Looking for Certainty in this Uncertain Market

Don’t let last week’s market rebound fool you, cleaning this mess up is going to take quite a while.

Sure, the Dow climbed 700 points in two days to close out last week, most bank stocks roared back to life, and we have a $700 billion commitment from the government, but there are so many questions left to answer.

Will the government buy all the bad loans off the banks? At what price will they pay for them? Who’s going to run this operation? How long will it take to get a bill through Congress? Is $700 billion enough?

The biggest question of all is - when will the U.S. economy recover? For investors, that is the key. Even if we make it through this immediate banking crisis, the U.S. is still headed toward recession. Unemployment has been rising for seven straight months. Last month it hit a five-year high of 6.1%. I’m confident a sustainable bull market for stocks will return, but it won’t get started until we get some positive economic data.

There are just too many unanswered questions right now. Consumers aren’t buying houses, nor are they buying new cars or washing machines. Actually, they’re not doing much shopping at all. Traditionally more than two thirds of U.S. economic activity comes from domestic spending. To stimulate national economic growth you need to buy your own stuff. When Americans do shop, they are buying Chinese-made goods, not American. One million U.S. manufacturing jobs have disappeared in the last decade.

In addition, Americans are definitely not buying stocks (they’re actually selling out heavily).

The only certainty in the markets right now is there will be plenty of uncertainty. Uncertainty is not necessarily a bad thing. In fact, we can turn it into a very, very good thing. Here’s how:

• The markets are in panic mode and no one knows what’s going to happen next. Investors are looking for safety.
• The old blue chips that we know will be in business when we wake up in the morning are attracting a lot of attention. Shares of Wal-Mart (NYSE:WMT) hit a new 52-week high last week. Every thrifty spender’s favorite restaurant, McDonald’s (NYSE:MCD), has seen its shares steadily climb in value throughout all this mess.
• Wall Street is even starting to pay some attention to Microsoft (NASDAQ: MSFT). Although a recession will certainly have a negative effect on the sales of the company’s “Office” software, its primary source of income, the company is prepared for a long economic downturn. At last report, Microsoft has $43 billion saved up.

The common themes here are safety and cash flow. The companies I mentioned generate billions of dollars in free cash flow and return it to shareholders. They all pay dividends and have been steadily increasing the amount of dividends paid for years.

A lot of investors are even throwing in the towel and turning their fortunes over to Warren Buffett. Which, given his remarkable performance and staying power over the past five decades isn’t a bad idea. Shares of Berkshire Hathaway (NYSE:BRK.A) climbed about 20% last week.

Finally, one of the best trading opportunities I can find now is directly linked to the uncertainty overwhelming the financial community. What I’m talking about is gold. That’s right, good old gold. It’s not just for gold bugs that have been waiting 30 years for the “Big One” to bring the world’s financial system to its knees. Gold is quickly becoming a favorite for novice traders around the world. Speculators are running up gold prices in anticipation of worsening problems in the global financial sector.

Will this be the “Big One” the gold bugs have been waiting for, or is it just another passing storm? To be honest, I’m expecting the latter.

However, if I’ve learned one thing as an investor, it’s that you never bet against the trend. Right now, the uptrend is in oil and precious metals.

Last week I bought PowerShares Double Gold Long ETF (NYSE:DGP). This ETF doubles the return of gold prices. For every 5% gold prices go up, the value of ETF goes up 10%. It’s one of the easiest ways to catch on gold’s steady rise, which could easily last a couple more weeks.

Of course, it’s a trading position and I have a very tight trailing stop loss on it so I automatically sell if gold prices make a downturn.

As the old Wall Street saying goes, it’s too late to sell and too early to buy. Granted, there’s a lot to be said for being a contrarian, but timing is important. And now is not the time to be a contrarian investor in the United States.

The best place for your “safe” money now is on the sidelines. I recommend continuing to buy stocks, but only to slowly chip away at high-yield, value stocks.

Uncertainty is fueling the bears’ appetite. And no government intervention is going to prevent a big correction. The U.S. government is pretty much out of tricks at this point to prevent any further decline in the markets. It’s going to take a long time to get this market turned around, but there will be plenty of opportunities along the way.

The best advice I’ve ever been given was to “take what the market gives you.” And right now, the uncertainty-fueled market is giving us short-term opportunities in gold, precious metals (platinum looks like it’s about to take off), and energy.

Disclosure: The author owns DGP.

Comments

[investor88:]

Fair comment, be cautious and trade a portion of capital.

2008 Sep 24 05:04 AM