Market Advice, II

About a month ago I passed along some investment advice from a few of the folks who help me in that department. One of them, Lisa Detanna from Wedbush, was working on a white paper at the time and she sent it my way a couple days ago. I thought a few people might care to take a look at some of her suggestions and the reasoning behind them. She starts out by reminding is that in July and August the U.S. stock market dropped by almost 20%. That's huge-- and volatility was the worst since Bush's economic policies crashed the markets in September, 2008. People are scared. Is it a time to sell stocks? Buy stocks? Something else?

Lisa doesn't believe you can time the markets-- negating the old adage about buying low and selling high-- and, she adds, you can't even do it when the markets are behaving rationally. Like many in the investing business, she's certain that the crisis of confidence that's causing the Wall Street roller coaster ride isn't about fundamentals-- rather, it's about the always changing perception of the moment concerning macroeconomics and political paralysis. "And," she points out, "if you try timing now-- when the markets are driven by fear rather than fundamentals-- it’s more likely you’ll end up selling low, then having to repurchase high to get back into the market." OK, what do you do? Let's look at the bullish underpinings first:

*Interest rates are at historic lows, and the Fed’s decision to keep them low through 2013 is positive. It means the Fed is committed to not stifling any economic recovery.

*We [she means Wedbush] foresee little to no risk of inflation.

*Corporations are sitting on large amounts of cash. Earnings are strong-- over 70% of companies have reported numbers that were better than expected. We anticipate earnings will continue to exceed expectations because companies are leaner and have deleveraged significantly.

*Stocks are trading at historically low price-to-earnings ratios-- a result both of stronger profits and depressed stock prices.

Don't rush out and start buying everything in sight yet. There's a bearish case as well:

*U.S. economic growth is weak. Recent government statistics indicate the Great Recession was deeper than originally believed. Hence, recovery will be slower and more painful.

*The European debt crisis continues to create uncertainty and instability throughout the global economy.

*The housing market-- a major economic driver-- remains depressed. The collapse of the mortgage market is still working its way through the economy, and some economists fear the decline isn’t over yet.

*Unemployment remains stubbornly high, and it is expected to stay there for some time.

OK, OK, what about me? She gets around to that too. Starting with avoiding any impulses to time the market. Wall Street convention wisdom for a time like this happens to be extremely self-serving: "It's time to re-examine your portfolio. Ensure it is properly diversified by asset class and industry and is designed to achieve your long-term goals-- both quantitative and qualitative. Make sure you are not overly concentrated in an individual stock or sector. You need to know where you are and where you want to go." Lisa-- probably most brokers-- suggest you rebalance your portfolio by asset class and by broadening your industry exposure. She suggests taking advantage of dips to average down in the market, which sounds very much like a form of market timing.

During the current market pullback in equities and the confusing bond market, consider creating yield or income with stocks that pay high dividends and with alternative investments.

S&P’s downgrade may force politicians to put aside posturing and deal with the twin issues of reining in debt while stimulating the economy back to life. But that may be wishful thinking, with political parties so intransigently divided on even the most fundamental questions, including the appropriate role of government in society and the economy.

Interestingly, not much longer than a month ago, brokers were getting guidance from their home offices that the Republicans would absolutely agree to raise taxes because it was so obvious that there was no other sane way forward. Once I heard that naïve analysis from 3 or 4 unrelated advisors, I decided to move a significant portion of my own assets out of equities. Can anyone actually be that clueless? Nice to see they seem to be grappling with something that looks marginally more like reality this month. I'd love to see a Wall Street firm come right out and say it though-- the Republican Party wants the markets to crash and the economy to fail so they can win the 2012 elections and impose fascism on America. I'm not holding my breath though.