The death of buy-and-hold
Once again Helicopter Ben Bernanke said jump and the market said how much. The stock market cheered his speech on Monday where he reiterated the Federal Reserve's willingness to further stimulate the economy saying:
"While I'm encouraged by the unemployment rate's drop to 8.3 percent, further improvement in the job market will require continuing the central bank's easy monetary policies. Faster economic growth is needed to keep the unemployment rate moving lower, and with GDP growth of 2-2.5% good for no change in the unemployment rate long-term, a further 2% growth is required to lower the rate by 1% in a year. Therefore, the Fed should be targeting 4-4.5% growth for several years. Monetary policy loses its effectiveness if the Fed allows the unemployment rate to stay high for too long. Hence, the Fed does not have the luxury to wait for a slowdown, especially when the economy needs a further boost."
This is just further evidence that they clearly see more pain on the horizon when the effects of QE2 wear off and that all the market really cares about is more free money, regardless of the long term negative effects. Lest we forget, this is an election year, and Bernanke is appointed by the president, not elected. This will help commodities such as Barrick Gold Corp (ABX), SPDR Gold Shares (GLD), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Goldcorp. (GG), Freeport-McMoRan Copper & Gold Inc. (FCX), PowerShares DB Gold Double Long ETN (DGP) for the not so faint of heart, plus Silver Wheaton Corp. (SLW) and ProShares Ultra Silver (AGQ) and Fortuna Silver Mines (FSM).
We remain on alert for our clients as evidence is mounting that we may witness a market top sometime this year due to the fact that:
• Bull markets are an average of 39 months and the current one is at 37.
• After the election there will be less inventive to continue to stimulate the economy.
• The last two years of a presidential cycle are normally very good, as we have witnessed, while the first two years (which start in January) are often terrible.
The next major downturn and or a crash will be even more devastating, as many investors will just throw in the towel having endured three bear markets in one decade. That will spell the death of buy-and-hold … which has actually been ineffective for almost 13 years already, and is suicide in a market like this … as the markets have just now passed where they were in 1999. Talk about a lost decade!
Whether it is "sell in May and go away" or we get a push until year's end is anyone's guess. Naturally more stimulus should push the market to new highs, coincidentally right around the election. In addition, the next earnings season set to begin in a few weeks will probably be better than expected and push stocks higher.
With that investors can still buy SPDR S & P 500 (SPY), SPDR Select Sector Fund - Financial (XLF), iShares MSCI Emerging Index Fund (EEM), Emerging Markets Consumer ETF (ECON), 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), Red Hat Inc. (RHT), Schlumberger (SLB), VMware Inc. (VMW).
If we do get true economic growth, I will happily change my tune. However I just don't see it. The massive deleveraging going on now and for years to come along with the demographics of a rapidly aging baby-boom generation past their peak spending years, which is spelled out clearly in "Facing Goliath," will be a major headwind for several more years at least.
Naturally you can't just "sit in cash" at 2/10's of 1%, so the key is to be "Tactical" and avoid buy-and-hold (buy-and-hope) at all costs. Be the expert or hire one with a focus on the market's "sweet spot", which is, currently, higher yielding investments such as preferreds, corporate and tax-free bonds, and MLPs, many yielding 8-10%. This way you can get the best of both worlds of appreciation along with a healthy dividend, but with less risk.
If your portfolio does not need the risk then don't take it and concentrate on investment vehicles with a guarantee of principle. Many do exist if you know where to look, and come with very generous yields, upside potential based on the market but with no risk of loss and/or a guaranteed income for life. If your portfolio can live with this option, take advantage of it. Why lose sleep the next time the market crashes?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.