Bear or Bull Market? Are You Confused?

Last week, the global markets looked quite bullish and all seemed nice and rosy, right? All of the CNBC pundits claimed we had hit a floor and were now on our way up. I had a few conversations with some friends at the end of last week, and they seemed disappointed that they hadn’t gone all in when the markets hit their low in October since the S&P 500 had well exceeded 1,000 at the end of last week. I still felt bearish about the markets but had mentioned a few weeks ago that we would experience a nice, but temporary, bounce back from those lows. Because of these conversations, I was adamant to post my thoughts late last week that every one should be monetizing their gains (or at least some of it and place a stop loss on the remaining shares) as that bounce back would be temporary.

Now, this week has been a mess. As I am writing this, the Dow is down over 440 points today! The global markets have given up all of the gains from last week. We are still in a volatile environment, and cash is still king. There is no reason to go all in. In fact, I will come out and say that would be downright foolish, and I would be forced to stamp a big fat “L” on your forehand…ok, not really. I wouldn’t do that. Any buying you do right now should be in the form of selling puts or buying small lots of shares in high quality companies (I published a list in an earlier posting this week) on the dips.

So, why am I bearish? We must have hit a floor in the markets by now, right? Well, the problem we have is not that of a liquidity crisis (which was the case in the Great Depression) but that of a solvency crisis. What this means is that there is plenty of capital out there, but the banks simply are unwilling to lend and people are afraid to borrow. So, the Fed pumping more dollars into the marketplace won’t help in my feeble opinion. What’s the point in printing more dollars if the banks still don’t want to lend? Essentially, the Fed has established itself as a backstop to every debt market out there (including unsecured commercial paper). To put it simply, issuing more debt will not rectify a debt problem.

Barron’s latest “Big Money” revealed an overwhelming bullishness amongst money managers. 62% thought stocks are undervalued and 70% expect stocks to be the best performing asset class for 2009. To me, this is unreal. Nothing about the fundamentals say we are recovering. If anything, our economy is getting worse. Target came out with earnings that were below estimates, and their same-store sales were down (Wal-Mart is still posting solid numbers nonetheless). Retailers are closing stores on a daily basis. Circuit City is closing around 150 stores. Linens & Things recently announced bankruptcy. Massive consolidation is occurring in the airline industry because the small, simply, are unable to survive. There is nothing pretty about the job loss claim statistics. Trust me, we may see another bounce back, but there is still some more blood to be shed out on the streets. So, with an overwhelming bullishness amongst money managers and the deteriorating fundamentals, this is why I am focused on building up my cash base and only buying shares in small lots. Sitting on the sidelines is not a bad thing. Sometimes, it’s the best investment decision you can make and guess what? With the increase in credit card debt and the decrease in 401K balances, Americans may actually need to start saving and have cash on hand in their bank accounts!

With that said, the nationalization by the US government of private institutions is unprecedented, and we really do not have anything in history to compare it to. But, as I mentioned earlier, we can’t cure a debt problem by issuing more debt. To me, that just does not make any sense.

Tomorrow, we should have the official job loss claims figures, and I imagine they will not be good. It may be flat, but I doubt there will be any improvement from the last report. In the end, I would not be surprised to see new lows in the S&P 500. At the very least, I would expect to see the market re-test its October lows. Prepare accordingly, monetize your gains, and invest cautiously (selling puts and buying shares in high quality companies with a ton of cash).

-Moolah

New President! So, How Should You Invest?

Not sure about you, but I am feeling inspired these days…obviously, not as a result of the stock market. Today’s has been another major drop. Rather, we have our first Black president in the White House. Regardless, whether you voted for McCain or Obama, you can’t help but feel inspired every time Obama speaks. It reminds me of the days of JFK, RFK, and Clinton. When Obama gave his acceptance speech, the hairs on my neck stood up like when I was 8 years old about to open my Christmas presents. He definitely provides hope to the citizens, and I think that is exactly what the U.S. needs granted he is successful in reaching across party lines, making effective decisions, and pushing back to the Democrat demands (I guarantee Pelosi has an axe to grind and will want to make full use of the Democratic majority in both the Senate and the House to upend the Republicans).

So, how will the change in the White House affect investors here in the U.S.? Well, Obama has already promised higher capital gains rates and higher dividend taxes (granted you make roughly over $250,000). Assuming investors have capital gains, I guarantee they will sell before the new hikes take place.

For rich people, we can agree that they will be paying more taxes. So, if you fall into this category, where should you be socking some of your money or a lot of it depending on your investment goals? My advice is that you should be buying municipal bonds due to their tax-free nature and high yields compared to taxable investments. Specifically, the closed-end municipal bond funds is where you want to be as they are offering yields exceeding 6% and currently trading at 10% discounts to net asset value (NAV). In other words, you would be buying these for 90 cents on the dollar while collecting 6% returns.

For example, investors in California can buy NCL shares (Nuveen CA Insured Premium Income Fund 2) at $10.80 per share (12% discount to its NAV of $12.29) and collect 6.5% in dividends, which are federal and state-tax free for CA residents.

6.5% is definitely a lot more than you would collect in a savings account. When you incorporate a 31% federal tax rate and an 11% CA state tax rate, this 6.5% yield is more like an 11.5% taxable yield. What this means is that you would have to generate 11.5% return on a taxable investment to equal the 6.5% dividend yield you would earn on NCL.

Sounds pretty good, right? So, if you are interested in this sort of investment, go to www.etfconnect.com to look up municipal bond funds in your state.

-Moolah