Is the economy really fixed?
What we're seeing right now is a rally fueled -- as was the post-2000 rally -- by central bank policy. Put enough money into the global economy and stock prices -- in nominal terms -- will go up.
But I think it's way too early to declare that the problems that damaged the global economy in 2000 and 2007 -- including too much central bank cash, global aging, inadequate systems for recycling cash from the Middle East and China, and policies that damped domestic demand while goosing exports -- aren't still with us. I'm pretty sure that we can't yet declare victory in the Great Recession, since the specter of a repeat of 1937 still hangs over the global economy. As Federal Reserve Chairman Ben Bernanke knows well, 1937 is the year that overconfidence in a U.S. economic recovery led Congress and the president to aim for a balanced budget in the belief that the Great Depression was over. That mistake ushered in another economic downturn that wouldn't itself be ended until the "economic stimulus program" otherwise known as World War II.
What worries me about the current rally is that the fuel -- central bank cash -- may be running low. It took massive cash flows from the Federal Reserve and the European Central Bank to get stocks to this level. The Federal Reserve isn't looking to expand its balance sheet; it increasingly has its eye on an exit from its stimulus policy, quantitative easing. The politics of the European Central Bank say that the bank won't send another wave of cash into the European financial system unless the crisis worsens drastically in Italy, Spain and France. The Bank of Japan will add its own program of quantitative easing to the global soup later this year, I believe, but that's likely to be the last big move from the global central banks.
At the same time, as the central bank cash that has fueled this nominal rally is becoming scarcer, inflation may be ticking up modestly in China and is likely to move higher by design in Japan in the not-too-distant future.
I'm not willing to say that this rally is going to end tomorrow -- I think it will take an external shock, something like a bad turn in the eurozone debt crisis in, say, June -- but I do think the odds against this rally are rising.
Stick with dividends
In this situation, I think a high but sustainable dividend from a company that seems committed to raising dividends over time is the best hedge that you can have. Dividend stocks with high, sustainable yields tend to fall less when a rally busts, although they do fall. The dividend gives investors a return while they wait for stock prices to recover, and investors will get a chance on any price declines to pick up shares of high-dividend stocks they know well with what will be higher yields. And, finally, companies with histories of investor-friendly dividend policies tend to be very aware of inflation and to raise dividends to keep ahead of rising inflation as long as it doesn't get completely out of hand.
Given recent history, investors need every edge they can get to generate a positive, inflation-adjusted return from stocks. And that means using dividends, too.
On Wednesday, I'll post an addition to my dividend income portfolio at JubakPicks.com that will help you do that on Wednesday. (Free registration is required.)
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Johnson Controls spikes on rumor
- Qualcomm shows it can keep its momentum
- So why did the Dow hit an all-time high?
- Focus turns to gold miners' costs
- Investors shrug at Seadrill's quarterly shortfall
- What do Wal-Mart's woes say about the economy?
- Targa is steady in an uncertain commodity market
You're invited to join Jim Jubak for a free Webinar on March 25 for a discussion he's calling “The commodity super-cycle is long dead: Long live the commodity super-cycle." Click here to register at MoneyShow.com, then return for the session.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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VIDEO ON MSN MONEY
So does anyone really believe the 2% inflation and the 7% unemployment rates?
It's called "cooking the books". Metrics were meant to reflect reality, but government can't handle bad news, so they generate bogus numbers.
This is all fabrication by Bernanke and the Fed. Funny money, monopoly money call it what you want this cannot last. China is tapping it's foot wondering when we're going to start raising interest rates on our treasuries while the major banks are still holding bad debt. The moment the Fed raises rates everything explodes. Markets tank and inflation kicks in with a vengeance.(and that will coincide with a republican taking the white house.)
But we can take solace for now in the fact that the Fed has no plans to raise rates until either Bernanke exits or BHO is out of office.
