Ming Lo Investing

Investing Article: January 2011 Part IV – Buy the Dip Continues

Posted by admin on January 7, 2011  |  No Comments

Stock Picks.

So I said that I liked Apple, Citi and Goldman in my November article.  Here’s their performance since then.  I remain long Apple, Citi and Goldman for myself and / or my clients.

Thematically, I favor:

• Financials, especially banks and brokers

• Technology, especially internet mobility related stocks

• Commodities after a pullback

• Early recovery cycle stocks, such as industrials and chemicals

• Gold, for the longer term, after a pullback

Investing Article: January 2010 Part III – Buy the Dip Continues

Posted by admin on January 7, 2011  |  No Comments

The Path of Markets

So what’s the investor to do?  Here’s some things to watch for in terms in the market.

1) Positive Environment, But Correction Likely. I think we have a lot of positive factors working in the market.  There’s QE2, extension of tax cuts, a more business friendly Washington, favorable economic indicators, a growing worldwide middle class.  That’s a lot of good stuff.  Still, we’ve had a major run since August of 2010.  So a correction in the near term is likely.  Exactly when is hard to say.  We could have one almost immediately.  Or, we could have one around earnings season, which starts in late January.  Always remember, the more we go up with pause, the more likely a correction will be.  So if we don’t have a correction before earnings, we’re even more likely to have a sell-off through earnings season.  One other factor to consider at the end of January –  Chinese New Year is February 3, 2011.  I think the Chinese government is will announce more tightening measures, most likely after the Chinese New Year.

That however, doesn’t change my game plan.  Because of the positive environment, I look at a dip as a buying opportunity.

2) European Debt Refinancing, Fed Exit during the March to April period.  As mentioned, Spain has a lot of debt to refinance by the end of April.  The Fed, which started QE2 in November, will also be thinking of exiting QE2 at the same time.  The Fed said 6 months of QE2, although they said they would execute as needed.  Still, based on the known schedule, they’re likely to exit at the lastest in April.  That period seems to me like fertile ground for a correction in the markets.

3) US Interest Rate Increases Summer of 2011. Interest rates are increasing around the world, while the US is keeping them low.  This means that the US will have lower rates relative to the rest of the world.  By the summer, it’s likely that the Fed will start increasing interest rates in the US.  It’s unclear what the impact on markets will be, but at the very least, it will be time to re-assess whatever macroeconomic assumptions the investor has.  By summer, what has been driving the market will fade, and new drivers will have to be considered and incorporated into any investing framework.

Investing Article: January 2010 Part II – Buy the Dip Continues

Posted by admin on January 7, 2011  |  No Comments

The Things To Worry About

Of course, with all the reasons to be in the market, we have to take a look at the things to worry about.  We’ve talked about many of these things for a long time, and many will be no surprise.  So here are the major things we know of:

1) European Debt.  If you read any of the headlines last year, you’re aware of this.  Many European countries have more debt than they can handle.  Their debt is held by European banks.   All this makes investors nervous, because European countries have to re-finance their debt on a regular basis.  As the risk of default rises, investors demand higher interest rates on country debt, which only makes it harder for countries to pay future debt (think of your lender increasing the interest rate on re-financing when the mortgage is already under water).  So far, the ECB has placed band-aids on this problem by lending these countries more money, but this may be hard to do as the bigger countries – Portugal and Spain – start to run into these problems in a more severe way.

Take a look at the above charts of the Portugal and Spain 10-year bonds.  Notice how Portugal’s interest rate has been steadily rising, and how Spain’s has been rising sharply in the last few months.  This basically reflects the rising costs of financing European debt.  And don’t forget the role of the ratings agencies.  As debt becomes a higher percentage of GDP, the ratings agencies downgrade the debt of the various countries, causing interest rates to rise and compounding the problem.

Rates can’t keep rising forever – at some point, unless the countries can grow fast enough to pay down their debt, the countries must default or investors will lose some principal.  The resolution to this problem is likely to come over a multi-year period, so expect this problem to cause a series of rolling crises in Europe.  In the first four months of 2011 alone, Spain needs to refinance 70 billion Euros of debt.  Investors may not be thinking of this problem today, but investors will be thinking about this soon.

2) US Housing.  There was a time when no one would believe you (well, me), when someone said there was a housing problem.  Today, almost no one debates, making my job of explaining it a bit easier.  Consensus is, we’ll have a real estate problem in 2011.  Consensus is also that the foreclosure problem can be contained, so banks and various real estate related companies will take hits, but nothing that will bring down the house.  If the problem is any worse than expected, housing will ding stocks.  The chart below is the Case Shiller Home Price Index and shows the percentage change.  You’ll see that in the last few months, real estate prices have started to head back down.

Here’s the quick reasons:

• There’s a mountain of foreclosure inventory sitting in the banks.  Over the last two years, banks didn’t foreclose that quickly, partially because foreclosing everything at once would have meant massive losses (instead of spreading them out over time), and partially because they didn’t have enough manpower to take care of them all.  Then there was the robo-signing “scandal”, which slowed things down even more.  In 2011, the banks will cleaning up their balance sheets as much as possible.
• Interest rates are rising, and as rates rise, prices go down.  Ironically, economic recovery will lead to inflation, and inflation will mean higher interest rates.  And higher interest rates means lower real estate prices.
• Unemployment will remain high. In other words, unemployment won’t go down fast enough to create new home buyers.  It will take years to get unemployment just a couple percentage points.

So here, the thing to look for is whether the real estate problem is contained.  I’m optimistic, but will keep an eye out for the possibility that I’m wrong.

3) Municipalities in Trouble. We all know this story as well.  Cities, states and local governments are under water.  Taxes revenue have fallen, municipalities haven’t cut budgets the way companies have.  Currently, the market expects this problem to be contained, and even Bernanke said on Friday, January 7, 2011 that the municipal debt problem was manageable.  We shall see.

4) China growth is slowing.  It’s no secret that I think the Chinese market is a bubble.  The Chinese government is busy trying to figure out how to slow the market down, and that means increasing interest rates, lowering bank reserve requirements, restricting lending, etc.  Basically, slowing growth.  If they manage to do this gently, it’s called a “soft landing”, and the Chinese will be proclaimed the best capitalists in the world.  Too much, and the bubble bursts.  The market assumes a soft landing at the moment.  This will be a drag on growth in the US, but anything worse than expectations could really knock down US markets.

