Why now is not the time to be buying stocks
Posted on 22 August 2010 with 5 comments from readers
Stocks are presently in a bearish phase after a long rally and will likely track lower until late autumn, possibly with a nasty crash if investors panic over the economic outlook.
The yield argument is false. This compares yields on bonds and stocks and that makes stocks look attractive. However, bonds are in a misleading place as interest rates will go up and bonds down as inflation rises. That would correct this yield situation without higher stock prices.
Non recovery
Besides you need to look at fundamentals. The stock market rally priced in an economic recovery that simply has not happened in the US. Think house and auto sales. Think consumer confidence and the latest manufacturing data.
Profit recovery is also a passing phenomenon. These profits came from huge cutbacks and a very modest recovery due to massive stimulus packages around the world. They are not sustainable as neither job cuts or stimulus can be repeated on the same scale.
The reality is that the world is a smaller place for business activity. And where the boom has returned is where it now looks most vulnerable. China is the next bubble economy.
That said any big dip in stock markets is a buying opportunity because there is inflation in the system from money printing, and that unused money in bank accounts will eventually be spent.
As Dr Marc Faber argued in Abu Dhabi earlier this months equities are a reasonable asset to own in times of inflation. They will tend to retain value better than cash or bonds, and possibly real estate too.
1970s again?
However, in the 1970s cash won hands down with high interest rates hitting real estate and bonds and leaving equities largely out in the cold too. It is hard for companies to raise prices fast enough to keep up with rising input costs, and by the late 70s the stock market was heavily skewed towards natural resource stocks, particularly oil and gold.
There is an argument for buying those stocks now and sitting on them. But it is not a good one as a meaningful downturn in stocks will take all of them lower. That will be the time and oil and gold shares will be the stocks to buy.
The ArabianMoney investment newsletter will be stock picking in these areas then. Why not sign up today and be ready?
5 Comments posted by readers:
Early, accurate and scary…….
http://www.consumerindexes.com/
In the last 40 days the contraction in the US has accelerated significantly.
Hang-on for Q3/Q4….2008 all over again???
@sandman: well said!
The Coming Q3 Data:
The Q3 data will be released well before the November elections, and the data will not be pretty, unless the US government manipulates the numbers. But then again, manipulation is the name of the game for the US government, which has been manipulating just about everything, including stocks, bonds, commodities, currencies, etc.
A Summary of Manipulation:
Almost every day, newly analyzed data and economic numbers are released; even when manipulated by the government or the “free” press, the indications have consistently deteriorated. Upon release, the stock market initially drops, and then it somewhat miraculously rises on little or no volume. Less than 20 US stocks are the ones that are manipulated heavily by the big banks; this action, coupled with the FED’s heavy buying of Dow and S&P futures, account for the daily market “melt up”.
How Long Can This Go On?
So how long can “they” continue to defraud, manipulate, and deceive? I suspect that within the next few months, some unexpected event, whether a Black Swan or not, will act as the catalyst to bring the market down again. For chartists, we now see the largest head and shoulders “topping formation” that the stock market has ever created.
We’re Beyond the Tipping Point:
We’ve gone well beyond that point in time when all small investors (i.e. “small” in this case are those with less than $1 billion in assets!!!) should be totally out of BOTH the stock market as well as the bond market.
Oil is the Achilles heel of the world economy. We’re riding through Utah in the Thunderbird convertible with ‘Thelma and Louise’. Only it isn’t 1991. The oil cliff is a lot closer now, than it was back then.
Jim McCaughan, CEO of Principal Global Investors, said on CNBC today (22 Aug.) that there is evidence of widespread fraud in the US stock market. Trades are occuring as soon as orders are placed into the system, but before they can be executed. Huge orders are being withdrawn before they can be executed. (Someone, I think it was Karl Denninger, had a video of that occurring in the middle of the night on his website a couple of months ago.) Jim said that the ‘flash crash’, that cost people who got stopped out a lot of money when their stock was sold at significant losses as the market crashed, MAY HAVE BEEN AN INTENTIONAL ACT. Computerized trading at its best?
@Bill Simpson:
Yeah, widespread fraud!
This has been “standard practice” in Wall St. for years now!