Back in May I warned my regular readers and viewers on the Switzer program on Sky Business that the old cliché or rule of thumb — “sell in May and go away” — has a lot of history supporting its relevance to investors. And with the debt disasters dominating news and market headlines from Washington to Dublin via Athens, Italy, Madrid and Lisbon, the question is when will the negativity break?
And what should an SMSF investor be thinking about in constructing their strategy? For most my answer is simple — stick to your knitting provided you are a good knitter. And the Wolf of Wall Street has a tip too, but more on that and some stock picks later. For now let’s look at what’s spooking the markets:
• The European debt crisis and its impact on European banks and the entire financial system;
• The US debt ceiling and the deficit debate quagmire in the US Congress; and
• The chance of a double dip recession in the US.
Let’s deal with the least worrying — the US debt debate. The deadline on this wrangle between the Republicans and the Democrats is August 2 and I don’t believe the posturing pollies in Washington will permit the US government to default. The whole stalemate adds to uncertainty. But to put it in context, the fear index, known as the VIX, is still at the relatively low level of 21 compared with 80 during the GFC.
The second least worrying issue for me is the suggestion that the US may dive back into recession. The debate on Wall Street gets down to whether the current economic slowdown is temporary or will be sustained.
The “it’s temporary” camp say the trifecta of woes — the Japanese disasters’ drag on US production, bad weather, and the big spike in oil prices — all drove economic growth down, temporarily. The most recent reading on US industrial production for June showed growth for the first time in three months.
Also helping this case is the US profit season, which so far has shown big name companies such as IBM and Google producing better than expected results. It will be important to keep an eye on profits over the next few weeks. One sure thing is that US banks have copped a drubbing this year with Bank of America down around 27% and Goldman Sachs off about 24%. Debt worries plus economic slowdown concerns, new regulations and some big legal settlements over mortgage mistakes have really hurt this sector, but when they turn, they could register a big bounce-back.
I think the US economy and company profits will set the scene for a late year rally, but the stumbling block is Europe.
The latest stress tests of European banks impressed no one. Only eight small banks failed, but 16 nearly got an ‘F’! The European banking system has hit bank stocks worldwide and ours’ have not been let off the hook, although none have fallen 27.6% like the European bank index did.
Others share my opinion.
“The bigger issues are clearly in Europe,” Keith McCullough, CEO of Hedgeye Risk Management in the USA said on CNBC. “The debt ceiling debate in this country, I’m actually looking for a resolution. I think that’s why the dollar is strong. Perversely strong dollar is bad obviously for stocks, but it’s bad for the euro as well.”
McCullough said the biggest issues are n the sovereign debt or credit-default swaps spread that you see in Spain and Italy, and those are bumping up against huge debt maturities in August and September. That makes me think we will see Euro-problems hurting stocks until September. But we could get some progress if US companies report well, the US economy progressively improves and the debt ceiling drama is solved.
One final point, and it comes from Jordan Belfort, the man who built a US brokerage up from a few-man operation to a 1,000-broker boiler room, ended up in the clink, then wrote about it in the best seller ‘The Wolf of Wall Street’.
Out and trying to make amends nowadays, Belfort told me he believes you have to buy quality companies when everyone is negative. He cited the Buffet advice: “When everyone is greedy, I’m fearful. When everyone is fearful, I’m greedy.”
Provided your knitting, that is, your investment strategy is sound, then this is not bad advice. Belfort says he is long resources at the moment for the long haul. And that’s why BHP-Billiton (ASX:BHP) and Rio (ASX:RIO) look good at these prices for me as a long-term player.
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