5) Rising Worldwide Interest Rates. Basically interest rates will be rising around the world.  Some increase in interest rates is good, it’s a natural result of a recovering economy.  Too much, and you could hurt the recovery.  Keep in mind that the increase in interest rates is the result of two things: first, the debt problems above (a bad reason for an increase); and second, inflation (China’s reason).  Strangely, you’ll have interest rates going up around the world for both good and bad reasons.

6) The End of QE2. Right now we have the Fed in the middle of Quantitative Easing 2 (QE2).  It’s helping to drive the stock market and asset prices.  When QE2 is over (late spring/early summer 2011), we’ll have to see how the economy does without the Fed backing it.  Remember that the rally off the bottom ended in April 2010 when the Fed and Washington stopped supporting economy.  This time, the question will be whether the Fed can exit without igniting inflation.  No matter what the Fed does, guaranteed that the market will worry.

7) The Black Swan. The above are the major factors that we know about.  In life, we always have to consider what we don’t know, or be on the watch for it.  Thus it is with markets – we have to look at unexpected events and see if they are big enough to seriously damage the market (e.g., the Flash Crash last year).  If the event is big enough, the only answer is to move fast.

Investing Article: January 2010 Part I – Buy the Dip Continues

Posted by admin on January 1, 2011  |  No Comments

Summary

Everybody’s bullish.  Everybody’s so bullish that people are worried.  The contrarian, the little voice that says, “things can’t be THAT good”, is nagging many.  And yet, if you run through all the reasons, all the considerations you can think of, you have to admit the bulls have a pretty decent case.  Consider the following:

• The Macroeconomic Conditions. The economic indicators are good, monetary policy is favorable and so is fiscal policy.  In Washington, the left has been neutralized by the right, leaving a more centrist – and a relatively more pro-busines Congress.
• Money Flow.  The 30-year bond rally is coming to an end, and investors need a new place to put their money.  Europe is weak, China is slowing down and those two facts leave the United States as likely the best place to put money.  The retail investor, scarred by the crisis of 2008, is watching the market rise and starting to put his money back in the market.  All good for equities.
• Technicals. Stocks have broken upward resistance, rising above pre-Lehman levels.  In recent weeks, markets have moved sideways, signaling consolidation.  Technicians consider this bullish, because after a large run up, stocks need to rest in order to continue their upward move
• Fundamentals.  Companies are in good shape – balance sheets have been cleaned up, debt has and continues to be refinanced, cash hoards are big.  And favorable macroeconomic conditions means likely revenue growth.

Granted, the world is not worry free.  We still have to deal with European debt, China slowing down, a nationwide real estate foreclosure problem and municipalities on the brink of collapse.  Yet for the moment, we have hope that these problems, while likely to bring repeated chills to markets, are contained and manageable.  Also, later on in the year, we’ll have to deal with the withdrawal of the Fed’s QE2 and increasing interest rates around the world.  So visibility after the first one or two quarters of 2011 gets a bit foggy.  Still, in the near term, all these things bring me to the conclusion that “buy the dip” continues, at least for the near future.

The Bullish Case in More Detail

Before we start getting all excited, it’s worth taking a look at the bullish case in more detail.  We won’t go  over everything (because that would be endless), but let’s take a look at the highlights.  Start first with the macroeconomic factors:

• The Chicago PMI (Purchasing Managers Index) came in at a red-hot 68.6 in December.  Generally, a reading over 50 indicates an expansion.  October’s reading as 60.6, followed by 62.5 in November and 68.6 in December.  The consensus estimate was 60 to 63.

• Jobless claims dropped 34,000 to a seasonally adjusted 388,000 in December, their lowest level since July 2008.  Estimates for claims were in the 414,000 to 425,000 level.  As the chart below shows, jobless claims are in a steady downtrend.  Markets need confirmation from the unemployment report which comes out at the end of the first week in January.  If unemployment also falls, markets would find this very bullish.

• For the first time in two years, commercial and industrial lending showed a quarterly increase according to Moody’s Analytics.  The first estimates that lending increased 0.2% in the 3rd quarter, and that total lending will increase 3% in 2011.  Increased lending would mean that markets are returning to health, and that businesses – especially small businesses – will be able to grow.

• As we all know, the Fed is in the middle of QE2 and will continue the program until June.  I would argue that QE2 is working – the Fed wants to encourage investment in equities and the markets are rising.  Although interest rates are also rising, business activity is on the upswing.

• Also, the Bush tax cuts have been extended.  This is the equivalent of fiscal stimulus, and a major one at that.  In addition, the resolution of the tax cut question allows businesses to plan and importantly, to hire.
• In Washington, the fall elections have resulted in a more centrist, pro-business Congress.  If you remember, throughout 2010, Washington policy was a big cloud over healthcare and financial stocks, and frankly, the economy as a whole.  Speeches from Obama would regularly send the market careening downwards.  We will still get days like that in 2011, but much less so.  After a shellacking in the November 2010 elections, Obama has moved toward the center and started to mend relationships with business.  Greater stability out of Washington will allow businesses to plan and spend.

Money Flow Considerations. We’ve talked a great deal in this column about the end of the bond rally, so we won’t go into much detail here.  If you do want some additional interpretation, you can go to this post: http://www.minglo.com/investing/2011/01/marketwatch-the-end-of-the-30-year-bond-rally/.  The upshot is that money coming out of bonds, out of the sidelines, and out of Europe and China, is likely to go into United States equities in 2011.  That would help propel the market forward, and also cause an expansion in PE ratios.  All in all, a bullish outlook for 2011.

The Technical Picture.  As mentioned, we’ve broken above pre-Lehman levels.  Why is this important?  It implies that we can put behind us – or at least start to put behind us – the Lehman debacle.  That gives us room to go upward.

As you can see from the chart above, the 1220 level has been a key resistance level in the past, going all the way back to 2008 and even 2006 (horizontal line, with resistance in 2006, 2008 and 2010 circled).  The 1220 level is now support, and I wouldn’t be surprised if we retested the 1220 level, even as soon as January (meaning we’re likely to fall down to the 1220 level and bounce off it).  Still, we’ve cleared a major barrier.  The next resistance level looks to be about 1280.

As for fundamentals, US companies are in great shape.  Over the last two years, they’ve cut costs and increased efficiency.  While many have been worried that there’s not much more that companies can do, at this point, the favorable macroeconomic picture will be enough to drive revenues going forward.

So that’s all the good news.  In the next section, we’ll take a look at the things we will need to worry about.

Investing Article: November 2010 – Buy the Dip – Part III

Posted by admin on November 18, 2010  |  No Comments

The Game Plan

So I’ve discussed the macro picture.  What does all this mean for stocks?  Let’s start with the technical picture.

