Hold the Fort

If you've had the fortitude to stay the course to this point, hang on. Despite the ramblings of one, Ben Bernanke, our hapless Fed Chief, the market appears to be reaching its bottom. I have to question whether the government efforts have actually had much effect. But, I'm certain that Bernanke not keeping his wild comments in check are causing harm. 

Regardless, it would appear that most issues are oversold. Which sectors are ready for investment is not clear, but the broader financial market (XLF) appears ripe for the picking. I'll post other tidbits worthy of consideration as they appear, but moving cash back in to the markets appears to be a wise move. I still recommend a hedge with UUP since the dollar is gaining nicely on the currency stage.

The choppy markets will continue, but expect some generally upward moves from week to week as money pours back in. I would expect the retail season to be very weak this season. Much of the retail stocks are already priced for bad news so the market should not be impacted dramatically. However, the retail weakness will create a vacuum that could finally push us into recession if the taxes are increased anywhere. Beware all tax increases and bond issues like the plague. This blog is not designed to be political but any proposition involving bonds should be sent packing no matter the bleading heart cause the ballot measure claims to benefit. Our proverbial credit cards are maxed and more borrowing will tip the scales in the wrong direction.

For the short term, expect some very nice spikes in the market, but brace for big corrections as well. If you have the stomach, index options could be a very lucrative play these days. 

Are we there yet?

Expectations are quite low when the new "up" is "not down 500", according to CNBC. Well, I guess today was a down day then. The only solice perhaps is that trading days are looking very predictable. 

I had to break open my history books to compare this bear market to past bear markets and my research suggests there is a light at the end of the tunnel. I believe (in the minority) that the credit crunch is predominately behind us. Now the mop up is a totally different story as we keep seeing various financial institutions fall under the weight of their own balance sheets. These things always go in cycles and history suggests we are not in a unique spot just yet.

The government hasn't started spending on their shiny new 700B credit card yet. When they do, it appears that some of the money will be put into the markets directly and such a move will definitely help. Another interest rate drop appears on the horizon which should help some. While the dollar typically cringes at rate drops, our peers are dropping faster which means the dollar is being held up (nice hedge, see my previous blog about UUP). The doomsayers are in full force regarding some major tech earnings announcements next week but such announcements are usually backed into the prices ahead of time which suggests that we probably are near the bottoms from a P & L perspective (IBM was a nice surprise). Some industries appear to be slowing but not tanking like those tied to the financial markets which suggests, again, that the broader index should be nearing the bottom of this mess. 

So maybe we've hit bottom, and maybe not. Regardless, the bear market WILL end at some point, and the bounce off the bottom WILL be notable. As mentioned in previous blogs, diligence will find some nice bargains in the market and a dollar hedge isn't a bad side bet. The business develepment funds like MCGC and AINV have gotten their heads chopped off and while the prices look incredibly bad, their investments don't seem to be going south as fast as their own stock prices. The credit squeeze held up their ability to make new business, but if their performing assets can provide enough cash, they should see it through the storm.

Don't sell!!! Hang tight, buy good value shares if you have the ability, and look forward to next year.

Time To Hedge

OK, the volatility is high and the latest reports suggest we are probably in for a week retail season. While we've not been in a recession, the risk of a decrease in GDP is looming and it's time to consider some hedges. 

I've mentioned in the past that those who prefer a gold hedge might want to consider GLD as an ETF equivalent. But I've not personally made that plunge. While I don't mind metals as a commodity play, I'm a little nervous about gold's volatility as well. The stock market is very much a pricing of future performance. And typically a drop in overall economic performance would suggest a drop in the dollar against other major currencies. However, I think we are in a unique situation. While I expect more volatility in the broader market, I expect even more volatility in overseas markets. The US markets appear more advanced in this financial drama than our foreign counterparts and that is why the dollar has been gaining in the last several weeks. Further, we are likely to be out of this mess in the first half of 2009 while some foreign markets will not rebound as quickly. 

After a long battering of the dollar over the last couple of years, the dollar has certainly taken a turn up. Two thoughts bring me to a currency play. First, currency trends tend to be long. While the peaks and valleys aren't obvious, once the trend starts it usually represents a significant economic shift. Second, the US economy has been well beaten down. At this point any additional losses in the market will likely see equivalent or greater losses in foreign markets. Again, a weak US market still trumps a weaker foreign market. Hence, the dollar will rise further. 

If  you buy in to my bullish dollar sentiment, you might consider an investment in UUP as a hedge to your market positions. The UUP is an ETF that paces the dollar against a basket of currency futures. If the dollar strengthens, UUP rises. 

While interest rates are increasing in some areas and might be worthy of a cash investment, I still prfer a broader approach. And I think the dollar is coming back.