Don't Give Up on U.S. Stocks Just Yet
There's no denying that bearish investors have made their case in recent weeks. They are legitimately afraid that the economies of the United States and Europe will fade so much in the next few months that they will sink back into recessions punctuated by credit blowups and a resumption of a bear market for U.S. stocks.
Still, the simple fact that there are a few economic boogey-men lurking behind each suspect piece of data doesn't mean that investors should run screaming away from stocks.
In fact, if you take the time to listen to the opposite point of view before you make up your mind about the direction the economy is headed, you might be pleasantly surprised.
Four Factors to Consider Before Determining Your Long-Term View on U.S. Stocks
Stocks rose worldwide over the past week — ranging from +2% in U.S. big caps to +6% in gold — as investors swelled with sudden courage in response to positive reports on Chinese economy and glimmers of hope that European governments can get their financial houses in order.
The week's results erased four weeks of losses, including the despairing session that ensued on June 7 after a disappointing report on U.S. employment. Meanwhile, the result of the past 35 trading days, or seven calendar weeks, are still largely negative, ranging from a loss of 5.5% for U.S. stocks and -8.5% for Europe. Only gold stocks have eluded the smoke monster, rising 7% in the span.
The variation in one-week and one-month results illustrate perfectly how investors are showing that they are hopeful but unconvinced that recent strength in gross domestic product (GDP) growth and corporate income advances are sustainable, and therefore won't buy stocks heavily until prices are so cheap that they discount worst-case scenarios. In other words, they want a high risk premium before buying — sort of like demanding a 72-month warranty before buying an expensive car.
To read about the four factors you should consider before investing click here.
Moribund Sentiment Is Jeopardizing the U.S. Stock Market
The U.S. stock market is really at a critical juncture right now.
I'm all for being optimistic at the prospect of a super-oversold condition amid rampant pessimism. But bulls need to take charge of the controls of this sputtering plane. But now that they failed to yank the stick higher before the February lows, the bottom is really in danger of falling out.
Most corrosive for the major indexes' value at present are large-cap energy and bank stocks, which have fallen 7% as a group amid a hex from the BP PLC (NYSE ADR: BP) blowout and financial regulation clampdown.
You would think that a cut in oil supply from the Gulf of Mexico would provide a strong undertow for energy, at least, but investors have been acting like industrial demand will grind to a halt in coming months.
June historically has been the second worst month of the year, after September. But after suffering through the worst May since 1940, and bearish sentiment on overdrive, it's fair to expect opportunistic investors to dive in now and take advantage of bargains.
Taipan Daily: Spoiling Wall Street's Surprise
Sometimes I don't know whether to excoriate the Wall Street/Washington axis for its constant efforts at obfuscation – or thank it for all the smoke and mirrors.
Yes, there is something deeply troubling about a culture so utterly dedicated to the manipulation of facts. But then again, these distortions introduce exactly the sort of information gaps that power the most lucrative trading opportunities.
For example, we have recently read that British Petroleum (BP) – mired armpit deep in a cesspool of oil of unknown size and depth, and fully aware that it will be sued continuously unto the next generation – is rewarding loyal investors with a billion-dollar dividend and spending something like $100 million on a public relations campaign to somehow obscure its culpability and rescue its reputation.
This Weekend's G-20 Meeting Won't Bring Any Answers on Financial Regulation
Finance ministers from the Group of 20 (G-20) nations this weekend will attempt to reach a compromise on the implementation of stricter banking regulations at a meeting in Busan, South Korea. However, significant changes to financial regulation will come slow, if at all.
The meeting will start late Friday and will involve discussions about how to reduce deficits and prepare financial institutions for a wider set of rules.
"Sustaining world economic growth is the most important item on the G-20 agenda this weekend," said U.K. Chancellor of the Exchequer George Osborne. "Countries with high budget deficits must show that they can deal with them. Equally, surplus countries, such as China, must show that they too can support economic growth going forward."
Top Profit Plays for a Defensive-Investing Portfolio
Prussian military theorist Carl von Clausewitz once said that "the best defense is a good offense." Although that bit of wisdom has been used everywhere from the battlefield to the gridiron, it could just as easily be deployed as part of a "defensive investing" strategy.
And in today's markets – whipsawed by worries emanating from virtually every major market around the globe – a defensive-investing plan needs to include protective stops, inverse funds, high-yielding dividend shares, "sin stocks, and investments in oil and other value-storing commodities," Keith Fitz-Gerald, the best-selling author who is Money Morning's chief investment strategist, said in an interview this week.
With the world markets in flux, Fitz-Gerald sat down with Money Morning Executive Editor William Patalon III to talk about defensive-investing strategies. What follows is the full text of that interview.
Question of the Week: Readers Respond to Money Morning's Market Volatility Query
The Dow Jones Industrial Average last week dipped below 10,000 for the first time since February as a month of market volatility and price declines continued. Analysts predicted volatility to continue into June as government exit strategies begin and liquidity dwindles.
The zooming rebound in U.S. stock prices from their March 9, 2009 bottom – the strongest rebound since the Great Depression – has been stymied by concerns over the Eurozone debt contagion, financial reform, the market flash crash and new political sparks in Korea. Figures show that the bulls are still hanging around – on the sidelines – but the bears have been calling the shots during a month that has seen stock prices fall more than 8%.
"I think it's a question of pick your poison," Dan Alpert, managing partner at Westwood Capital, told MarketWatch. "The market was poised for a very severe correction and whether it's southern Mediterranean countries or worries about German banks, you can pick your catalyst."
The Tobin Tax: The Fix-It Plan Wall Street Hates … But Can't Seem to Kill
German Chancellor Angela Merkel recently came out in favor of a "Tobin tax" – a small tax on financial transactions, proportionate to the size of the transaction. The Tobin tax idea also has been proposed by Britain's former prime minister, Gordon Brown, and was proposed in Congress by U.S. Rep. Peter DeFazio, D-OR.
Every time a Tobin tax is proposed, it has failed to gain traction – which isn't surprising: Wall Street, with its international affiliates and legion of lobbyists, hates the idea.
Even so, the Tobin tax idea just refuses to die – which is a good thing, since it is probably the best way of curing some of Wall Street's pathologies.
Will the Financial Reform Bill Really Rein In Wall Street?
The Senate on Thursday approved an extensive financial reform bill that would give Washington broad new powers over Wall Street. However, there's still a question over whether the bill will really be able to rein in Wall Street, or if it will simply become another broken barrier tripping up the free market. The legislation is [...]
What Really Caused the Stock Market 'Flash Crash'
Just when you thought it was safe to get back into U.S. stocks, you think you see a shark.
If you are searching – like the regulatory lifeguards and all the political beach bums – to pinpoint and kill the menacing shark that took a huge bite out of investor confidence when the Dow Jones Industrial Average tanked 1,000 points in a just a few minutes late in the day on May 6, don't bother to scan the horizon looking for the dorsal fin of some lurking predator.
The threat you fear isn't under the water: It is the water.
We're talking about market liquidity.