19/11/2019 Finance makes the world a new place

The Shot Heard Round The World!

The Shot Heard Round The World!

As I expected, the U.S. downgrade by S&P was going to be a lot worse for the stock market than for treasuries. This came as major surprise for most people as it is counter intuitive. The reason being is that it was not so much a loss in confidence in the ability of the U.S. Government to pay its debts as it was a signal that the free spending ways of the last 50 years is ending. History shows that sovereign downgrades spark action in governments to tighten their belts and cut budgets. Less spending, whether it be in employment, infrastructure or social services including Social Security and Medicare means less aggregate demand in an economy and thus less revenue and profit.

In simple terms, the downgrade applies very little to the creditworthiness of U.S. Treasuries, even though we are now rated below Finland, Luxemburg and the Isle of Man. It was only S&P that downgraded us, while both Fitch and Moody’s left the triple A rating. The real effect, and what it really means to you and me, is that it is going to light a fire under our politicians ass to cut spending at a time when our economy is already incredibly fragile from not enough spending and consumer demand (70% of our economy is consumer spending) from our aging population which naturally spends less as it gets older and an already massively indebted population who has no more spending power.

With the recent drop, there is a lot of talk about this being similar to last year’s correction. This is not D?j? vu all over again. The global economy is slowing and the global debt crisis is getting more intense, and it’s not just a U.S. problem either. It is a global problem, particularly amongst the developed world. So, it’s not just us that is bankrupt, but Europe as well. It started with Greece, recently spreading through Italy and Spain and just this morning reaching France. Our banking crises of a couple of years ago, is rocking through Europe which will eventually reverberate back here.

The Federal Reserve’s statement yesterday was very blunt, acknowledging that our economy was slowing more than previously thought and that monetary easing would continue until the cows returned. I am glad that they will continue QE Mini-Me and leave zero interest rates until 2013. But I am disappointed that they did not come up with a new asset purchase program or QE3 that is full of breath.

Investor Strategy: Current uncertainties create extraordinary opportunities in investment that generate income and especially short-term corporate bonds (not bond funds), with yields now exceeding 10-12%. Even with the market down 500+ points as I write this, many dividend stocks and our preferences go up. Corporate bonds were hit because hedge funds were forced to liquidate bonds to meet margin calls to cover money lost from stocks. (Paulson’s hedge fund announced half an hour ago that they were down 31% this month only!) This depressed price is most likely very temporary and is a benefit for “reasonable” investors who only need a decent return without all the headaches and heart attacks. After all, if you can get a yield of 10-12% per year and get your principal back in just one or two years, why take all the stock market risks? Invest for needs, not for greed!

The lack of QE3 is not good news for the stock market, and we have implemented a selective portfolio hedge through reverse funds that go up when the market goes down. The next few days are very important. If we don’t see the actual bottom formed with a strong rally, not just a “rally relief” with a good increase in demand and volume, we will start implementing our stop safety control stop exit strategy for stock growth. As discussed above, bonds must be held and added, even if the price falls with the stock market. At current prices they represent exceptional value and offer excellent possibilities for appreciation other than interest payments. However, even if they don’t appreciate, all you have to do is wait a few years to mature. Plus, they are always very liquid.

The Federal Reserve’s statement yesterday was very blunt, acknowledging that our economy was slowing more than previously thought and that monetary easing would continue until the cows returned. I am glad that they will continue QE Mini-Me and leave zero interest rates until 2013. But I am disappointed that they did not come up with a new asset purchase program or QE3 that is full of breath.

Investor Strategy: Current uncertainties create extraordinary opportunities in investment that generate income and especially short-term corporate bonds (not bond funds), with yields now exceeding 10-12%. Even with the market down 500+ points as I write this, many dividend stocks and our preferences go up. Corporate bonds were hit because hedge funds were forced to liquidate bonds to meet margin calls to cover money lost from stocks. (Paulson’s hedge fund announced half an hour ago that they were down 31% this month only!) This depressed price is most likely very temporary and is a benefit for “reasonable” investors who only need a decent return without all the headaches and heart attacks. After all, if you can get a yield of 10-12% per year and get your principal back in just one or two years, why take all the stock market risks? Invest for needs, not for greed!

The lack of QE3 is not good news for the stock market, and we have implemented a selective portfolio hedge through reverse funds that go up when the market goes down. The next few days are very important. If we don’t see the actual bottom formed with a strong rally, not just a “rally relief” with a good increase in demand and volume, we will start implementing our stop safety control stop exit strategy for stock growth. As discussed above, bonds must be held and added, even if the price falls with the stock market. At current prices they represent exceptional value and offer excellent possibilities for appreciation other than interest payments. However, even if they don’t appreciate, all you have to do is wait a few years to mature. Plus, they are always very liquid.