Technical Levels. In the short-term, we bounced off the 1173 level on the S&P on Wednesday, November 18, 2010.  This was the upward resistance level after the flash crash (see chart below).  So basically, what happened was that after the flash crash, the market bounced back, hit the 1173 level, but failed to rise above it.  The technical view says that once we cross the 1173 level, which was upward resistance after the flash crash, not becomes support.  Meaning that we are looking to make sure that the market stays above this level.  The longer we stay above 1173, the more support there is, the more of a “base” of support that has been built, the more likely we are to go upwards instead of downwards.

So provided that we stay above the 1173 level, I’m buying dips in the market.  There’s several ways to look at entry points on stocks, but one way is look at the levels that were reached on Wednesday, November 17, 2010, when the market bounced off the 1173 level.

Apple. So for example, I have been and remain positive on Apple.  On Wednesday, Apple closed around $300, and I would consider that a good entry point.  In fact, Apple anywhere near $290 – $305 probably works.  Keep in mind that if we break below 1173, Apple is likely to decline along with the market, meaning that Apple will likely fall below $300.  Still, at $300, that’s 13.7x estimated 2012 earnings of $21.88 per share and 15.9x estimated 2011 earnings of $18.89 per share.  With 16% estimated growth, that’s cheap.  Of course, you can debate whether Apple will hit these numbers (and there are those who do), but I continue to see Apple as a leader with many positive catalysts in front of it.

Citi.  I also remain constructive on Citi.  So on Wednesday, Citi closed at $4.19.  If the government manages to sell all its shares of Citi in Q1 or Q2 of 2011, I think it’s very likely that Citi would cross $5 per share.  If you can buy Citi at $4.19 and Citi does hit $5.00, then that would be a 19% return in 4-7 months.  Let’s assume some margin of error and say you only get a 10% return in 4-7 months instead.  That’s still pretty respectable.

Goldman Sachs.  I also continue to like Goldman Sachs here.  On Wednesday, Goldman hit $165.  Investment banks trade on book value, and Goldman’s current book value is $134, or 1.23x book.  Historically, Goldman, the best of the investment banks, trades at a 2.0-2.2x book value.  Even at 1.5x book, that would imply a stock price of $201.  But the real reason to look at Goldman is the macro context.  First, after the pounding the company took this summer and the ensuing SEC settlement, it’s likely that the worst is over on the political/SEC front.  Also with a stronger Republican presence in Washington, further headline risk from Washington is even less likely.  On the business side, this last summer was tremendously slow for markets.  With so much pessimism in the air, very little trading was done, and that meant low revenues for investment banks.  Activity is now rebounding (IPOs, mergers, trading, government securities, capital markets, etc.), meaning that revenues will be much better than in Q2-Q3 of 2010.  I think it’s likely that Goldman will hit $190 in the next year, and perhaps, even by end of summer 2011.

I am long Apple, Goldman Sachs and Citi for myself and / or for my clients.

Investing Article: November 2010 – Buy the Dip – Part II

Posted by admin on November 18, 2010  |  No Comments

The Worries of the Day

For some time now in this column, we’ve been talking about the reasons to be positive – QE2 (aka Quantitative Easing 2), political stalemate in Washington (i.e., the decline of anti-business sentiment in politics), increasing economic certainty and a slowly improving economy.  These conditions remain in place and are likely to be with us for some time.  For example, we know that the Fed is planning to purchase bonds for the next six months.  Still, worries arise and conditions change, so it’s worth reviewing these concerns to see if the fundamental picture has changed.

Europe.  As mentioned, European debt concerns have resurfaced, prompting meetings in Brussels (the home of the European Union) and talk of a bailout.  My guess is that we will have a bailout, and concerns about Irish deb will fade.  Meaning, the immediate problem is surmountable.  Still, make no mistake, the European debt problem will return in another form.

The European debt problem has two sides to it.  First is the question about whether each problem country (Greece, Ireland, Portugal, Spain) can re-finance its debt.  In the summer it was Greece, now it’s Ireland.  I am less worried now about Ireland because the European Union, having seen this problem before with Greece, is now more prepared and has mechanisms in place for approaching the problem.  In all likelihood, Ireland will request aid from the European Union, and aid will be granted.  The aid will come in the form of capital needed to re-finance Irish debt.  Problem is, Portugal or Spain could very well be next.  And as interest rates rise around the world, the problem will be more severe.  It’s likely the EU can manage these crises, but they will be on-going for the foreseeable future.

There’s a second part to the European debt problem, and that’s solvency.  Even as debt is being re-financed and the European economies plod on, it’s likely that many of the EU countries will not be able to pay their debt.  And so someday, the EU’s lenders will have to take a haircut on their loans.  People politely call this “re-structuring”, or more bluntly, “default”.  This is likely somewhere down the road, perhaps a year or two, perhaps even longer.  So these concerns will appear, and re-appear.

China. In my opinion, China is, without a doubt, in a bubble created by cheap money.  China keeps tapping on the breaks, but it’s been doing so gently.  Keep in mind that China has no choice but slow the economy.  The country’s main concern is the massive unrest that can come with inflation or an economic bust, something that we are unfamiliar with here in the United States.  So the Chinese government has to be gentle to maintain stability.  That means they will slow the economy, but not enough.  In the long run, we will have a series of these “scares” – China’s growth numbers come in hot, threaten inflation; markets will pull back, afraid of hard break; China will be gentle.  At some point, the sum of these braking actions may be enough to cause a bust in the economy.

Remember that in the US, the Fed pursued a series of 17 25-basis point rate hikes from June 30, 2004 to June 29, 2006.  During that time, the Fed Funds rate went from 1.00% to 5.25%.  The Fed was trying to tighten after years of  low interest rates.  It was the Fed tightening, in combination with adjustable rate mortgages that reset, that finally caused the bust in 2007 and 2008.  The point is, China is just in the early stages of the tightening phase.  Just as with the Fed in the US, China will need to go through a series of tightening steps, all of which will give the market pause.

US Municipalities. I have also mentioned the problems with state and city budgets for quite some time in this column.  The states have tried to ignore their budget deficits or pushing off any decisions, but they may finally be at the point where they have no choice but to take action.  That’s because the market is less willing to buy state bonds.  If this continues, it will be increasingly hard to finance the state deficits.  This is similar to the European debt problem: increasing long-term rates have made investors demand higher returns for higher risk in state bonds.  Cisco earnings was also a major sign of this problem.  Although many are saying that this is a Cisco specific problem, the company reported that state municipalities purchases of Cisco equipment fell short of expectations.  It’s not yet clear what the solution is, but we now that (1) companies with a large portion of their sales to states are at risk; (2) unemployment will continue to be pressured because of state layoffs; and (3) the consumer is likely to remain under pressure.

