Just when things start to look up, Ben Bernanke gives us a little slap of reality, warning that things don't look so rosy down the pike and a little tickle in the form of a probable QE3 to soothe our souls.
The markets have responded to the impressive string of better than expected economic news over the last few months. It's hard to believe that all that many could think that it was truly the end of the great recession, (I know it officially ended long ago but it doesn't feel like it!) but it gave hope that perhaps at the very least a firm recovery was underway. Bernanke's warning and subsequent continuance of QE Mini-Me simply confirms the case I have been making that the economic strength was simply the last vestiges of QE2 and without further stimulus, the economy would again turn south.
To my surprise however, Bernanke and the Federal Reserve Board laid out the groundwork for further stimulus now, before things got bad again, rather than being reactionary. To that I give him credit because the latter would have come too late, as there would have been too much lag between the end of QE2 and when we would start feeling the effects of a QE3, which is typically 9 months later. They are going to keep interest rates at nil for an elephant's lifetime they announced, and if inflation is below their target rate of 2% when the slowdown starts, they will begin a new round of asset buying or an official QE3 … which I would bet my Superbowl winnings on, had my team not broken my heart.
Now, I know you may think there's much more inflation out there, but in reality we are actually battling "deflation." Take a look at a recent Bloomberg article:
Huggies Price Cut Shows Why Bond Market Backs Bernanke QE3
Feb. 6 - Procter & Gamble Co.'s failure to raise the price of Cascade dishwashing soap shows why investors are buying Treasuries at the lowest yields in history, giving the Federal Reserve more scope to boost the economy. The world's largest consumer-products company rolled back prices after an 8 percent increase lost the firm 7 percentage points of market share. Kimberly-Clark Corp. started offering coupons on Huggies after resistance to the diapers' cost.
Let's face it, with interest rates so low the Fed is going to keep borrowing for Quantitative Easing programs until the cows come home, which is essentially when the bond market stops allowing them to, and they are going to have to for a long time. The demographic overhang of 92 million baby boomers past their peak spending years, the massive over-indebtedness of the American consumer just screaming to deleverage and a powder keg in Europe set to explode in a matter of months is a gale force headwind that will take years to overcome.
Regardless of the slowing economy, or even a European implosion led by Greece, a full-blown QE3 will push the markets higher. Although stocks are seriously due for a correction, a pullback probably won't come until the market is much higher because so many people have been left behind and are just waiting for a chance to get back in. More importantly, the continuation of the rally would simply be an extension of the aging bull market and not the beginning of a new one.
In the bigger picture, the market will not likely top until the average investor, who remains unenthused, throws caution to the wind and decides to get back in. Therefore, investors must avoid complacency and remain alert for signs of a top, as this rally in our old bull market will likely be measured in weeks or months and not years. Even if you think that it won't happen until after the election … are you willing to bet your family's financial security on it? I'm not!
Although, you may have the feeling of being left behind or the urge to try to time the market, we continue to urge our clients to simply invest for need, not for greed. That is merely the art of getting the very best returns you need in order to succeed with the least risk possible.
Risk investors and traders can take advantage of this rally, but always be "Tactical" and avoid buy-and-hold (buy-and-hope) mentality. A QE3 will certainly be a boom for commodity stocks, especially gold and silver and investors should have at least some position in SPDR Gold Shares (GLD), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Goldcorp. (GG), Freeport-McMoRan Copper & Gold Inc. (FCX), Silver Wheaton Corp. (SLW) and ProShares Ultra Silver (AGQ).
The more moderate average growth investor may will want to look at ETF's to participate in the market's rally, such as SPDR S & P 500 (SPY), SPDR Select Sector Fund - Finan (XLF), iShares MSCI Emerging Index Fund (EEM), PowerShares QQQ Trust, Series 1 (QQQ), iShares Russell 2000 (IWM) and iShares FTSE China 25 Index Fund (FXI). More aggressive investors will still want to stick with the big daddy's like Apple (AAPL), Google (GOOG), Intel Corporation (INTC), Microsoft (MSFT), Cisco Systems (CSCO), Dell (DELL), Caterpillar (CAT), General Electric (GE) and Yahoo (YHOO).
Lower risk investors, should continue towards the market's "sweet spot" which is currently income investments such as corporate bonds, preferreds and MLP's, many yielding 8-10%. If the market does continue to rise, you'll likely get the best of both worlds of appreciation along with a healthy dividend, but with less risk.
- Legacy Reserves LP (LGCY) -- yielding 9+% (cusip 524707304)
- Vanguard Natural Resources (VNR) - yielding 9+% +% (cusip 92205F106)
- Breitburn Energy Partners (BBEP) - yielding 9+% (cusip 106776107)
- Terra Nitrogen (TNH) -10 1/4%. Makes and markets farm products. One of the few hot sectors in our economy. It is yielding 8+%. (cusip 881005201)
- CVR Partners, LP (UAN) - yielding 10+% (cusip 126633106)
- Edison International (EIX) 7.5% of 6/13 (cusip 281023AN). This is yielding almost 10% for less than 2 years
- Broadview Networks Holdings (BDVU) - 11 3/8% 9/1/12 yielding 16% (cusip 111384AC7)
- Ally Financial Inc. (ALLYPRA) - 11.5% There are three very attractive Ally Bank Preferreds yielding around 10+%. Ally is 91% government owned, so they're not going anywhere. (cusip 361860208)
- Ally Financial Inc. (ALLYPRB) - 10+% (cusip 02005N308)
- Compass Diversified Holdings (CODI) - 10+% yield (cusip 2045Q104)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.