1-12-09

What About Income?

"Okay, it's all very well talking about making a profit here and there, but what about income?"

            True, income is a separate deal and it's certainly hard to come by currently when you think that government bonds (considered the safest place) are paying such a pittance.

            BUT, AAA rated Corporate Bonds could well be the place to be this year. Corporate bonds became even more oversold than stocks. It's like lending money to a big company like Alcoa and returns can be well over 5%. Plus, capital gains could well be thrown in the mix too. There are funds that hold a basket of these for you and do all the work deciding which company bonds are best and safest.

            If you need income from your cash, take a long hard look at AAA grade corporate bonds in 2009. I think any defaults are priced into these now they're such good value.

"You do keep on about the markets Patricks. I'm not a market investor- especially now. Talk about something else for a change."

            I hear this a lot. But, whether you like it or not, we are ALL market investors. Your 401k is in the stock market. The price of gold affects the purchasing power of the dollars you earn. The stock market is a reflection of the economy, the country and even the national psyche, which in turn affects the price of your property and the company you work for or possibly own- your livelihood.

            It's a symbiotic relationship. Your fate and that of the markets are intertwined. Deal with it!

            But most of all, markets can make you rich IF you don't act like one of the sheep.

            Knowing what's happening in markets is like an early warning system- so you don't just wake up one day poor.

"Okay, okay. The markets are important. So where's this stock market going?"

            Very good question. Do you remember that scene from 'Jaws' when everybody was on the beach but nobody went in the sea in case the shark attacked them? That's where the big buyers that drive markets are right now- sitting on the beach nervously eying the water. But, like in the movie, as soon as one brave soul decides to get wet AND he doesn't get eaten, the rest will dive in.

            Should this scenario take place, the rally could be so explosive everybody thinks the shark truly is gone. Those people would ultimately be wrong- just like in the movie. 'Jaws' wants as much prey in the water as possible before he strikes.

            So, the markets are trading around a kind of 'no-mans land' currently. In the absence of convicted buying, stocks will fall of their own weight, which is what we saw last week.

            The market has this perverse habit of always doing what you least expect and doing what you don't 'want' it to.  Mr. Market wants to break you down. Then, just at the point when you're about to throw the towel in, he throws you a bone and says: "Sorry I was mean. Please don't go." A bit like a wife-beater. That's why the best policy is to trade with that in mind. Trouble is now, nobody seems to really have an opinion to go against.

            And if you truly do throw the towel in, Mr. Market doesn't care. He'll just move on and laugh at you while he makes other people rich. He's a psychotic madman.

            We watch and wait.

            One thing's for sure: all these money managers MUST put their trillions to work somehow. If they charge a 1% management fee and they invest their clients' money in 'safe' Treasury Bills that pay less than one percent, their clients would be NEGATIVE! Ha. That beach is getting crowded and seemingly shrinking in size.

"Okay, so the stock market is important. You seem to have a bias towards commodities. Why?"

            I have no bias- I just look for the best places to make a profit. Trust me, I'll be the first to advocate dumping commodities the minute they get too expensive.

            I like commodities now because they should do well in an inflationary environment, they represent something of true value, they can't lie and they go can't go broke and reduce to a value of zero.

            They also got way oversold last year.

            If gold doesn't gain by the end of 2009, I'll eat an ounce of bullion.

            Oil may mess around for a bit longer in the $40 range but closing of exploration projects, OPEC cuts, Middle-East tension, China stockpiling to take advantage of prices make more than a formidable opponent for the slowing economies. The global infrastructure plans alone should cause demand.

            Grains like wheat are doing nicely and should continue to do so.

            Nothing to bet the farm on though, with maybe the exception of gold. For additional gold acquisition, you might want to consider selling your kids.

"I'm hearing a lot of talk about deflation and the damage it would cause if that set in."

"According to recent analysis by Nielsen Co., about 30% of all packaged goods have lost content over the past year. This at a time when U.S. grocery bills are rising -- up 7.5% in October versus a year ago -- at the fastest rate in 18 years."

            That's called INflation- the opposite of Deflation if you use the standard (and incorrect) meanings of the words. I keep looking for this 'deflation boogeyman' the government speak of but have yet to see much subtle evidence.

