What to do about the debt ceiling debate

The advent of the debt crisis is like sitting through a scary movie. There is anxiety. There are anxious moments. We hold our breath. But in the end, it is just a movie. After the movie, we walk out of the theatre and life goes on. The grips that Washington has on us will soon end and business will continue. Our government will keep paying for stuff.  All bills will be paid.  In the end, the conflict in Washington will be…. just theatre.

Harry Reid said this morning” It’s time for us to be adults.” Really Senator Reid?  I thought a pre-requisite for any person taking a responsible job was to be an adult. 

The real concern is that the slowing economy happening all around us threatens to move our country into a recession. Short term, steps taken to balance the budget are not helpful to a fragile economy. Whatever resolution settlement is made in congress will surely create more drag . Any combination of tax increases or spending cuts will have the same effect.

Given this environment, where do we need to invest?  Long term treasury bonds. Long term rates have remained stubbornly high for several years. Short term rates are near zero percent while the rate on the 30 year treasury bond has been over 4% for the last several years. This spread between zero percent short term rates and over 4% on long term rates is much too large and will have to contract. The time for them to appreciate is now.

Concern over credit ratings on the US Government, the dollar, and fears of inflation have all contributed to keeping long term T-Bonds at high rates and low prices. If mortgage rates were to fall below 4%, our economy would receive a much needed medicine. Refinancing would accelerate. People would save money on interest costs. Home building and all sorts of projects requiring long term financing would pick up.  Of course the bi-product would be increased tax receipts which is just what the doctor in Washington has ordered.

Who Will Buy All of These Commodities?

Massive liquidity can have mixed impact on the markets.  We are seeing that right now. The stock market has gone down in each of the first four days of May. This lends credence to the saying, “Sell in May and go away.”  Liquidity can drive prices up for commodities and stocks. But this liquidity can get restless.  Then the disruptions can overflow causing all risk assets such as stocks to go down.  So far, the S&P 500 is down over 3% for May.

Silver is a bubble bursting. Oil and gold are sharply down for the month. Leading industry groups in the stock market are rolling over and many headline stocks are currently undergoing significant corrections. As we have seen in this bubble driven liquidity-ocean, trends get locked in where prices move to extreme levels. Then, softly, almost imperceptibly, these trends reverse.

Now is a time for caution. For the time being, stocks appear to have more downside than upside. This condition shouldn’t last too long. For investors, however, it would be most constructive to implement some decisive defensive measures.  These would include shorting stocks in the commodity and energy space. It also means locking in profits on consistent winners.

The stocks most likely to weather this short lived storm are consumer stocks like the restaurant group, selected financial stocks like Visa and Goldman Sachs, and defensive companies like utilities.

posted 5-5-11

The Focus of Investing in Today's Environment

The argument wages onward. Are we headed for further economic weakness or is the economy staging a long, slow, recovery? Neither camp is gaining much of a foothold. It would hold that a double dip recession would cause the stock market to fall sharply and improved marks on the job front and the economy as a whole would be helpful to stocks. To an extent, the answer to this debate is coincidental and would not determine the direction of the stock market.

Interest rates on riskless investments are close to zero. Money resting in this arena must certainly not be long for life. It is just a matter of time before this money will grow restless and be forced into higher returns. Much of these flows are evident in the bond market but data also shows a record holding of cash and money markets by American citizens and institutions. Figuratively, there is a lot of uninvewsted cash that has piled up.

By the time a recession hits, this restless money will be on the move in an attempt to get in on the ground floor of an eventual recovery. This migration of money is how bottoms are formed. Often times the best investment gains come in the intial stages of a recovery. In this economic climate starved for returns, you prepare for recovery moves in the stock market that willl be swift and somewhat short lived.

The key focal point is to determine where the best relative returns will  emerge. Right now  money seems to be flowing into Latin American stocks. This would be a region to focus investing efforts. It is also constructive to focus on micro stories such as stocks like Priceline and Netflix. These companies offer exemplary solutions in their marketplace.

Investors need growth investments but with cash paying zero, there are also income producing investments that can provide decent returns if carefully managed.On the income front, corporate bonds still offer rates above 3.5% for holding periods as short as three years. Corporate and sovereign debt of developing nations can also safely earn 6%.