Could the economy and stock market be recovering faster than we expect? In terms of the economy, Fed chairman Ben S. Bernanke said the worst U.S. recession since the 1930s has technically ended and cited various signs of a recovery. Even President Obama has said that the embattled US economy is recovering spurred on by his $787 billion stimulus plan. From a stock market perspective, the most influential stock market guru and investor – Warren Buffett – has also said that he is once again bullish on equities and his company, Berkshire Hathaway, is heavily buying. Here are my ideas on which American blue chip stocks he would be buying (or adding to existing positions) based on intrinsic value, ability to leverage fast-growing and more rewarding international markets and profit from a battered US dollar.

General Electric (GE) - U.S. multinationals that do business overseas directly benefit from a global recovery and weaker dollar thanks to higher profits reported in US dollar terms. General Electric is the biggest of the US conglomerates out there and stands to reap huge profits as global industrial and manufacturing demand soars from countries like China and India. GE also benefits from increased domestic infrastructure spending courtesy the $787 billion economic stimulus. Further, the large share price appreciation from historic lows this year reflects investors' growing confidence that the company's hefty GE Capital finance arm had weathered the financial crisis and that its large industrial businesses would benefit as the world economy begins to climb out of recession. That's why Warren Buffett (already an investor in this stock) and most analysts see only one way for this stock to go - Up.

Gold futures surged to $1,013 an ounce last week, the highest closing price on record and the first above $1,000 since February. The advance resulted in another weekly gain with gold prices having climbed for four straight weeks. SPDR Gold Shares (GLD), a huge ETF that holds more gold than many nations have in their reserves, has seen its assets climb toward $35 billion, just shy of a record set in June. Many market watchers and stock analysts are still bullish on this most precious of metals, but there is divided consensus on what is driving the price so high. Here are the three factors that could be contributing to the current and potential future rise in gold prices (and why you should consider it for your investment portfolio):

US Dollar Falling

Recent economic figures released confirmed what most had expected: America’s economy is still contracting. The world’s largest economy shrank at an annual rate of 1% in the latest quarter (compared to 6.4% in the previous one) meaning that while the country's deepest post-war recession was not over, the rate of decline is most definitely slowing. In fact some optimists would even say that the nation's economy is showing signs of stability - albeit without the two sure signs of economic growth - inflation and employment.

There are also other reasons to cheer, like newly released housing data. The S&P/Case-Shiller index of house prices in America’s 20 largest cities rose for the first time since July 2006 in May, by 0.5%. Americans also bought more houses in June than they did in May: sales of new single-family homes rose by 11%. All of this suggests things are getting brighter in the troubled housing market - the key bastion of the American economy.

President Barack Obama said recently that a second [multi-billion] economic stimulus package isn’t needed yet, though he expects the U.S. economy and unemployment to worsen this year. He also acknowledged that due to worse than expected economic factors, initial forecasts from his administration missed the mark. The original $787 billion stimulus bill was rushed through Congress and signed in February 2009, with his chief economic advisers forecasting that it would help hold unemployment below 8 percent. It included tax cuts and spending on infrastructure projects that the president pledged would save or create 3.5 million jobs.

Obama defended his initial stimulus projections, saying the economy worsened once the legislation was enacted only weeks into his presidency. “Nobody understood what the depths of this recession were going to look like,” Obama said. “It was only significantly later that we suddenly get a report that the economy had tanked.” However, the President did acknowledge that he was not satisfied with the progress made around distributing the stimulus funds and that the administration had to do more work with a program to modify existing mortgages, which hasn’t “been keeping pace with all the foreclosures that are taking place.”

It looks the rest of the world is getting tired of using the once mighty Greenback as it's reserve currency. Recent reports show that China and other emerging super powers have started seriously calling for the creation of a new global currency to eventually replace the US dollar. China, the largest foreign holder of US debt ($2 trillion), is behind the current push for moving away from the global fiat currency because of frustration at their financial dependence on the U.S., with Premier Wen Jiabao this month publicly expressing "worries" over China's significant holdings of U.S. government bonds. President Obama was forced to publicly assure the Chinese that all is well. Because other nations continued to park their money in U.S. dollars, the argument goes, the Federal Reserve was able to pursue an irresponsible policy in recent years, keeping interest rates too low for too long and thereby helping to inflate a bubble in the housing market.

