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By Keith Fitz-Gerald
Money Morning/The Money Map Report
During an appearance at a recent investor event, I was asked if I could make a bullish argument for U.S. stocks in 2008, given the expected continued flow of negative news.
My answer: Making that case for U.S. stocks will be a lot tougher than making a case for international stocks. But the bottom line is that there is a case to be made.
The trouble is, I'm not sure that I fully believe it.
The Case for U.S. Stocks
I can give you four reasons why U.S. stocks hold some promise this year.
First, even though we don't agree with how "Team Bernanke" is handling U.S. monetary policy right now, at least U.S. Federal Reserve Chairman Ben S. Bernanke is reacting a whole lot faster to market stresses than his predecessor, former Federal Reserve Chairman Alan "Irrational Exuberance" Greenspan, ever did.
On average, Bernanke is waiting mere weeks to respond and launch a monetary counterstrike, while his predecessor took months and months – and sometimes more than a year – to make badly needed moves. And believe me when I tell you that we're right now paying the price for those delays.
Furthermore, by working closely with the players involved, Bernanke is showing a lot more creativity and a willingness to do whatever it takes to keep the U.S. economy from going under. Granted, not everyone likes that stance, and some feel that Bernanke is playing to the markets, instead of managing the economy, which is his real mandate. Even so, investors who feel reassured by the Fed chief's actions will keep their money in the markets, which will keep losses from getting even deeper than they already are.
That's not such a bad thing.
Second, the weakened U.S. dollar has created a sort of export "incentive," for lack of a better term. This is allowing U.S. multinationals, particularly those that are large exporters, to gain ground on their overseas counterparts while at the same time providing a reason for the foreign investment money flowing into the U.S. market.
This, too, is highly bullish. In the past, it's helped propel earnings even when the local economy is weakened for whatever reason. And because stronger foreign currency can buy primo U.S. assets on the cheap, merger activity escalates, which also helps keep U.S. share prices chugging for higher ground.
Third, American corporations are sitting on nearly $3 trillion in cash according to Standard and Poor's. This is three times the level of cash these firms held 10 years ago, which probably ties in some way to the fact that U.S. firms have been buying back their own stock at one of the fastest paces on record.
Like the merger markets supercharged by foreign capital, a brisk buyback market can help keep stock prices high, too. When companies spend gobs of cash on share buybacks, it tends to have a calming and stabilizing impact on investors, and on the markets, in general. Indeed, without the buybacks, investors might stay out of the markets altogether.
And, fourth, American consumers have generally remained in a spending mood, although the lackluster holidays and some recent disappointments in the retail-sector earnings department are more than a little bit troubling. However, the U.S. Commerce Department yesterday surprised investors with a report that U.S. retail sales unexpectedly rose in January.
As you can see, I've made a fairly bullish case for U.S. stocks for this year.
Now, as for whether I believe the case that I just made … well, that's a different story.
2008: The Year of Uncertainty
I can't ever recall entering a trading year with such conflicting signals. This suggests to me that before the markets get better, they're likely to get rougher. And, if Fed Chair Bernanke elects to cut rates further – as most of us expect that he will – the U.S. greenback is going to get even weaker, which makes most of the bullish indicators I've just mentioned susceptible to being swamped by other global forces. Some of the most worrisome include:
- A deteriorating credit situation.
- Energy prices that are certain to spike.
- An unsettled Middle East – and by that I'm not just focusing on the U.S. war in Iraq.
- The spectacular growth in China, and all of the fallout that creates.
So how do we balance this somewhat bullish outlook with this long list of caveats – and still manage to profit?
We're advocating several strategies.
First, go with the "Global Titans." These are the large multinational firms – many of them based in the United States – that harvest a hefty percentage of their sales and profits from the foreign markets that are growing at several times the tepid pace that's being predicted for the U.S. economy this year. They offer diversification, should the U.S. market falter completely and stumble into a recessionary pothole. At the same time, the U.S.-based firms offer the safety of the much-more-stringent U.S. regulatory oversight. So you get the great growth of the foreign markets, and the protection of U.S. oversight.
Not a bad deal.
Second, when it comes to bonds, go international. Because these are tied to economic conditions outside the U.S. market, foreign bonds are really plays on national economies rather than individual companies. And, to make the point again, many of these markets abroad are growing much faster than their U.S. counterpart.
Third, and last, get " inverted." At a time like this, as both a hedge and as a profit-generator, we advocate the use of inverse funds – particularly those tied to the U.S. markets. We believe that each investor should hold at least a small portion of these in their portfolio. Not only can these take the sting out of further declines, they also can dramatically stabilize a portfolio because they are so-called "non-correlated assets," which means the funds zig when the markets zag.
In my opinion, the U.S. economy is still highly prone to a "zag" – otherwise known as a "downturn" or "recession." The retail sales report released yesterday may well end up being a case in point; although the report said sales rose unexpectedly in January, I'm not sure those numbers are all that bullish. We'll see for sure when next month's retail report comes out.
To profit if the market drops, or to hedge your other holdings, take advantage of a specialized exchange-traded fund (ETF) such as the Rydex Inverse S&P 500 Strategy Inverse Fund (RYURX), which is designed to rise in value by 1% for every 1% the Standard & Poor's 500 Index falls.
News and Related Story Links:
- Money Morning Investor Alert:
Three of the Most Reliable Investment Indicators Signal Rougher Waters Ahead For Investors.
- Money Morning Investment Research Report:
Five Survival Strategies That Will Allow You to Profit Even in a Recession.
- Bloomberg News:
U.S. Economy: January Retail Sales Unexpectedly Rise.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.