Rising Long Term Rates. Many fear that the Fed may actually lose control of the bond market, leading to a unexpectedly rapid rise in rates, especially on the long end of the curve (10 year and above).  We already see the consequences in the European and US state bond markets.  Bond funds are also likely to suffer outflows as prices fall.  I’ve been telling almost everyone to be careful about the bond holdings in their portfolio; if the trend continues, investors may have to exit bonds sooner than expected.  The other obvious area of concern is real estate.  If interest rates increase, real estate prices will be pressured and the foreclosure inventory – already at very high levels – may continue to build.

The Bottom Line. What does all this mean for the markets?  I remain positive on the markets because of improving conditions, but we will have a series of “mini-crises” and worries that will push the market back.  Problems with state budgets, rising interest rates and real estate will continue to limit a recovery.  So in my opinion, there is support in the markets because of QE2 and reduced uncertainty, but it’s hard to see significant gains in the market.  Moderate gains make much more sense given all the problems that will continue to encumber us.

Investing Article: November 2010 – Buy the Dip – Part I

Posted by admin on November 17, 2010  |  No Comments

The Market Corrects

One of the cardinal rules of investing is that after a big run, the market has to correct.  Another is buy the rumor, sell the news.  And a third rule says the market is likely to run into resistance when a previous high is reached.  All three rules applied at the beginning of November.

Take a look at the chart above.  Since late August, we’ve had a massive run – from about 1040 on the S&P to about 1225.  That would be about 17.8%.  That’s huge, and says that a correction afterwards is very likely.  The market also peaked on 11/5/10, about 2-3 days after (1) the election; and (2) the Fed’s announcement of $600 billion in quantitative easing.  That’s the buy the rumor (the anticipation of elections and quantitative easing) and sell the news (the actual events).  Finally, notice that the market peaked at about 1225 on November, 5, 2010, very close to the previous peak of about 1220 reached on April 23, 2010.  This is rule three – you find resistance at a previous high.  So the current correction isn’t really a surprise.

What did surprise many was the catalyst and the timing.  For a week after the elections and the Fed’s QE2 (Quantitative Easing 2) announcement, the market seemed to hold.  Bears were beginning to doubt a correction and some may even have thrown in the towel.  But on Thursday night, November 11, 2010, China’s reported a high inflation number.  That meant the Chinese government was likely to clamp down on the economy to curb inflation.  If so, demand, especially for commodities, would suffer.  And commodities have been driving the recent rally.  The next day, the market closed below the previous days’ lows, and has continued to sell off.  Today (Wednesday, November 17, 2010), the S&P stands at ~ 1182, a 3.5% correction so far.

The other ostensible reason for the current correction was European debt, and in particular, Ireland.  You may wonder, why now?  After all, we haven’t worried about Europe since the summer.  Turns out, the current Ireland crisis is an indirect result of QE2.  When the Fed announced that it was going to buy Treasuries, it concentrated on buying the shorter term notes instead of the longer term securities.  As a result, long-term interest rates have been rising.  Take a look at the following chart of Treasury yield curve rates.  You’ll see that the 1-month and the 3-month rates have barely budged.  In contrast, the 30-year has risen from 4.01% on November 1, 2010 to 4.31% as of November 17, 2010.

What does the US long-term bond rate have to do with Ireland’s debt problem?  Well, as US rates go up, investors have an increasing preference for US debt over Irish debt.  In order to get investors to buy Irish debt, the Irish government has to offer higher interest rates, making it more expensive to finance the Irish government.  Some think that investors won’t even buy Irish debt and many believe a restructuring (a polite word for default; basically the equivalent of a short sale) is inevitable.  Thus the crisis in Ireland, and the need for a bailout by the European Union.

So that’s where we are today – the market in the midst of a correction following a huge 17.8% run.  You could blame the correction on China and Ireland.  You could also argue that the actual catalyst doesn’t really matter, that a correction was inevitable.  Either approach works.

Investing Article: October 2010 – Quantitative Easing – It Works… Until It Doesn’t

Posted by admin on October 17, 2010  |  1 Comment

Here are the highlights of this month’s investing article:

• Over the last six weeks, the market has seen a major rally, from 1,049 on the S&P to 1,146 as of Friday, October 15, 2010.  Truth is, most money managers missed it.

• The economy hasn’t changed much, but Fed policy has, and Washington policy will probably change with elections in early November.  The Fed has returned to quantitative easing and is even encouraging inflation.  A looser Fed and gridlock in Washington sets us up for a bullish environment into the end of the year.

• So what next.  We’re in the midst of earnings season, so I think it pays to see where the numbers are.  Likely, there will be buying opportunities after the releases are out.

Investing Since the Beginning of September

If you just looked at the market, you would think that the world had dramatically changed in the last six weeks.  Back on August 31, 2010, the S&P was at 1,049 – near the lows post-flash crash.   Pessimism was high, the bears owned all the headlines.  Then the market shot up – very quickly.  At first, it was hard to tell where the market would just reverse again and head down.  The market broke through the 200-day moving average, which it had done before this summer, but instead of heading back down, it continued upward and broke past 1,130 – the highs of the summer.  So far, the market has held above 1,130, and as of Friday, October 15, 2010, the S&P stood at 1,146.  We are now at the highs of January 2010 and are butting our heads against the 1,150 resistance level.

To get a little perspective, take a look at the chart below:

Sometimes it’s hard to cover market moves in a monthly article, so if you want some more detail, you can check out my blog posts:

• On September 15, I recommended taking some profits as the market hit the 1,125 range.  Still, I suggested not selling completely because the market could go either way:  http://www.minglo.com/investing/2010/09/marketwatch-taking-some-off-the-table/

• On September 20, we had a clear breakout above 1,130, and we had to consider that the rally could continue: http://www.minglo.com/investing/2010/09/marketwatch-interpreting-the-breakout/

• On September 25, I noted that the breakout had held (meaning, that the market had fallen back to the 1,130 range, and bounced upward off the level.  This means that what was resistance had become support, and that we were likely to remain above the 1,130 level) and that a change in sentiment may have occurred. http://www.minglo.com/investing/2010/09/marketwatch-the-breakout-holds-a-change-in-sentiment/

So has the world really changed that much in such a short time?  Economically, things actually aren’t that different.  Unemployment remains high, production levels remain about the same, GDP estimates are being revised downward.  What has changed is what Washington might do about all this.  And that comes on two fronts: first, the Fed, and second, the legislature.

