"Markets have gone up too much, too soon, too fast."
--Nouriel Roubini
Prof. Roubini, known for having predicted the economic
crisis, proclaims he's cautious in the near term because of a
weak economic recovery. George Magnus, economic advisor at
UBS , agrees, saying, "This recovery is
entirely dependent on the unprecedented largesse of
governments and central banks ... the recovery is built on
very short-term foundations."
This doubt about the economy is all well and good, but one
only needs to look at the recent stock market recovery to
find some seriously optimistic expectations.
We must be dreaming
Since the March lows, the MSCI World Index (ACWI) has
climbed by 74% and the S&P 500 has jumped 59%. Healthy
companies like
FedEx (NYSE: FDX) and
Walgreen (NYSE: WAG) have rebounded more than
85% over the same time period, and bedridden stocks like
AIG have been able to secure whopping 500%
gains. Bulls are pointing to a fast,
V-shaped recoverythat will mirror the quickness of our
slide into recession. Could a full recovery really be this
immediate?
There goes the alarm
The short answer is no -- this can't be as prompt a
recovery as some believe. Here are three reasons why I
believe this rally is a castle made of sand.
Deleveraging : Household balance sheets are
fundamentally linked to property busts, which often take
years to play out. People will continue to spend less and
consume less as they realize the reduced worth of their
assets. This is the ultimate hurdle as the economy
struggles to grow, since consumer spending accounted for
70% of the economy in recent years.
Government spending : Unfortunately, it
seems as though our tax dollars have been behind much of
the rally. Bears point to the fact that car sales slowed
after the "Cash for Clunkers" program ended, and home sales
will probably become sluggish when the first-time buyer tax
credit extension expires next year.
As the threat of inflation increases, and the public
becomes more concerned with the ballooning of the Fed's
balance sheet, government spending will slow. Magnus states
that "if you don't have credit growth operating, it is hard
to sustain spending while unemployment is still rising." In
other words: Let's not count on the government to get us
out of this mess.Â
Interest rates : Central banks worldwide
have kept interest rates as close to zero as possible,
which has increased the flow of capital into the stock
market. But many people believe low interest rates (cheap
money) are one of the reasons we got into this fix and
think the Fed will have to raise rates sooner than later.
Would investors really be throwing their money into
inconsistent dividend stocks like
Nordic American Tanker (NYSE: NAT) if they
could earn 5% with CDs like they could in 2006 and
2007?
This is no time to snooze
OK, so what can you do?
You can look for growth stocks, companies like
Solarfun Power Holdings (Nasdaq: SOLF) that
operate in unproven industries but could generate great
returns. But despite the market surge, Magnus argues, "the
economy doesn't really go anywhere." Translation: This may
not really be a great time for growth.
You can try to play it safe and look for dividend-paying
stocks that have some possibility of appreciating in price.
However, even steadfast, reliable stocks like
JPMorgan Chase (NYSE: JPM) and
Nokia (NYSE: NOK) have had to slash their
dividends. It's difficult to know which dividend stocks you
can count on in a turbulent market. Continued... |