Consumer Continues To Struggle

Recent market action has been consistent with the economic turmoil that we have been experiencing as it has been unable to hold onto early morning gains as the economy is still a mess because, ultimately, the consumer is struggling. To further explain this, October’s retail sales (directly tied to consumer spending) were the worst in 35 years according to GlobeSt.com. Wall Street’s uncertainty continues to show up on Main Street as October comparable-store sales declined 0.9% from a year earlier. If you exclude Wal-Mart, the figure skyrockets to a decline of 4.2%! Specifically, apparel stores were hit hard as they dropped 11%, with Abercrombie & Fitch posting a 20% reduction, followed by Gap (down 16%) and Chico’s FAS (down 13.4%). However, Cato posted a 4% increase and drug store comps rose 2.3%. Overall, all of this can’t bode well for the holidays in terms of retail sales.

On a side note, McDonald’s had 8%+ in same store sales. So, it looks like the public is actually getting poorer and focusing their dollars on value purchases. We should do the same with our investment capital, which is why I had previously mentioned MCD and WMT as solid long term buys.

As for today, the market nosedived to the red by 300 points and ended the day in the green by over 500 points. This has all of us scratching our heads, right? Today’s remarkable rally was a function of the market being well over stretched in selling. There was going to be the inevitable bounce back. Will it last? I think so for at least another day or two. As I have been preaching about, I recommend taking your gains when you get them. I bought some UYG today when the market was deeply in the red and came out with a quick 15-20% pop by the day’s end. I sold half the shares and waiting to see what happens tomorrow to see whether I can get some more gains and then close it out.

I am still nibbling at the large blue chips (the list I mentioned earlier) every time the market dips down. So, today, I bought shares in small lots across the board. I do think we are getting close to where we want to load up on these shares. However, not quite yet because when the government is meddling and handing out bailout money to everyone and anyone, we want to stay out due to the inherent volatility.

I really hope GM and the other auto manufacturers don’t get the bailout funds. Why? You might be saying that lots of jobs will be lost. I agree, but our government can’t be in the business of bailing out companies with broken business models. Let’s take Chrysler as an example. Chrysler still derives over 50% of its revenues from truck sales. Are you kidding me? The reason the US auto companies are having its lunch eaten by foreign competitors is because the competition was simply quicker in evolving their business models by producing gas efficient/hybrid vehicles and decreasing truck production. If the government bails out the auto companies, then unions will only get more pushy, current flawed business practices will continue, and management will feel that all is well. Bankruptcy is not a bad thing. It allows these companies to safely fix their business models while not getting pestered by the creditors.

I have been doing a lot of reading over the past few days. Here are the most interesting ones:

• Here is an article illustrating the issues when government tries to be an investor. Back in 1999, Gordon Brown (current PM of Britain) sold of a chunk of England’s gold reserves under the most unfavourable (for you Brits out there) circumstances. Now, a rather embarrassing question arose from the opposition benches in the House of Lords the other day.
• The current risk of deflation could lead Helicopter Ben (because he has a history of dumping US dollars into the market) to adopt an inflation target at the Fed.  I, personally, am not in favor of this because it changes the focus of the Fed from that of growth to that of inflation. That’s not a proactive way of leading our economy to new highs. Here is the article.
• Will the REIT model cease to exist? Here is an article explaining why REITs will continue to trend downwards, and the reasons are directly correlated with the consumer being pained. If the consumer isn’t spending, the retailers aren’t selling.

-Moolah

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

Wild Day…Time To Buy? Election Time!

Today was a historic trading day right before the election. Never have we had this much of an increase. I hope none of you have gotten greedy over this past 1.5 weeks of increase in the overall markets. I highly recommend you monetize some of your gains. For example, if you are up 25% in a matter of weeks for a particular stock, at least sell half of your shares and place a stop loss to protect your backside so to speak. Wouldn’t you be happy with a 25% gain for the entire year for your portfolio? If so, you should be content with a 25% gain in a matter of weeks. Don’t worry if the stock continues to go up because no one sells at the peak and buys at the absolute bottom. That’s why I say to sell half and use a stop loss of say 15% to protect your gains. Also, never manually input your stop loss as market makers see these positions. Just keep a mental note of it or keep track of it on a spreadsheet.

I expect the market to retest the 920 S&P 500 lows sooner than later. At this point, is when we want to buy stocks because there will be enough of a support on the downside to sustain a rally over the next few months. I think the natural gas sector is ripe to spike up during this period. UNG is a good fund to buy into once we test 920. Also, at this point, we will want to start thinking about acquiring additional shares in large stable companies trading at historically low valuations. I have compiled a list after researching companies that have strong cash balances, stable dividends, and clean balance sheets. Here is the list:

• Berkshire Hathaway
• McDonald’s
• Altria
• Johnson & Johnson
• Coca-Cola
• Wal-Mart
• Exxon Mobil
• Microsoft

Another way of participating in these large companies is through a fund, such as JPZ, a Nuveen fund. Keep in mind if the above stocks go up by 15%, this fund may only go up by 10%. However, if there is a sell off in the market, this fund will be less volatile.

I still wouldn’t go all in. Still maintain a strong cash balance because this market will be volatile for the near future. Be sure to monetize some of your gains because many of the technical indicators reveal that the market is ripe for a downward move. Just keep buying small lots on downward moves.

No articles for today as I imagine all of you are psyched to watch the debate tonight. I hope all of you here in the US have voted as it is exciting times globally and here in the US.

cheers,
Moolah