The Fed

Let’s take a look at what the Fed is doing.  I know this is stuff that will put most of us to sleep, but it’s actually worth the exercise in this case because it’s so pivotal.  Also, I’m going to include my handy-dandy layman’s interpretation.

The Fed released it’s FOMC (Federal Open Market Committee, the committee that sets Fed policy) statement on September 21, 2010.  The first paragraph reads as follows:

“Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.”

Interpretation: The economy will remain weak, and it continues to be slower than what the Fed would like to see.

Here’s the second paragraph:

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.”

Interpretation: Inflation is low.  In fact, inflation is too low: deflation is a possibility (keep in mind that if there is deflation, which is a fall in prices, the Fed will have failed in its goal to maintain price stability) and higher inflation may actually be necessary to reduce unemployment. This is a landmark change in policy; the Fed almost never talks about the need for higher inflation.

And here’s paragraph three:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.”

Interpretation: The first part is clear – interest rates will remain low.  The second part – that the Fed “will maintain its existing policy of reinvesting principal payments” – requires a bit of explanation.  The Fed has securities holdings, and when those securities holdings mature, the Fed is paid principal.  At that point, the Fed has a choice.  If the Fed holds on to the principal, it is actually taking money out of circulation. This is known as tightening. If it reinvests the principal, it takes money and buys more securities with it.  By doing so, the Fed puts money back into circulation, and this is known as easing. Thus we have the term quantitative easing. Many would also consider this inflationary – perhaps not today, but eventually.

And finally, paragraph four:

“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Interpretation: If additional easing is necessary, the Fed will do so.

It may take a moment to realize all the implications of this statement, and truth is, it took the market a little while to soak it in as well.  If you look carefully at the chart above, you’ll see that the market declined for three days following the FOMC meeting and then bounced back up.

The Bottom Line. The bottom line is, the Fed has decided that higher inflation and a resumption of the quantitative easing policy is necessary.  You could say that the Fed is is justifying the pessimism of the summer.  Remember that the Fed had a quantitative easing policy from March 2009 to April 2010.  During the summer, the Fed withdrew support, and basically, the market panicked – no one knew whether the market would be able to move forward without the training wheels of quantitative easing.  Now, the training wheels are back on.  And the Fed took it one step further by saying that it was willing to risk inflation to get the economy moving again.  That’s very unusual, because traditionally, the job of central banks has been to fight inflation.

On a tactical level, keep in mind that the reason for low interest rates is to force investors out of low yield securities such as bonds and Treasuries, and into higher risk assets such as stocks (ideally, investing in riskier assets such as stocks should lead to growth).  In theory, banks should also want to lend rather than earn next to nothing by stashing cash.  As we all know, that policy is not working: investors are flooding into bonds, and banks aren’t lending.  By increasing inflation, real interest rates (nominal interest rates of near zero less inflation) could actually be negative.  Essentially, the Fed can’t lower interest rates any more, so their only choice is to increase inflation, and hope that negative real interest rates force investors back into risk assets.

Washington Policy

The second major component of change in the last six weeks has been expectations regarding Washington policy.  Of course, nothing has changed yet, but Wall Street is optimistic about gridlock in Washington.  The business view is that Obama is anti-business, and in the last year, healthcare, financials and the oil industry have all taken hits.  If the Democrats hold Congress, you can expect a lot more anti-business sentiment.  But most expect a major Republican pushback.  No one knows the exact result, but Wall Street would be happy with gridlock; they’d be happy with waking up in the morning and not finding out that their costs have increased.  If the Republicans take enough Congressional seats to block anti-business initiatives from the Democrats, that’s very bullish for the market.  If nothing else, political stability and economic predictability will encourage investment, and hopefully, hiring.

Looking Forward

With the change in Fed policy, and likely change in Congress, the rally in the markets makes more sense.  Hopefully, you’ve caught some of the rally, but if not, the question is, as always, what do you do now?

I always find it difficult to buy stocks after a big run like the one we’ve just had.  Also, we are now into earnings season, so I think it’s better to wait and see what earnings have to say before making a decision.  In specific cases, such as Google (which reported last week), the results will be good and the stock will really.  But I do think that in many cases, the recent rally will make it hard to justify further upside once the earnings are out.  Intel reported and not much has happened since.  GE’s results were disappointing.  The recent rally overshot earnings, and the stock sold off after.  Likewise, in JP Morgan, moderate results, combined with fears regarding foreclosure documentation, caused the stock to sell off after. That’s three bellweathers with not much upward movement after earnings.  With many stocks near recent highs, I think it makes more sense to wait until earnings have been released and to reassess after.  If you’re interested in a stock and it sells off, any selloff after earnings could create a buying opportunity.

In terms of market catalysts, we will find out in the beginning of November how it executes its quantitative easing policy.  Bears have said that the reality is likely to be disappointing, meaning that the amount of easing will be less than expected.  Personally, I think that any amount of easing will be good.  The amount might be less than expected, but how long the Fed continues the policy is probably more important.  And as long as the Fed lives up to its promises, we will have support in the market.

Also, elections will be in early November. Then, we will have a good sense of the political landscape.  Like many others, I expect Republican pushback, and likely gridlock in Washington thereafter.

Finally, I do believe that many money managers missed the September rally. This means that they will need to buy to achieve performance targets for the end of the year.

That sets us up for a bullish environment going into the end of the year.  We’ll be limited by the economy, so I’m not a huge bull.  By the same token, I am much less worried that the market will suddenly reverse.  So there’s less of a danger that anything you buy will be worth much less in a couple weeks.

That bring us to the new year.  What should we expect in 2011? We will have to see, really:

• By then, we’ll get some idea of whether this quantitative easing policy is working.  So we will have to watch economic indicators for that.  Primarily, we should focus on whether businesses start to hire, whether banks start to lend and whether consumers feel any better about spending.

• We will still face economic problems, because states will continue to cut budgets.  There will be another round of cuts in banks.  And as everyone knows, there’s a wave of foreclosures coming.

Still, I don’t think a mixed picture is all that bad.  Growth and recovery will be slow, but as long as we’re trending in the right direction, that’s all we need.

I know that these investment letters can be a bit long, so I’ll refer my blog for those that are interested.  Here’s some situations I’ll be looking at and covering in more detail on the blog at http://www.minglo.com/investing:

• The banks will be hit by the mortgage “scandal”.  I think the fears are overblown and this will present a buying opportunity.

• The government will be selling its final block of Citi shares this quarter. By the beginning of next year, the government will own very little of Citi.  This, combined with the mortgage fears in the banks, will create another buying opportunity in Citi.

