The economy is a lot like the fabled stuck between a rock and a hard place, "Push me pull you," neither hot enough to sustain a true recovery nor cold enough for Ben Bernanke to pull the trigger on another round of quantitative easing.
The bulls hang their hat on "not terrible" economic data along with the meteoric, albeit narrow, rise the last few months and say the stock market is predicting an improving economy. The bears point to the continued printing of money by practically anybody with the power to do so as the life preserver keeping the patient afloat.
What is the average person to believe? Many see their rising 401k statements and some friends driving a new car, and the recovery seems a reality. After all, our beloved government Federal Reserve would never lie to us, now would they?
However, Beneath the surface another story stays subdued, for now, but looms ever larger. The fact that the economy, and thus the market, is addicted to continued stimulus is so blatant to me; it screams my name in the middle of the night when I sleep. $15 trillion newly printed dollars has to go somewhere, and it ain't going into a bank saving account at 2/10 of 1%!
Robert Shiller recently said it best:
"In the U.S., major new fiscal stimulus is on hold, and monetary policy is impotent. State and local spending, housing, inventory investment, capital equipment investment and commercial construction are likely to remain subdued. U.S. exports are curtailed by sluggish foreign economies. So U.S. growth in 2012 will be decided by consumer spending, 71% of GDP. With declining real wages and incomes and low confidence, continuing strength in outlays is unlikely. A 2012 U.S. recession is probable, but milder than the 2007-2009 nosedive, unless another financial crisis unfolds."
Not mentioned are increasing payroll and capital gains taxes, the expiration of the Bush tax cuts and the simple fact that the majority of the U.S. population and developed world is not only over-indebted but now well past their peak spending years, all of which is discussed in, "Facing Goliath - How to triumph in the dangerous market ahead." Add in the simple fact that the administration will have little incentive to print more money after the election and it seems obvious that without a QE3, we're a not so colorful creek without a paddle.
A QE3 will push stocks to new highs growth investors locking for good plays both domestically and internationally can buy the SPDR S & P 500 (SPY), SPDR Select Sector Fund - Financial (XLF), iShares MSCI Emerging Index Fund (EEM), Emerging Markets Consumer ETF (ECON), Brazil (EWZ), PowerShares QQQ Trust, Series 1 (QQQ), iShares Russell 2000 (IWM) and iShares FTSE China 25 Index Fund (FXI).
The more nimble trader can continue to play the big movers such Apple (AAPL), Google (GOOG), Intel Corporation (INTC), Qualcomm (QCOM), Microsoft (MSFT), Cisco Systems (CSCO), Dell (DELL), Caterpillar (CAT), General Electric (GE) and Yahoo (YHOO), Red Hat Inc. (RHT), Schlumberger (SLB), VMware Inc. (VMW). Earnings for these stocks should remain strong as corporation continue to replace workers with technology. The pullback in Apple is particularly interesting as this consolidation will allow investors who have been waiting for an entry point a chance to get in.
For more moderate investors who may also like some yield, you should focus on REIT's related to the aging baby boomers such as Healthcare Properties (HCP), Senior Housing (SNH) and IShares Healthcare (IYH).
More stimulus will certainly give a kick to commodities and aggressive traders and speculators can buy Barrick Gold Corp (ABX), SPDR Gold Shares (GLD), Power Shares Double Gold (DGP), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Goldcorp. (GG), Freeport-McMoRan Copper & Gold Inc. (FCX), PowerShares DB Gold Double Long ETN for the not so faint of heart, plus Silver Wheaton Corp. (SLW) and ProShares Ultra Silver (AGQ) and Fortuna Silver Mines (FSM).
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 MLP's, 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.