Wall street means nothing! Their just playing with funny money. Ignore the investors, brokers and everyone else that says to get in the market NOW! It's just another scam for those bast**ds to fill their pockets with our money!
....The only thing running the stock mkt right now is bernanke and his printing press....
"When Wall Street wants to flog stocks, it runs out stories like "Dow Jones Average hits all-time high"
Exactly. And, who presents these sales pitches for them? It’s the so-called Independent News Media which is only slightly more captured by their Wall Street masters than government regulators.
The whole thing is a sham. If only one of the thousands of self-proclaimed geniuses on Wall Street would come up with an investment that guarantees purchasing power of your savings after taxes. Then they would have something to brag about. And, they don’t even need to waste time coming up with some exotic name for this investment like they usually do. I think it’s what Ron Paul refers to as sound money.
Hey, you have to keep the Monopoly game going by printing more currency when the bank runs out. If you don't print more currency there's no reason to keep playing the game and working. If everybody stops playing the game then there's no more assets for the banks and Wall Street crowds to steal.
Just think if all the progress we've made going from free 6 TV channels to $100 month 86 channels of reality, reruns and news about violent crimes and two parties of pigs. Now we'll get to store all of our stuff online and pay $100 month to access it. We'd be better off turning off all media and putting gold and silver bars under our beds.
ANOTHER ENCOURAGING ARTICLE FROM JUBAK. EVENTUALLY HE WILL BE RIGHT AND THE SKY WILL FALL. AUNTIE EM AUNTIE EM......
ALMOST ALL THE ARTICLES DEAL WITH INDIVIDUAL STOCKS FOR PROS LIKE HIM. ALL MY INVESTMENTS ARE MUTUAL FUNDS RUN BY PEOPLE WHO I HOPE UNDERSTAND STOCKS. THERE'S NEVER ANY USEFUL INFO FOR MUTUAL FUND INVESTORS IT SEEMS. NEVER PUT YOUR EGGS IN 1 BASKET IS WHY I AM IN MUTUALS. I HAVEN'T A CLUE HOW TO ASSESS AND FOLLOW 1 STOCK AT A TIME
The only thing he gets wrong is the same thing all idiots get wrong and that is the ridiculous idea that government spending is needed to help an economy recover. The greatest recovery in U.S. history took place when Reagan cut taxes and let the American people get to work. And that was after a far greater recession than the "great recession" which was exacerbated by government interference in the housing credit markets.
The reason government spending has always failed is because it's not an infusion of money, it's a transfer of money. It's present and future money taken from the private sector so it takes the American people out of the equation. It makes far more sense for the American people to keep their money and invest and spend it (a demand economy) than it does for the government to take it and spend it (a command economy). Ask the Soviet Union and China how well that command economy works. After a combined 125 years of failure the honest answer is that it doesn't. And if it fails for a long time it also fails for a short time, which has been our experience in America.
Look at the ends of the first couple of QE's and the "twist" and you see the market started dropping after the end of each. As it will when this one stops. At some point the FED not only has to stop printing but it has to take the 3+ trillion off its balance sheet. Deficit spending a trillion a year and printing a trillion a year is a very dangerous game to play with long term rates and the possibly very bad outcome.
The beats on earnings come from a couple of things. One ... Earnings estimates were lowered. Another few things that eat into earnings numbers are hiring and capital expenditures. They have both been almost nonexistent thus not affecting numbers negatively.
I wouldn't be surprised to go higher short term but the current policies (deficit spending and printing) getting me more nervous now than what happened in 2008.
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[BRIEFING.COM] Last week, the S&P 500 rallied sharply on Friday but missed a ninth straight winning week by the slimmest of margins. It is up today, but it will have to have a blockbuster afternoon session if it is going to avoid a second straight down week.
At its current level, the S&P 500 is down 1.5% from last Friday. The odds are stacked against making a complete comeback by the closing bell considering there isn't much concerted leadership today and knowing the ... More
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