• If you’ve been reading, you’ll know that I’m a fan of Goldman Sachs.  I do believe the worst is over for Goldman.  Book value on Goldman Sachs is about $130, so anytime Goldman is at 1x – 1.1x book, that’s very cheap historically and makes Goldman a buy.

• With quantitative easing and inflation down the road increasingly likely, longer-term bonds look like a short.  It’s time to revisit shorting longer-term bonds.

• The weak dollar and the weak American economy means looking at companies that do well in early cycle recoveries and with a high percentage of international sales.  That implies commodities, industrials and tech.

• As I’ve been recommending, consumer staples with a good dividend remains a solid bet.

I own Citi and Goldman for my own portfolioand/or for clients.

Until next time, sleep well.

Disclaimer. All material presented herein is believed to be accurate but we cannot attest to its accuracy.  All trades, patterns, charts, systems, etc. discussed in this article are for illustrative purposes only and are not to be construed as specific advisory recommendations.  All ideas and material presented are entirely those of the author and do not necessarily reflect those of the publisher.  All readers are urged to consult with their investment counselors before making any investment decisions.

No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses.  No representation or implication is being made that using the above approaches will generate profits or ensure freedom from losses.  The examples used herein are not intended to represent or guarantee that anyone will achieve the same or similar results.  Each individual’s success depends on his or her background, dedication, desire and motivation.

The author may or may not have investments in the stocks or sectors mentioned.

As always, I encourage you to consult your own investment advisors before making any investments.  I don’t claim to be right; I can only present you my logic, and I hope you will take the time to do your own homework and decide if you agree or disagree with the arguments presented here.  Also, if you really feel like spending some more time on stocks, there’s more on my blog at http://minglo.com/investing/.

Ming Lo is an actor, director and investment advisor.  He has an A.B. from Harvard College, Cum Laude, and an MBA and an MA Political Science from Stanford University. Prior to going into entertainment, Ming worked at Goldman, Sachs & Co. in New York and at McKinsey & Co. in Los Angeles.

Investing Article: September 2010 – Hide, But Don’t Hibernate

Posted by admin on September 6, 2010  |  1 Comment

The Current Situation

It’s Labor Day weekend, and despite the calendar year, this is always the time I realize 2010 is about to come to an end.  For investors, coming back from summer holidays, it’s also time to roll the calendar into 2011 and to prepare for the sometimes dangerous months of September and October.

Although there’s been lots of volatility in the markets, the big picture has actually remained the same for much of the summer.  Take a look at the following chart of the S&P.  You’ll see that we’ve been stuck in a trading range of about 1040 on the bottom (which at one point extended to the 1020 range) and about 1120-1130 on the top.

In qualitative terms, we can summarize the situation with a few bullet points:

• Pessimism and caution remain high, so it’s unlikely that we’ll break through the 1120-1130 range on the top end.  To do that, I think we need positive economic information that tells us growth is back.  That would mean employment increasing, or data indicating GDP growth in excess of 2.5-3.0% (ballpark).  Right now, economists are busy taking down GDP growth expectations.  Where they’ll end up is hard to say, but in the first quarter, real GDP growth was 3.7%.  In the second quarter, initial estimates were 2.4%, but the latest data puts second quarter growth at 1.6% (according to the Bureau of Economic Analysis).

• We remain fearful of the “double dip”, or a second recession, most commonly defined as “two quarters of down GDP”.  In this column, we’ve talked about the possible drivers ad nauseum – weakness in the US (driven by consumer retrenchment, real estate troubles, fiscal woes in the various states, etc.); a flare up of credit concerns in Europe; and weaker-than-expected growth in China.  Unfortunately, the probability of a downturn in the markets remains higher than of a upturn.  The sideways market remains the highest probability, with a downward market the next highest.  If we get signs of the double dip, we are likely to break below the 1040 level.

Based on where the market has traded and the economic data, here’s my layman’s way of thinking about the current market levels:

• GDP > 2.5-3.0%, market will break above the top end of the current trading range, 1120-1130, or say 1125.

• GDP in the range of 1.0%-2.0% (ballpark), market will remain in the current trading range of 1040-1125.

• GDP of 1.0% or less, and the market will break below 1040.  Strictly speaking, it’s the down GDP, or GDP < 0% that the market is afraid of, but if we get a reading of 0% – 1.0%, the market will sell first and ask questions later, which is why I’m saying 1.0% or less.   Keep in mind that shocks from Europe or China affect US GDP, so it’s not a US-only issue.  In the case of 1.0% or less GDP, I think we could fall to the 950 range pretty easily.

Of course, there’s much debate about this, and many will argue that we’re already pricing in a double dip.  I don’t think we have yet; we’ve threatened to fall below 1040 several times, but we’ve bounced off that level, and indications are still that the economy is growing, albeit slowly.

Looking Forward

We’ll get to what this all means strategywise, but first, let’s look at what future catalysts may change this assessment.

September. During the month of September, I don’t expect much to change in terms of macroeconomic data.  But at the company level, negative earnings pre-announcements could push the market back.  Recently, we’ve bounced off the 1040 level, and we’re likely meander or drift back up to the 1125 level.  Earnings warnings, which would begin in mid-September (if they’re coming), could not us off the top end of the trading range.

October. October is likely to volatile, as more catalysts come into play.  On the one hand, we have politics and the November elections.  The Democrats, feeling pressure to do something about the economy, will try to push through programs to boost spending, employment and small business.  In the first year of the Obama administration, Obama and the Democrats got a pass.  Now critics and opponents are speaking up; business had turned against Obama-nomics, and Republican momentum is gathering.  Despite Obama’s current flurry of economic initiatives, there’s already talk that Democrats will lose control of Congress.  On the positive side, political pressures could lead to some favorable policies, such as an extension of the Bush tax cuts.  At the very least, Republicans are likely to take some seats and make it harder for the Democrats to continue pushing their agenda.  If the Republicans make headway, the market is likely to view this positively, at least in the short term (meaning into year-end).

The other major factor to look out for in October is the economic data, both macro and earnings.   We’ll get the usual employment and production info, and this will all affect GDP estimates.  It’s unclear whether the macro data will fall, so we’ll have to wait and see.  Also, we’ll get earnings.  Q3 is likely to be weak given the fear that has dominated over the summer, but as in past quarters, it’s the outlook that will matter.  In the short-term, spending going into year-end by consumers and corporations could give us a somewhat favorable outlook.

All in all, I’m inclined to be bullish going into the end of the year because of Republican pushback and spending going into year-end.  However, these effects could be short-term, so January 2011 will bring a new slate.  By then, the political situation will have stabilized and year-end spending will be moot.

