Now It Gets Complicated

As my readers and clients know, I have characterized this period as a time of both great risk and great opportunity. For the first time in a long while it has seemed that a number of great opportunities were pretty obvious.

It appeared that commodities and hard assets (stuff) were likely to do well due to the enormous amount of money that is being printed by the U.S. and other countries in an effort to stimulate and save their economies. I have recommended energy, gold, copper, basic materials, mining, and agriculture stocks and exchange traded funds (ETFs) to benefit from that phenomenon and all of them have moved much higher over the last four months.

We have also invested in companies that create productivity-enhancing technology and also have a large position in emerging markets with better demographics (more young productive people and fewer older recipients of massive government entitlements) than the U.S.

I have also strongly advised people to stay away from U.S. government bonds which have collapsed in price as interest rates on 10-year notes have now doubled from 2 percent to 4 percent in just a few months. Our top recommendation has been an ETF that moves in the same direction as interest rates symbol TBT) and it has almost doubled in the last few months.

These opportunities seemed to be relatively low risk based on the clear underlying fundamentals. The overall stock market has done well during the same period due to the amazing valuations that resulted from the selling panic that peaked in March and optimism that the much-criticized moves made by the federal government have actually worked and saved us from a total economic meltdown.

On top of that, we have avoided the banks, health care, and consumer products companies that are more closely linked to the performance of the overall economy -- which still stinks. Most of these stocks remain down for the year while our focus sectors have been soaring.

Let's have a drink and give each other high fives. We got it right. So did our friends at Riverfront Investment Group (who manage my kids' money) and who I use for managed accounts. You can check them out at www.riverfrontig.com

OK. Celebration over. What do we do now?

As usual, I think most of the experts and pundits are way off base. Most have been too negative about Obama and the stock market from the outset. You can't turn on cable TV without hearing the screaming and hand-wringing over the deficits and how wasteful and ineffective the stimulus and bailout plans have been. There remain cries that Obama wants to destroy capitalism and replace it with socialism. There are dire warnings that the market has to go down from here since the economy is still bad, unemployment continues to rise, and rising interest rates will choke off any recovery -- particularly in housing -- in its tracks.

Some of the concerns -- particularly about the impact of rising rates -- are certainly valid. But here's what the experts might be missing. Just a few months ago people believed that our economy was in a death spiral that would end with the collapse of the world financial system. The fact that we are now worried about deficits and government spending but that most Americans now believe we are on the right track is a huge improvement. Those who are complaining remind me of people whose house was burning to the ground complaining that the firemen who saved their home did excessive water damage to the furniture.

But getting beyond politics there seems to be another paradigm shift in the works. Maybe, just maybe, for the first time in 25 years, we are now in an environment where paper money backed by no tax revenue will be viewed as just pieces of paper (instead of a safe store of value) and real assets and real companies with pricing power will be considered safe instead of risky.

This, of course, would be a 180 degree shift from last year when cash and U.S. Treasuries were the only safe place to be and every other asset class was an accident waiting to happen. Is it possible that the whole investment world has been turned on its head so suddenly? Give me a break -- of course it's possible.

Any time an investment goes up 50-100 percent in value in a short period of time it is poised for a pullback at some point. But the sectors that have performed best this year -- energy, technology, commodities, infrastructure, and emerging markets -- have had a bulls eye on their backs for weeks now and they just keep moving higher.

As I've said repeatedly, it is not time to be bullish or bearish -- it is time to be smart. In investing, as in life, it is always smart to keep your eyes on the road ahead and not to navigate with your gaze fixed on the rear view mirror.

Be well and stay in touch.

Comments

[research]

If we keep giving Banksters more money and the FED more power,

Invest in Crowd control and obscene luxury.

[joebaggadonuts]

Liek Krugman, you are advising staying the course. http://www.nytimes.com/2009/06/15/opinion/15krugman.html?_r=1&em

Same recommendation, different viewpoints.

[Larry Gellman]

That's not bad company