4/27/2011 12:02 PM ET|
Investors, it's time to run and hide
The stock market can ignore economic woes and worries for only so long. Here's why a pullback is on the horizon and the smart money is preparing for the worst, as well as several ways to get defensive.
Since last summer, it's been a very good time to be in the stock market. The economic turmoil and price volatility which had become so commonplace were smoothed over. This taste of the "epic bull market" I predicted in September overpowered the popular obsession with bonds and drove the average investor back into stocks in a big way.
Mainly, this was due to the Federal Reserve's $600 billion money dump, teased in August 2010 and confirmed in November. Economists have dubbed the move "QE2" -- short for the second round of quantitative easing -- but the terminology isn't important, and the strategy wasn't new. The Fed started buying back long-term bonds in late 2008 and expanded its "QE1" program in March 2009 to eventually total $1.7 trillion, helping put an end to the bear market.
In short, the Fed has been injecting cheap cash into the heart of the financial system. As a result, equities, commodities and other assets have all pushed higher with nary an interruption. We've had the bailout of Ireland, a midterm U.S. election, revolutions in the Middle East, interest rate hikes in the developing world -- and yet the move has continued.
Since Sept. 1, the Standard & Poor's 500 Index ($INX) has climbed 27%. The small cap stocks in the Russell 2000 ($RUT.X) have added more than 40%. As a result, investor sentiment has soared. Margin trading -- investing with borrowed money -- has become popular again. In fact, brokerage cash levels are now at their lowest levels since June 2007. At the same time, outflows from ultraconservative money market mutual funds have surged to a four-month high, according to EPFR.
There just isn't that much dry powder -- uninvested cash -- left out there.
Yet conditions have become more difficult lately, with the earthquake and tsunami in Japan, a bailout in Portugal and violence in Libya dampening enthusiasm. Inflationary pressures are also on the rise, a nasty side effect of the Fed's intervention. Higher food and fuel prices have scuttled consumer confidence and dampened corporate profitability, and they now threaten economic growth. Indeed, as I mentioned in a recent blog post, first quarter gross domestic product is set to disappoint.
Within days of the S&P 500's late February high, I warned of market trouble. The situation has only worsened since. So is it time for investors to batten down the hatches?
I think so. First I'll tell you why. Then I'll offer some ideas on where to move your money to keep it safe.
A constellation of concerns
There is plenty for investors to worry about right now. America's top-tier AAA credit rating was threatened by Standard & Poor's analysts April 18 when they -- for the first time since 1941 -- put America on downgrade watch. (I presaged this warning and explored the economic impact of the budget-cutting it seems to demand, in my Feb. 2 column.)
Crude oil worries have only worsened as the "Arab spring" has spread to Yemen and Syria. And NATO intervention has resulted in only a protracted stalemate between rebel forces and Moammar Gadhafi in Libya. (I explored the oil supply situation in my March 3 column.)
The economy has yet to show it can stand on its own without the help of government assistance, be it QE1, QE2, Obama's stimulus package or the $858 billion tax cut passed in December. All of these tailwinds are now turning into headwinds as central banks around the world tighten policy and governments cut spending and raise taxes.
The United States is one of the last holdouts. But QE2 is set to end in June and the battle over the 2012 budget -- and the need to raise the U.S. Treasury's debt ceiling -- is just beginning.
And the eurozone crisis is heating up again as Greece moves closer to a debt default or restructuring. The London Telegraph reports that European Union and International Monetary Fund officials are expected to visit Athens as early as next week to review the country's progress on its fiscal deficit and possibly address worries about its current debt levels.
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I am not a financial expert and my wife and I are counting on our investments in our 401k to help carry us through our retirement years. The world is filled with uncertainty and that is the gamble we all take when investing.
It drives me crazy when I read dramatic headlines such as this that serve no purpose other than to grab one's attention and instill unfounded fears in the publics mind.
I wish the author good luck but suggest that he follow his advice to go run and hide.
Look my 401k and Roth is in stocks by about 60% and has been for 15 years now. I am not pulling out my money now or anytime in the next 20 years it is what it is. Long term the stock market with steady investments will pay out or the US way of life will end and then I be farming in my backyard full time like the rest of you. If the stock market crashes for real then your dollars you pulled out will be worth the paper. We are all in the same boat except if you pull out and miss time it then you buy gold and it goes down your working until your 80.
I have a friend who took his money out at the low and put it in a safe in his house now it is to late to get back in.