January 2011. In January, we will be re-assessing.  It’s hard to say where the economy will be at that time, we will have to see.  We will hope that the banks haven’t suffered major shocks from real estate foreclosures; that trying to balance state budgets will not have led to significant layoffs; that banks feel safe enough to start lending, particularly to small businesses; and that Europe and China chug along a slower but sustainable pace.

On the political front, the 2011 picture is mixed.  Many of 2010′s political headwinds could be stabilized by then – financial rules, which are still being written, could be clearer; health care reform will start to take shape; and the moratorium on drilling in the Gulf could be lifted.  If the Republicans take some seats in Congress, we can hope that will forestall Obama’s desire to solve problems by spending and taxing.  Still, the picture is not all roses.  While I lobbied for Republicans in last month’s article, I will be the first to admit this is not the perfect solution.  If the economy is doing well, then gridlock could be good.  But if the economy turns down and we need fiscal action, admittedly, gridlock could be bad.  In terms of policy, the legislative phase of reform is likely to be finished in 2010, but execution questions will begin in 2011.  So uncertainty around how healthcare, financial and energy policies will be implemented could be alive and well in 2011.

When I look at all this, there’s so many variables it’s not even worth running scenarios.  We will have to watch things over the next few months and just accept the possibility that uncertainty could continue to be with us as 2011 begins.

Strategy

So what’s an investor to do?  Here’s my game plan.  Of course, consult your financial advisor before taking action for your own portfolio:

• If you lean toward the conservative side, staying in cash, especially during the potentially volatile late September and October period (earnings will begin in mid-October), is a perfectly fine place to be.
  

• If you’re in the market, I would sell as the market approaches the 1125 level unless economic data improves says that the outlook is improving.  If anything, I would consider buying puts as we approach the top end of the current trading range.

• Personally, I would be very cautious about buying more bonds at this point.  Prices of bonds are already high (yields are near record lows), and a reversal, if it comes, could bring down bond prices quickly.  Because so many people are running into bonds right now, we should go into this in a bit more detail.  Take a look at the following chart of PIMCO’s very popular Total Return Fund (PTTRX).  Notice that at the beginning of the year, the fund traded at about $11, but with increasing concerns about the economy, a share now trades at $11.47.  Notice also that the fund has a 3.61% yield.  If you do the math, that’s equal to 41 cents.  So if, in the next year, the fund falls back to the $11 range, this will wipe out any dividends you’d earn from this bond fund.  Now, as bond bulls say, the fear in markets could continue for quite a while, and the price of PTTRX could continue to climb.  However, if – or when – the economy stabilizes, bond prices will fall as money comes out of bonds and goes back into stocks.  And as you can see by the math, it doesn’t take much to eliminate any gains that you may have.  If you put any more money into bonds, you have to watch it carefully and be ready to exit when the economy improves.

• If you can handle some risk and can invest money that you don’t need for a while, I favor income producing securities, such as dividend-paying stocks. Such stocks will fall if the market turns down, but not as much.  In the meantime, the investor collects a dividend.  Again, let’s be specific.  Take a look at the following chart of Clorox (CLX), which I have often mentioned in this column.  You’ll notice that the price of Clorox stock has actually returned to where it was in 2007 – it’s held up very well.  Compare Clorox’s price level with the S&P (light blue line), and you’ll see that if you held Clorox stock, you’re far better off than holding an S&P ETF.  Meanwhile, the stock offers a 3.3% dividend, so you would have earning that dividend over the last two years.

• Of course, this isn’t true of all stocks, even the more conservative dividend-paying ones, so some stock picking is necessary. Take a look at the following chart of P&G (PG).  You’ll see that PG traded in the low-$60 range in early 2007, and then traded up to the low-$70 range in late 2007 and mid-2008.  Since then, PG has trade back to the low-$60 range ($60.29 as of this weekend), but not to pre-crisis high in the low-$70 range.  That’s because PG tends to sell premium products, and in today’s economy, consumers are trading down and forcing PG to focus on lower premium products.  This cuts into earnings and explains why the stock hasn’t been able to return to pre-crisis highs.  So here, an investor that bought just before the crisis would collect the dividend (3.2% currently), but will have to wait a while longer before the stock price returns to pre-crisis levels.  I do think that’s likely in 2011 or 2012.

• For me, modern portfolio theory – i.e., asset allocation – isn’t very appealing. In order for asset allocation to work, investments have to be non-correlated.  That means some investments move up while others move down.  It doesn’t take much research to figure out that in today’s markets, correlation is very high.  If you look at 2000-2003 and 2007-2009, you’ll see that pretty much everything went down at the same time.  In other words, modern portfolio theory didn’t work.  I think, if we see another dip in the market, the same will be true – all securities (except bonds, I think), will go down at the same time, so placing assets in various categories won’t protect the portfolio.  If you’re using an asset allocation system, I would consider increasing the cash level whenever the opportunity arises.

• If you’re holding assets and can’t go to cash, but still want to protect the portfolio,  the better route may be to hedge.  For example, you can buy puts on a portfolio if you are holding a portfolio that is facing a dip.  The best time to buy such protection is when the volatility is low (measured be VIX).  This is when the market is calm and isn’t worried about a drop.  Puts are most expensive in the midst of fear and drop in price whenever the market stabilizes (when the VIX falls).

• There are stocks that I would recommend going into year-end. If you’ve been reading this column, you won’t be surprised that one of them is Apple. We’ve gone through the reasons – great product line, high customer loyalty, continuous innovation, rapid growth in iPhones and iPads.  Add the fact that year-end is great season for Apple (how many iPads do you think will be gifts toward the end of the year?).  So let’s take a look at the chart (below).  Since April, Apple has been sitting in a trading range between $240 and $265 (for the most part).  Thus support is in the $240 range, and I would buy whenever the stock falls into the low-$240 range.  Apple could fall below this level if the economy gets significantly worse, but given what we know now, the low $240 range is a good buy point, in my opinion.  Keep in mind that you need to buy 100% of a position in this range if you want to be a bit more conservative.  So if you want to put $10,000 into Apple, you could buy, say 25-50% of that in the low $240 range.  If you feel very confident, you could go higher, and if you are less confident, you stay toward the 25% range.  One last thought: be sure to re-evaluate in late December/early January.  Apple usually has a conference in mid-January, and new products or improvements may be announced.  At the same time, the market tends to sell Apple after the conference.

