The markets are very complicated at the moment, which is why now’s an ideal time to reach into the Money Morning Mailbag and address your concerns.
The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.
This report tells why, and what to look for in the data and the markets. GO TO THE POST
The goal here is simple: To provide understandable, actionable, and, of course, profitable answers to your thoughtful and extremely insightful questions.
Let’s start with Syria and what the conflict really tells us about gold and energy…
Q: “Does the president’s speech change anything (in Syria)?” ~ Robert P.
A: Nope. What’s interesting in this case is that most leaders throughout history spend their time debating an exit strategy. President Obama seems to be hunting for an entry.
This points to opportunities in gold and energy. The key is not so much the commodities themselves, like most people think, but what conflict says about the need to own them.
Gold is really a value play that’s very pure and simple, if you pardon the pun. Conflict places every fiat currency at risk, and that means the need to preserve value overrides price.
Energy is much the same. There is no doubt that a broader conflict would spark higher energy prices, but unless you’re nimble and equipped with institutional-grade trading platforms, chances are you won’t be able to harness the volatility. But, you can absolutely get in front of the need to find new sources away from the shooting. Exploration and equipment companies are a logical alternative with momentum that will continue long after the shooting starts… and stops.
And finally, the euro.
Europe is far more exposed to fighting in the Middle East than America because of where our oil is sourced. This speaks to a weaker currency as prices rise in conjunction with any conflict escalation. Diversified European companies are a different matter because many do business in dollars. I’m talking specifically about the euro itself.
Q: “What do you make of Apple’s big slide?” ~ Thomas W.
A: Apple’s got a real innovation problem post-Jobs. Tim Cook is just not up to the task, which is why the company is losing market share in almost every market segment. The latest iPhones move – introducing the premium 5S and the inexpensive 5C for emerging markets – makes it clear that the company wants profits over market share. That’s not going to be enough at the end of the day.
It’s worth noting that both Palm and RIM adopted similar philosophies on the way down. Droid is now strong enough to “pick” Apple.
There are three strikes against Apple: slowing innovation, a lack of differentiation, and margin compression.
Short Apple or, if you’re not comfortable doing that, consider running some really tight stops to protect your capital. Longer term, there are better opportunities out there. It simply doesn’t make sense to get “pruned.”
Q: “How risky are bonds now… really?” ~ Andrea J.
A: Investors holding long-term bonds are going to get hit hard as rates rise. For example, when yields jumped 0.75% from May to June earlier this year, long-term bond funds dropped an average of 6.01%, according to Morningstar and Money Magazine. Intermediate bond funds took a 3.4% hit, while short-term funds fell only 1%, or just a bit more than rates themselves moved.
You shouldn’t sell out, though, because bonds remain an important part of any properly constructed investment program. Instead, consider shifting into short-term bond funds or cash alternatives like the US Global Investor Near Term Tax Free Fund (MUTF: NEARX) if you’re willing to take on slightly more risk. That way you’ll minimize the impact of rising rates while, more importantly, positioning yourself to capitalize on the higher rates ahead.
[Editor’s Note: Money Map Report subscribers who followed Keith’s most recent bond-market recommendation locked in a 100% gain last month. But “this game is a long way from over,” he says. Get all of Keith’s Money Map Report recommendations right here.]
Q: “September is historically the worst month for stock markets but we seem to be doing okay so far. What do you see ahead?” ~ Jonas L.
A: Seventy percent or more of total trading volume is now computerized according to the latest studies, so the seasonal pattern is more likely busted than intact.
As long as the data presents a “Goldilocks” recovery – meaning neither too hot nor too cold – the Fed will have no choice but to continue. That said, the Fed meets Sept. 17-19 so we’ll know more then.
As Art Cashin, perennial CNBC favorite and Director of Floor Operations at UBS Financial Services, put it recently, unless Bernanke “gets a miracle with the non-farm payrolls,” it’ll be tough to justify tapering.
A snowball’s chance in hell is more like it, which is why investors would be prudent to tighten up their trailing stops now – ahead of time – as a means of protecting capital and capturing profits.
Remember, the goal is not to time the markets or even exit prematurely. A Barron’s study shows that 85% of all buy-sell decisions are wrong, which amply demonstrates the futility of trying to outthink the out-thinkable.
The more prudent course of action is to ride the bull for as long as the bull wants to run. Trailing stops help you do that unemotionally and with the added benefit of being able to plan ahead for turns that will take others by surprise. Serious investors rarely run their money without them.
Traders, on the other hand, often do, but they offset their positions with put options or shorts designed to profit when the markets hiccup. Right now, they’re really cheap because nobody is looking on the other side of the fence.
Q: “My friend says the Hindenburg Omen indicator is overly simplistic and produces too many false alarms to be profitable. He cites a whole lot of ‘signals’ as evidence. Your take?”
A: Sorry, but your friend is dangerously naïve and appears not to understand its true message very well.
The Hindenburg Omen indicator has never missed a major market turning point. The key is in not only the primary reading (which can happen frequently) but the secondary reading (which happens rarely), because it significantly increases the probabilities of a correction.
And that’s where experience comes in. You never want to make all-or-nothing decisions. Successful investing is about going with the market’s flow, and the Hindenburg Omen indicator helps you do that.
Primary signals suggest turbulence ahead, so professionals (and informed investors who’ve actually traded big money) begin tightening up stops as a precaution. If and when confirming signals are triggered, many tighten up stops further. Aggressive investors and traders also begin implementing hedges or buying put options.
If there is a crash, the combination of stops and hedges not only ensures stability, but profits, too. If a “crash” never develops, so what. They’ve stayed in the game and continue to ride the bull to still more profits.
As my grandfather, who played baseball in the “stovepipe” league at the beginning of the last century, used to say, “You miss 100% of the swings you never take…”
The Hindenburg Omen is simply a way to raise your batting average.
Best regards for great investing,
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