Skeptical investors, including me, have been experiencing hard times lately. Basing investment decisions on the fundamentals of our economy and the state of our countryâ€™s collective finances are working less effectively than previously. And commodities like gold and oil are falling in price, which makes investing even more difficult. But Iâ€™m not about to change a thing in my portfolios!
Maybe this is a good time for reflection — to look back at what has worked well for investors during this decade. To start, letâ€™s look at one of the hottest stock markets on the planet — Brazil. That market has risen by about 1,600% since Luiz Inacio Lula da Silva took the leadership role in 2002. Anyone who believed what they heard from our financial media at that time wouldnâ€™t go near that market, based on Lulaâ€™s socialist political leanings and Brazilâ€™s boom and bust history.
Yet those investors focusing on the fundamentals, seeing the emergence of China as a massive buyer of raw materials and Brazil well endowed with them, recognized in this combination an â€œinvestment of a lifetimeâ€ opportunity. Once again, too many U. S. investors waited until the financial media began reporting big investment gains in Brazil. They rushed in too late, only to see that market revert back to its characteristic volatility, which, undoubtedly, spooked many late comers into selling in frustration.
Meanwhile, financial experts and media promoters, who focus on investing, have universally derided gold. Their arguments may well have brought about the determination that little opportunity existed for big brokers to profit from rising gold prices. But those who saw the rapid deterioration of our domestic economic fortune, exacerbated by the mindless fiscal policies of the Bush administration, defied conventional wisdom and enjoyed another of this decadeâ€™s great bull markets.
For the most part, successful investors had to invest in that market early, too — when skepticism was running high. Getting into the gold sector also allowed investors to ride up with one of the more volatile assets classes, knowing they had bought in when prices were at their nadir — or close to it.
Before too long, I anticipate that gold will renew its move to much higher prices, though many will wait for some breakout in metal prices before jumping back in. I believe the biggest gains are made by those who buy in at the best prices, which is rather obvious. But it also means having the nerve to load up early and to stay invested when the trend is temporarily reversing and falling in price.
You need to be involved when things look worst. This is the best way to follow the old â€˜â€™buying low and selling highâ€™â€™ adage; thatâ€™s when the crowd most loves what you bought at the time the crowd most hated it!
What I find truly amazing now is how many investors continue to chase domestic stock markets, which tosses my entire investment theory into the nearest trash can. In my not so humble opinion, buying stocks in our home market now remains the dumbest thing an investor can do. Yet look at the markets rallies from March low points when Bear Stearns â€œblew up,â€ and we were hearing how the Fed needed to intervene with tax payer money to keep our entire financial system from imploding.
Propagandists in the financial media repeat again and again that weâ€™ve seen the bottom and have nothing else to fear. And, oh boy, if you donâ€™t load up on stocks now, youâ€™ll miss the big rally thatâ€™s coming â€“ as always!
They see the worst of the housing and sub-prime mortgage mess behind us, consumer spending rebounding soon and exports driving economic growth. Though this is all pure nonsense, it does sell stocks and mutual fund shares.
Most amazing to me now is how the market responds to economic data reported by the government, which, in so many cases, is bogus information. And the kicker is that most big institutional buyers of financial assets know full well that many economic data points are manipulated, yet they still plow fresh money into stocks!
The market cheered at the recent GDP report, which saw â€˜â€™better than expectedâ€™â€™ news showing that our economy grew at a .6% rate in the first quarter. That number was made possible by using an inflation factor of 2.6%, which, you may know, is then deducted from the gross gain in economic activity.
The lower the rate of inflation, the lower the amount subtracted from the gross number. But for the past year, when the price of oil has doubled and food items like wheat, rice, corn and soybeans have also doubled or tripled, is inflation really running at less than 3%? Large investors know as well as I do that these numbers are altered, yet most canâ€™t wait to buy more stocks on the news!
Last week, the Bureau of Labor Statistics reported the job creation number, which showed â€˜â€™better than expectedâ€™â€™ job creation, or, in this case, fewer lost jobs than previously forecast. Futures raced higher on the release of this report, while few seemed to question how the construction sector could add 45,000 new jobs with the housing market in the tank — or how big brokers and investment banks could hire another 8,000 workers after recent mass layoffs in the financial sector.
Had they bothered to look at the actual report, investors would have seen that the BLS simply assumed another 267,000 new jobs, using its scandalous birth/death model to gin up the numbers. The report provides some meaningful information, yet todayâ€™s Bulls fail to scrutinize headline reports before rushing into more stock purchases.
Add to this the fact that the S&P 500 is selling at an average P/E of 21, based on reported earnings! With recessionary overtones seen in all corners of our economy, I would have guessed that investors would require much stronger economic data before loading up on such richly valued shares. Silly me, eh?
I see our domestic markets as simply not worthy of investment — on the long or short side. This market appears to be heavily manipulated by those bogus economic data points, while commentary coming from the financial media expounds their meaningfulness, when surely they know their lack of trustworthiness.
Consider, too, the blatant intervention by the Federal Reserve in bailing out Bear Stearns and cutting interest rates while commodity prices are soaring. Both are efforts to support the stock market. They show the idea that our markets are free and fair to be utter nonsense!
Yet opportunities to profit always exist, and those sectors taking the biggest hits over the past few weeks still look best to me. I know how hard it is to stay invested in whatever is falling in price. Add to that the endless guessing about when the commodity boom will end or how Europe and Asia will be dragged into recession as we go deeper into our own.
I am not buying into any of this thinking. Other markets are better valued and much less manipulated than ours. Europeâ€™s central bankers focus on inflation rather than growth, in direct opposition to our Federal Reserve, chaired by someone too weak to resist calls from the stock market for ever cheaper money.
Commodities like oil and gold are likely to be the prime beneficiaries of the horrid financial tools the Fed and the government are using. How absurd we must look to foreign markets as our government sends out checks to encourage people to spend the money as soon as they receive it! Does anyone wonder how the stimulus program will be funded, ultimately, since we are running massive budget deficits, havenâ€™t the first dollar to hand out, and must borrow these funds before sending them?
My recommendation after these considerations: do your best to rid yourself of all domestic stocks and mutual funds while you can. Take this opportunity to get better prices than you would have a few weeks back — when you were wishing that you could. And get more involved in areas that look worse now, namely the commodity sector and foreign markets.
Donâ€™t wait for the financial media to tell you what fared best in the second half of 2008. The opportunities are there now, but you need to be there earlier than others.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.