• There are also stocks that look inexpensive, especially when the S&P approaches the 1040 range. Take for example, IBM. You’ll see in the chart below that IBM has traded between $122 and $132 (or thereabouts) since the beginning of the year.  Analysts estimate that 2010 and 2011 earnings are $11.29 and $12.36, respectively.  At $122, that would be 10.8x 2010 earnings and 9.9x 2011 earnings.  That’s cheap, especially for a pretty stable business with 9.5% EPS growth over the next year.  Whenever IBM falls to the low-$120 range, you can buy it for the longer-term.  As with Apple, same ideas apply – IBM could still fall below $122, and you can buy some percentage of a full position if you want to be more conservative.

There’s lots of these ideas, and I’ll be featuring them in my blog at www.minglo.com/investing/ if you’re interested in more detail.   Bottom line, there’s lots to be concerned about, but there are opportunities out there.  So hide, but don’t hibernate.

You’ll notice that this month’s investment article is shorter than in the past.  That’s largely because we’ve been sitting in a trading range, and the strategy hasn’t changed.  The day-to-day does, and opportunities arise in specific stocks at different times, but the themes have been the same for much of 2010.

FYI, I hold PG and Apple for myself or my clients.

Until next time, sleep well.

Investing Article: August 2010 – Time to Vote Republican, Part III

Posted by admin on August 12, 2010  |  1 Comment

Investing, Going Forward

So it may seem like I’ve gone off into op-ed land, but let me put things in the context of investing.

Going forward, there’s not much likelihood that the market will break upward.  Think of it this way: where will the upside surprise come from?

Not the consumer, for sure, unless unemployment suddenly falls.

Probably not businesses, either.  Earnings were good, but there are indications that orders have fallen off or been pushed back because of all the uncertainty in the markets.  I think it’s very likely that all the market turmoil and questions about the economy going forward have caused companies to push back or delay delivery of goods.  That means, despite good earnings in Q2, don’t expect much for Q3.  We know that Europe will be implementing austerity and that China will engineering a slowdown.

With the US, Europe and China all slowing, don’t expect Latin America, Africa, Southeast Asia, Japan or Russia (i.e., the rest of the world) to make a dent in world demand.

Finally, will Fed action make a difference?  We’ve already discussed how the Fed may have maxed out its tools.

That leaves fiscal policy.  Here, I wouldn’t expect much until November.  If the Democrats retain control, guaranteed the market will drop, perhaps even significantly, and your 401K won’t be happy.  On the other hand, if the Republicans take some seats and counter the Democrats, markets will be happy, and so will your 401K.

Likely best case is that the market goes sideways.  And there is a case where markets drift lower simply because there aren’t any significant catalysts coming up in the near future.  Barring a big shock (hard landing in China, more fears of credit collapses in Europe), there is likely to be a floor under the market, and a point at which things look very cheap.

So what’s an investor to do?

• If you’re a long-term investor, and you don’t like the volatility, it’s perfectly fine to sit it out in cash.  Of course, I would look for things that might move markets – shocks to the system (as mentioned above), changes in policy dynamics, changes in unemployment, etc.  So sitting in cash while watching for changes in direction is, I think a perfectly valid strategy.

• If you like to be more active, it’s always good to remember that the next several months could also represent a great buying opportunity for the long-term. for example, if we get a more business friendly Congress in November, September – October might very well end up being the low for the next several years.  Businesses are also more likely to do some gearing up for the December season, so that may be a positive catalyst into the end of the year.

• If you’re willing to spend some time and do some trading, there will certainly be opportunities.  In the short-term, valuations aren’t likely to mean much (they would longer term), and instead, technical trading will likely win the day.

Here’s some quick specifics:

• Buying defensive, dividend paying stocks remains a pretty solid strategy.  I continue to like Kraft, Clorox, PG, McDonald’s, Coke, Altria, Phillip Morris and the like.  The trick here is to buy them when they drop a bit, because even though they’re defensive, they’ll still go down if the market does.  They’re also more exposed than they have been in the past – P&G could weaken because consumers trade down; Kraft could be sensitive to rising food prices, caused by events such as the ban on wheat exports from Russia; and all are sensitive to international currency issues.  But they will still hold up better than others in weak markets.  I’ve advocated this approach all year, and continue to.  I am long Kraft and PG for myself or my clients.

• Personally, I’m not jumping into bonds or bond funds. You can, but you have to be watching to see when the market will turn.  Remember, you’d be buying bonds at historic highs, and also at historically low yields right now.  It’s not clear to me that the low yield is worth it; miss the turn and your low yield return could be wiped out quickly.  I prefer defensive dividend paying stock strategy mentioned above.

• Recent comments from analysts and from Cisco today has the market believing that tech will slow down in Q3. Very likely, as mentioned, that orders have been pushed.  If nothing else, the market has certainly begun to believe it.  Barring news that changes this picture, I would look to buy some tech in late September to October ahead of a possible ramp-up into December.

• Anything consumer related is likely to be weak in Q3, so depending on how far consumer stocks fall, October might be a buy for December.  Still, it’s too hard to say for certain now, best to revisit in the fall.

• Expect financials to be weak going forward as well.  Financials are very sensitive to market and consumer conditions.  Also, you have to monitor the shape of the yield curve.  If long rates rise while short-term rates stay low, financials will rally.

• Industrials, which were enjoying quite a good run, will be subject to fears of a slowdown around the world. They will trade with the market’s assessment of a recovery.

• For commodities, I find it hard to see a longer term trend. Rather, commodities will be a trader’s market.  Lower dollar created by easy monetary policy would argue for commodities, but signs of slowdown in China would push commodities down.  Commodities are likely to bounce around quite a bit as economic reports give conflicting signals (because you know they always do!)  The one area where commodities could see the beginning of a longer-term trend is in the agricultural sector – stocks such as Monsanto, Mosaic and Potash.  Input costs are going up around the world, Russia’s fires have wiped out their wheat production, people have to eat and arable land is limited.  But keep an eye on these – remember that they are momentum stocks, and “momo” stocks as they are called require attention.  I am not long any of these stocks at the present time.

• Gold is a likely winner, especially if fears of a weakened economy escalate.  Here the thing is to try to buy it on enough of a pullback to lower the risk on the investment.

• Currencies and interest rates. Yields are likely to remain low until we have some indication that the economy is growing appreciably.  Usually this means a weaker dollar (people flee the dollar because there’s a higher return elsewhere), but at the moment, fear is driving people into the dollar, so the dollar is actually rising.  I expect currencies to be volatile, and wouldn’t play currencies unless you have a good pulse on the market.  If we think the market would rally into the end of the year, I’d look to short bonds or buy the TBT in late September / October.