            No question, stocks and property prices have fallen and according to statistics, inflation of prices is falling. But that's before the Fed has really got started...

"The money being spent on the economic bailouts now totals more than the New Deal... 
the entire Iraq war... the lifetime budget of NASA... the 1980s Savings & Loan crisis... 
and all the dollars spent on the Korean War COMBINED!"

            That's INflation, ultimately. You simply can't just go and print a load of new money, spend it on stuff and that not be inflationary.

Editor note: Learn how you can cash in on inflation Click Here

            There's a lot of crap being banded about currently by dirt-poor, lazy journalists who have no clue what deflation and inflation really is. These two 'flations' deal with the SUPPLY OF MONEY in the system- something directly influenced by the Fed. Prices of things are merely a consequence as a result of this but these figures are very hard to track accurately and they depend on what things you're looking for and whether deflation can actually be a GOOD thing. For example, we constantly see the price of electronic goods come down in value. That's deflation is you want to speak of it just being concerned with the price of things. Wal-Mart IS deflation by that definition and it's seen as healthy. More efficient businesses produce quality goods for a constantly lower price. The mass-manufacturing of goods revolution (the 'economies of scale') caused massive price drops but the economy became stronger than ever.

            In my opinion, the Fed needs to keep people in fear of deflation right now so they can justify their dubious activities and keep the price of gold under control. They know that they only have to utter the 'D word' and the stupid media will take care of the rest and sell fear.

            SO, it all depends on your definitions. What's certain is 2009 will be a much worse year economically than many think. People will spend less and companies will lower prices to counter the effect. If you want to call this deflation, fine.

"I keep thinking about getting into gold but am nervous. My 401k rules don't allow holding this."

            Did you know that gold was one of the few assets that actually finished UP in 2008? Did you know that it is the ONLY asset to have gained each and every year since 2002?

            Gold isn't something to actively trade and worry about whether you bought at a low enough price- it represents true wealth as it has done since the dawn of civilization. It's protection against government stupidity, war and depression.

            Having said that, I believe gold is due for a correction in the short term. If the stock market soars, it will drop a little as confidence returns. If markets fall badly, it will be because deflation is believed to have taken hold and it will drop a little as people run for (more) Treasury Bills. Either way, it's headed for a healthy correction.

            FACT: the price of gold will rise directly in line with inflationary policies. The Fed is on record as saying they will simply print all the money necessary to force inflation. They assume they can just switch off the supply of money when required. History says they are gravely mistaken.

            Short term I think gold dips 10-20%. Longer term (2 years), I see it headed way higher.

            A company like Monex will Fedex you all the gold you want. Gold is honest and has stood the test of time.

            Hmmm... I wonder why government rules don't allow you to hold gold in a 401k! Gold mining stocks are a way around this- the GDX is a basket of gold mining stocks to diversify risk.

"Is it too late to sell property?"

            This really all depends on what happens next, much like the stock market.

            More foreclosures will come on the market and further depress prices for sure.

Editor note: Learn how you can cash in on foreclosures Click Here

            What might mitigate this effect is if the stock market rises again (ideally, psychologically above 10,000 again) and it is felt that Obama's stimulus plan is having effect, we could perhaps see a bit of panic buying in the decent areas of the property market as people rush to get in at what they perceive as the bottom of the market AND to lock in mega-low rates wile they still can. In California recently, there have been reports of buyers trying to out-bid each other once more.

            It's hard to resist believing in the 'Obama effect'; even if it's a pure delusion (and it is), en masse delusions move markets, albeit temporarily.

            If this event does materialize, the temptation will be to believe it is real. The stock market will make you believe too if it rises again.

            You'll WANT to believe it's real. Maybe it even will be real! But, dear reader, how can an entire generation of boom and excess be corrected within a fast and painless few months?

            Remember, recessions are natural and healthy. Allowed to run their course, a recession breeds a leaner meaner economy on the other side. But of course, we've become far too precious to know any pain, so rather than accept and pay for our mistakes, we go crying to politicians to make it go away.

            And they're more than happy to oblige (if they want a second term, that is). I wonder, is it the politicians or the shuffling masses encouraging them who are to blame...?

            All the best,

            Mark Patricks

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