It's still early and calls for moving to a non-US dollar world standard are not new. In fact, the Euro was starting to do this, but the global recession has placed a lot of stress on Euro member countries which in turn raised fears about the Euro's stability. Furthermore, the technical and political hurdles to implementing a new global currency are enormous, so even if backed by a coalition of nations, it is unlikely to change the dollar's role in the short term. This is clearly demonstrated by the fact that central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency combined. However, the longer term (5+ years) picture is not that great for the US dollar and eventually the current deficit spending will catch up.

When previously writing about where I would invest $50,000 in the year ahead, I had discounted gold as an investment because in essence it is a speculative commodity with little utilitarian purpose beyond that of jewelry. I may have been wrong as gold was one of the few "investments" that held up amid all the economic turmoil. But will the trend continue in 2009 and beyond?

In 2008, with markets and real estate collapsing around the world, gold on a per ounce basis posted a near 5% gain (the Dow was down by over 30% in comparison). If it wasn't for the unexpected appreciation in the US dollar, as global investors flocked to the safety of US treasuries, gold could have performed even more strongly. So far this year, gold is up about 2% to around $900 an ounce. However, gold critics argue that it should have performed even better given the state of the local and global economies, while advocates of the yellow metal argue that the worst is still ahead of us and that the best gains for gold are still to come with $2,000 not beyond reach in 2009.

In an effort to provide greater transparency and build bipartisan support for the largest stimulus plan in the nation’s history, President Obama and his team have laid out more details about the $825 Billion Economic Recovery Plan. This plan includes the much anticipated $200 billion plus in consumer stimulus, now in the form of tax rebates, which many families are keenly anticipating. I have written in detail about the makeup of the consumer stimulus (see this post), which basically gives tax breaks - based on income - worth $500 to individuals and $1,000 for couples. This will be paid via adjusting the withholding on people’s paychecks or as a credit when tax returns are filed. It is estimated that 95% of families will benefit from the new tax rebate.

However the consumer stimulus (tax rebates) are only one part of Obama's recovery plan and is more of a short term measure to jump start the economy. In the long term though the focus is to create jobs (3 to 4 million) and upgrade our nations infrastructure and facilities to the 21^st century. Here are some of the other key measures in the economic recovery plan :

Financial stocks have taken a battering over the last week with steep falls across the board, including the big banks such as Citigroup (C), Bank of America (BAC) and JP Morgan Chase (JPM), which have all fallen more than 25% to record lows. The reasons behind the falls are primarily due to a re-emergence of the credit crisis as it becomes evident that a number of the larger banks will need more federal cash injections (or yet another bailout) to stay liquid. Bank of America, which seemed to be amongst the most well capitalized, may need up to another $80 billion and Citigroup is to be split-up in order to survive. This and other grim news (like dividend cuts) on a number of financials has dominated the business news of late and placed continued pressure on stock prices.

The other big the cause for the sharp stock price falls are pure panic as investors run for the doors fearing the collapse of our big financials, despite government assurance to guarantee and/or buy the "toxic" assets held by these institutions.

Everyone knows that 2008 was a terrible year for most equity investors. The financial/credit crisis led to full blown recession which in turn caused a downturn in consumer and business spending. All this was reflected in equity markets which fell off a cliff over the latter half of the year. Any way you cut it and no matter where you invested around the world, 2008 was a disaster for long term investors. The graphic below from Yahoo! Finance shows how some of the major global stock indexes performed (click to enlarge).

Many are calling this the worst recession since the Great Depression. Or, most succinctly, the Great Depression 2. No doubt the news is bad and all the major economic indicators signal that growth is slowing at a quickening pace. But the question on most people's minds is how long will this recession continue.

It is getting stale to read about all the bad news making headlines everyday and it would be nice to read a positive headline like, "US economy adds 100,000 jobs". Unlikely in the near term, but there may be some light at the end of tunnel as we enter 2009 under a new political administration.

Like most investors still braving this market, I keep trying to find a safe place to invest that provides decent returns. With a stock market that seems to have many more down days than up days, it is hard to have confidence in future growth prospects. However with interest rates falling rapidly, saving money in even the best of high yield savings accounts seems to offer little return in real terms.

There is one bright spot, however, and a good option for medium to long term investors - High Dividend Stocks. Amongst the S&P 500 (whose yield is approaching a record 3%) there are some relatively stable, good quality stocks with significantly above average dividend yields. These stocks have not escaped the market beating, but they have held up better than most, and at current prices offer attractive entry points for long term investors.

