring worldwide. And in keeping in good fashion with this bipolar market, Papi triggered an upheaval yesterday by backing away from the deal so as to hold a referendum with his parliament on the rescue package. This of course sent stocks plummeting. Perhaps he is just sick of getting beat up by his own people and politicians alike and wants to pass it off on them. In the end it won’t matter; the Greeks have no choice but to accept the original deal.
Once the European crises is out of our face, at least for a little while, the market will start to focus on what’s important which I discuss in The Ride of Your Life:
1. Earnings – which have beat expectations
2. Economic news – although not great but better than expected.
3. You don’t fight the Fed – The continuation of QE Mini-Me and likelihood of a QE3 will keep us out of recession.
4. Negative investor sentiment – the market loves to climb that wall of worry
Naturally all the world’s economic problems are not close to being solved.
The European crises is essentially a world crises, caused by the majority of the entire developed world’s populations getting older in unison and past their peak spending years and trying to retire all at the same time. This is going to go on for several more years at a minimum and is the foundation of my book, "Facing Goliath: How to Triumph in the Dangerous Market Ahead."
However, in the short term, the market is certainly due for a reprieve. The game changer will likely be a QE3. Readers of this newsletter know that I have been practically alone in calling for another round of Quantitative Easing, yet in a very recent survey, 69% of economists now agree with me. This alone will send stocks soaring. It’s not that I believe we should have one, I do not. It will only increase the nation’s debt load, extend the malaise and do nothing to fix the inherent economic problems, but it will help the market.
Commodity stocks should do particularly well in the near future, not from inflation but from a QE3 and more EU bailouts: SPDR Gold Shares (GLD), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Genpact Ltd. (G), Freeport-McMoRan Copper & Gold Inc. (FCX), Silver Wheaton Corp. (SLW), ProShares Ultra Silver (AGQ), iPath DJ-UBS Grains TR Sub-Idx ETN (JJG), Potash Corp. of Saskatchewan, Inc. (POT), The Mosaic Company (MOS). Growth stocks will do well such as Apple (AAPL), Google (GOOG), Yahoo (YHOO), Microsoft (MSFT), Intel Corporation (INTC).
We have to keep our wits about any rally though, and understand that bear market rallies often show substantial gains and are not the start of new bulls. For example, the Oct.-Nov rally in 2008 resulted in a 19% rise in the S&P 500, while Nov.-Jan. 2008 produced a 27% gain. There were also gains of over 24% in the 2000-2003 bear market, from July to Aug. and from Oct. to Dec. 2002. The key is being tactical, taking advantage of the markets “sweet spot” but prepared to get out of the market before the next crash.
The “Sweet Spot” is still equity returns without equity risk through income and dividends.
MLP’s are particularly attractive here - Legacy Reserves Lp (LGCY), Vanguard Natural Resources, LLC (VNR), Breitburn Energy Partners P.P. (BBEP) and Terra Nitrogen Company, L.P. (TNH) all yielding above 8%.
Preferreds from Ally Bank – GMAC, Ally PrA and Ally PrB yielding over 10%.
Edgen Murray bond 12 ¼% 1/15/15 yielding 14% (cusip 280148AC1)
Broadview Network - 11 3/8% 9/1/12 yielding 16% (cusip 111384AC7)
Solo Cup - 8.5% of 8/15/14 – yielding 15% (cusip 834260AB7)
Colt - 8.75% of 2017 yielding over 18% (cusip 19686TAC1).