Maybe we are going in the tank and maybe gold will keep rising but I am not starting to buy gold now (sorry glenn beck) just like I would not getting out of the stock market at a low.
we are in a storm in the middle of storm it is hard to see the way out. good luck and we can see who is right on the other side
You all keep using the term "invest" when it is closer to gambling. Investing went by the way side along time ago when we started allowing anybody and everybody to start creating and pushing derivatives, hedge funds, and commodities to the general public. The big players have this vehicles to separate the ordinary person from their money without being held accountable or even having too much at risk because they can get a bail out. Imagine if pension funds, 401K, individuals not involved in an industry and other sources of funds were not allowed to touch anything but pure simple investments. The billions paid to financial institutions might actually stay in our pockets for future use. Paper pushers believe they add value by generating obscure financial instruments when all they are looking to do is take your money for as little work as possible, collect bonus, and bribe politicians to look the other way.
Commodities came into being to help farmers balance the risk of production. Exactly what does a hedge fund or Joe Public have to do with investing in them? It's time to return to an actual investment environment were small events like one earning announcement or a penny shift in a stock price shifts the entire market and everyone knows what they are investing it. Banks need to get back to making money the old fashion way (lending and investing it) not coming up with another shell game.
professional futures traders are building big positions in Treasury bond futures -- betting with real money that higher bond prices (along with lower interest rates) are on the way.
So, now we’re supposed to take investment advice from traders. I think this is a fundamental root of the problems in our economy and markets. What happens when those traders change their mind next month, and decide to exchange their treasury positions for oil, the Swiss Franc, or whatever then happens to be the hot investment du jour? Didn’t Bill Gross at PIMCO do this already?
OK Let's look at two of the picks for investment in the article.
One JNJ has had all sorts of quality control issues due to the fact that they have fired all their American workers and hired Mexican workers who do not pay attention to what they are doing. The law suits alone and the abandonment of JNJ goods by the consumer put this elephant firmly in the ditch so dump this stock and quickly.
As to putting money in bonds. With the Federal Reserve not buying US T-bills anymore and China building 30 million homes for their people and two nuclear power plants a year for the next ten years is not going to be in any position to buy US T-bills nor is Japan having to rebuild 1/3 of it's country and replace it's nuclear plants with expensive coal burning plants in the next ten years is also not going to be buying US T-bills and Europe has a mess with the piigs bailout and will not be buying any US T-bills. In fact all three will be selling US T-bills in the coming year.
So who will buy the US T-bills? The rest of the world does not have enough money and the super rich in America are investing in China,India , Vietnam and Brazil with the money they get from not paying their fair share of taxes. Buffet is typical of the super rich and instead of paying 35 percent in income tax as per Reagan with the deal he made of taking the tax breaks away from the rich and lowering their taxes from 74 percent. Only now 30 years later the tax breaks are back and Buffet even though he says he is for paying more tax is only paying 2 percent income tax on all his billions. So much for Reagan's deal the super rich are not paying any tax at all. It seems like a lot to normal people but it's only 2 percent of what they earn. Wish I would be able to pay only 2 percent.
So basically the only way the US will be able to sell T-bills to fund the deficit and everyone else not rolling over their T-bills will be to offer 15 percent interest like Greece is now. That will increase bond yields so high that everyone in bonds will lose a lot of money.
Things are going to get a lot worse people.
Personally, I'm not in a hurry to sell because there's not a good alternative investment and the S&P 500's average trailing P/E is almost exactly at its historical average so I don't expect a big sell-off.
Nosybear - excellent point! It reminds me of the very first stock-market book I bought. It was a series of essays by investment experts at some brokerage and I remember one saying a woman came into the office and said, "What's GE going to do today?" Just like your comment, the writer said he told her that if he knew that, he'd be sitting on an island with a drink in hand instead of working!"
Lumber prices have an eerie ability to predict what's coming for home sales, housing stocks, job creation and more. That's due in large part to the long lead times and great expenses associated with increasing wood production. so that indicates the stock market is going to crash?
Here is a much better written article as to why lumber prices are behaving the way they are...
But professional futures traders are building big positions in Treasury bond futures
what traders? you and your buddies?
you make it sound like it is a done deal that treasury prices will rise b/c investors are already seeing past inflation and are no worried about deflation???? i can't believe all these words were in 1 paragraph without technical facts. you don't even mention the effects of how QE2 ending will help or not help treasury prices.
here again is a much better written article that shows how true experts on treasuries have strong disagreements on what will happen in the coming months..
Then you top it off with recommending a triple leveraged treasury ETF without any explanation or disclosure of how 3x leverage funds are only built to track daily performance and have great risk as a long-term holding.
I really wonder to myself what the heck Mr. Jubak thinks when he sees these articles next to his own.
Oh, boy. The last time Anthony wrote one of these was back in late August and then the market went on a tear and spent three months going up. Ok, it was mostly because of the Fed and QE2 but anyway here we go again. I'd definitely be looking to take some winnings off the table after this week but don't think it's going to get as bad as last year. Rotation from momentum plays (Apple, Google, etc.) into big cap laggards (GE, INTC, MSFT, T, XLU) is already under way.
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