In a continuing revelation of the economic team(s) to support his administration and its policy development, President-elect Obama announced the formation of a new panel called the Economic Recovery Advisory Board (ERAB). The board's mission will be to give President-elect Obama and his administration expert "outsider" policy advice on lifting the nation out of the current recession and stabilizing financial markets. It is designed to provide an alternative information source outside the normal government (bureaucratic) channels. The ERAB is modeled on the Foreign Intelligence Advisory Board established by then-President Dwight Eisenhower in 1956, at the height of the Cold War, when officials worried that the existing bureaucratic structure was inadequate to help the U.S. keep pace with Communist regimes. The financial crisis has drawn similar concern that the government isn't properly organized to monitor and respond to modern financial markets.

Former Federal Reserve Chairman Paul Volcker will be the chairman of this new board, with economist Austan Goolsbee appointed as the staff director. Goolsbee is also a member of the White House Council of Economic Advisers. Other members of the ERAB will be drawn from a cross-section of citizens outside the government, chosen for their independence, representation and expertise. The ERAB's findings will be used as direct input into the Obama administration's policy setting.

One of the most important, but dividing, issues currently facing America and Congress, as the economy continues to crumble, is the need or not for a US automakers bailout. The US owned automakers directly or indirectly touch most of us and their future is considered vital to the nation’s economic recovery. Here is a look at the pros and cons of bailing out Detroit's car makers (formerly known as the Big three).

Pros – Why the bailout is necessary

Treasury Secretary Henry Paulson announced that he has shelved the original plan to buy troubled mortgage assets via the recently approved $700 Billion Troubled Asset Relief Program (TARP). Instead he will use the remaining funds to assist non-bank financial institutions and promote consumer finance initiatives. In a striking admission, Paulson said that buying up distressed mortgage assets "is not the most effective way" to use government funding. "Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy."

Purchasing these so-called "toxic" assets was once the cornerstone of the rescue plan for financial markets and was almost the entire focus of Congress when the TARP package was being debated before its enactment in September. But almost as soon as Treasury received the money, it decided that giving capital to banks in return for preferred stock was a better use of the funds. Some analysts have accused Paulson of "flip-flopping" on every plan and it doesn't look like he has a plan at all.

Amongst strong objections and threats of legal action from antitrust regulators and customers who believed a Google/Yahoo alliance would have too much power over on-line commerce, Google (GOOG) has scrapped its Internet advertising partnership with rival Yahoo (YHOO). The market has reacted by pushing Google's stock down yesterday, yet Yahoo has seen an 8%+ jump in its share price.

This is purely because the market and a number of analysts believe that Microsoft (MSFT) or another company will make another run at taking over some or all of Yahoo's on-line business. Microsoft (MSFT) had offered $33 per share in May for all of Yahoo, but that offer was rejected by management and the board. With Yahoo now trading at $14 in a depressed on-line and off-line economy, Microsoft can now get a second takeover shot at a much cheaper price. If it thought Yahoo was worth $33 a few months ago, surely it would see it as a bargain at its current price.

This is the second in a series of posts about recent trades based on predictions that the market has bottomed. My previous trade on QQQQ (Nasdaq Index) calls was quite profitable in a short period of time, but with volatility falling the return to risk ratio from buying options on indexes is not as attractive. Hence, I have decided to play specific stocks that tend to be more volatile; on which options are more effective. Apple (AAPL) was a prime candidate.

Readers will know that I already own Apple Stock, bought at a much higher price, which I continue to hold long term. Here is the rationale behind the current purchase of the Apple call options and potential outcomes:

Despite global economic woes, one positive aspect for main street America has been the relatively rapid rise of the U.S. dollar in the last 3 months. The dollar index (DXY), a measure of the greenback against a trade-weighted basket of six major currencies, has strengthened by over 20% in this time.

A sign of America's declining influence in controlling world financial markets was signaled by the fact that unprecedented Federal Reserve and Treasury actions over the last few months was not enough to calm financial markets that went into free fall last week. It wasn't until a coordinated global rescue, orchestrated by EU members over the weekend, that global markets and the Dow finally found some confidence to move upwards in a significant manner (up 11% on Monday).

In the past, it was up to America to set and lead the course for global financial markets, but recent events could augur a future in which the rest of world will not and does not want America to control the financial system. Perhaps it is better that way. Just like one company should not be "too important to fail and bring ruin to all", so to should the influence of one country be limited.