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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • MUST-KNOW UPDATE ON WORLD MARKETS FOR INCOME INVESTORS 0 comments
    Jun 19, 2009 10:50 AM

    A Mid-Month Review of What Forex, Commodities, and World Stock Indices are Telling High Dividend Stock Investors

     

    1. "It's the Economy, Stupid"

     

    This was the famous summary of Bill Clinton's presidential campaign theme that helped him seize the White House from George Bush Senior in 1992. Then too, the U.S. economy was suffering a decline that started with…surprise!!... irresponsible bank lending and a resulting Savings & Loan banking crisis that threatened the health of even the largest U.S. banks.

     

    Sadly, the U.S. Government did not learn from this painful bit of recent history that the profit motive and banking don't always mix, at least not for the common good.

     

    Because we didn’t learn from history, we were indeed destined to repeat it, and we have.

     

    Since June began, doubts about the strength (or existence) of the world economic recovery has been the underlying cause of events in world stock indices, commodities, and currencies.

     

    A. The Big Question

    Is the assumption of ongoing recovery, in fact true? Let's look at the following international asset classes: Forex, Commodities, and Stocks Indexes.

     

    Most instruments have generally followed a similar pattern (timing has varied a bit) over the past two weeks:

    1.    Continued their existing rally into June

    2.    Brief multi day reversal

    3.    Settle into horizontal trading range in the past days

     

    2. Forex

     

    The same recent pessimism and decline in commodities has helped demand for safer currencies like the USD and Yen at the expense of the commodity currencies like the AUD, CAD, and also of higher yielding currencies like the NZD.

     

    Virtually all major currency pairs have spent the past week or more in a trading range.

     

    The USD got extra help over the past weeks from a chorus of support from both the U.S government and its creditors. These creditors have alternately expressed both frustration at the recently declining value of their dollar holdings, and support for both the dollar's status as the world's reserve currency and for continued purchase of U.S. Treasury bonds.

     

    The common theme among their conflicting remarks: sheer self interest. After all, these same creditors need to protect both their USD denominated foreign currency reserves, AND the U.S. consumer's continued demand for imports from these creditor countries like Japan, China, Brazil, and Russia.

     

    Playing its part, the U.S. has added its own comments of support for the dollar. After U.S. Treasury Secretary Geithner met with the Chinese in early June, Fed Chairmen Bernanke declared the U.S. needed to reduce it's money printing and it's debt. How do you say "amen" in Chinese? Assorted Asian officials also reiterated willingness to buy Treasury bonds even if they lost their AAA rating.

     

     

     

     

    3. Commodities

     

    Crude oil has followed the same pattern as pessimism about growth and oil demand reversed stopped and briefly reversed a roughly 100% climb since January from around $36/barrel to about $72/barrel. It has been trading between $68 to $72 a barrel. Here too, there are opportunities for those able to establish positions at reliable support or resistance.

     

    Gold has ceased its multi-month rally and has been trading recently between $930 and $960 as pessimism about growth has eased inflation concerns, despite exploding supplies of virtually all currency groups. The consensus seems to be that as long as world economies continue to contract and/or fail to grow, inflation is not a near term threat despite new currency pumping out via high pressure hoses throughout the world. When job growth returns and consumers are able to spend, then watch gold fly.

     

    4. World Stock Markets

     

    Since early June world stock markets mostly stopped rising, traded in range, have recently pulled back and are now settled into trading ranges as they await further signs that there is enough real economic improvement coming within the next year to justify their 20-30% climb since early March. These same doubts are reflected in the below asset classes.

     

    The coming FOMC meeting may provide key hints about the US, as may the coming second quarter bank earnings reports. Remember, it was trouble in the banking sector that really ignited both the current crisis and the March rally.

     

    Stocks are currently in a mostly horizontal trading range, that may provide lucrative opportunities for those able to catch moves at solid support or resistance levels.

     

     

    5. So What do Income Investors Do?

     

    It depends how you prefer to invest. To paraphrase King Solomon:

     

    “Everything has its season, and there is a time for everything under the heaven”

     

    A. Short Term Trader’s Delight

     

    If you like to trade in and out of stocks, forex, or commodities, this is your time. The range-bound nature of these markets will provide opportunities galore for those adept at picking reliable support and resistance levels, and who are able to catch the desired instruments at these levels. Best of all, these levels allow the smart, disciplined traders/investors uniquely low risk, high reward situations. Well defined support and resistance levels allow traders to know quickly if their theory about support or resistance is correct, and thus to place stop loss orders a short distance beyond these levels and get out with a small loss. The markets remain skittish and news driven, hence prone to unpredictable moves beyond near term support or resistance levels.

     

    B.  Long Term Buy and Hold High Dividend Stock Investors Stand Aside & Prepare

     

    If you prefer to buy and hold high dividend stocks, stand aside for now, or limit purchases to partial positions. Place orders for stocks we've recommended around March lows.

     

    As detailed in earlier articles, there is too much potential bad news waiting to happen, especially considering stocks have risen 20-30% since March in the absence of any signs of anything close to actual economic growth, never mind 20% or more growth.

     

    In case you forgot, remember just a few minor details.

     

    Worries about the financial system started this crisis, signs of bank profits in Q1 of  2009 started the March rally.

     

    There are serious doubts that these were sustainable. Q2 disappointments will hammer stocks and commodities as pessimism returns in force.

     

    Even if the banks survive Q2, there remain, still growing unemployment (already around 9.2%, well beyond the  8.9% "worst case" scenarios of the recent stress tests,

    will

     

    1.    further erode consumer spending to sustain both residential and commercial debt portfolios

     

    2.    coming residential mortgage rate resets (read: massive increases) will further accelerate the deterioration of bank residential mortgages

     

     

    Let's not even get into credit card debt.

     

    Meanwhile, take note of March lows in stocks we've recommended. These are buy points.

     

    While energy and precious metals get hammered as pessimism reduces demand for energy and the inflation fears that feed gold demand, take positions in related income stocks.

     

     

     

     

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