Monday, October 25, 2010

Income Investing

Here is our Tahoe Bonanza article covering how to invest for income in a low interest rate environment:

http://tinyurl.com/2fkym8y

Market Update

Since September opportunities to join the rally are few and increasingly far between. We saw one last Tuesday, but you had to act fast. That's been the story for seven weeks, despite the background of a nearly flat economy, high unemployment, a falling dollar, the mortgage mess, etc. Those negatives are being more than offset by the prospect of political change, the improving earnings outlook and more.

Earnings reports, with few exceptions, are coming in better than investors expected just as they did three and six months ago. Across a broad spectrum of American business, companies are doing better and, even more important, they are becoming increasingly optimistic.

Investors and Wall Street have not been sufficiently optimistic They succumbed to the wave of negative data about the economy, data we have been seeing and hearing every day for many months. They forgot that investing is about the future, not about today or last quarter.

While my outlook for the economy and profits is pretty mainstream that doesn't necessarily mean stocks will languish. Because stocks are undervalued relative to earnings and interest rates, and the alternatives remain unattractive, there is ample upside. Add in the buying pressure as more and more investors put cash to work and you will have a recipe for higher prices. That's what lies ahead. Not in a straight line, of course. There will be periods of profit-taking, as we saw last week. Brief ones.

Thursday, October 14, 2010

Sunday, October 10, 2010

Jobs and Money

Friday's jobs report underscored how difficult it will be to reduce the unemployment rate. There were 64,000 private-sector jobs created, less than half the number needed to prevent unemployment from rising. The story has been similar month after month. The economy is inching along.

Expect a second round of what's called Quantitative Easing (QE), which means the Fed will purchase more assets (mortgages, Treasurys, etc.), expand its balance sheet and increase the money supply. That would boost bank reserves, but those are close to one trillion now so more wouldn't have much if any effect. The economy doesn't suffer from a lack of capital, cash and reserves. There is plenty. Liquidity is one of the factors driving the market higher.

I know, I know. There are problems such as deficits, the sinking dollar, spending run amok, Social Security and Medicare, to name a few problems. But as investors we needn't fear problems that are well known because they are already reflected in current prices. And to the extent that the well-known problems turn out to be less severe than expected, that will become a positive.

Friday, October 1, 2010

Market Update

The steady drip of slightly positive or merely "less bad" economic data continues. This week's data showed that second-quarter GDP grew slightly faster than first thought and CPI inflation was less. Housing numbers were better and prices actually rose. First-time jobless claims declined again and purchasing managers are more upbeat. The picture is becoming clearer. The recovery and eventual expansion will be slow, but it's coming.

In our last blog we said that sooner or later stocks would break through the upper end of the trading range that has contained them since the spring. They did so last Friday and the buying has continued. The month of September was the best since 1939. Short covering explains some of it, but the rest of the buying is by people who anticipate earnings growth. That's a good bet.

There are other reasons too. The largest: alternative investments are unattractive. Professionals know that and they're putting money to work but many individuals are still not on board. That explains why people continue to liquidate stock funds in favor of bonds, never mind the yields and risks of the latter. They'll regret it. Bottom line: stocks are going higher.