Protect Your Assets from a Summer Swoon - Is Now the Time to Buy Equities?

The American equity markets are an extremely unpredictable place in the previous 30 days, because Dow as well as the Nasdaq touched highs not witnessed since pre-2008. With the recent pull-back plus the lull in action following the ‘Spailout’ there has been a brief pause in the action. While the markets are seeking a direction, shareholders are nevertheless keeping an vigilant eye on Greek Elections slated for Sunday, June 17th along with the Supreme Court judgement on health reform, due to be announced virtually any day now.



Both events may have significant ramifications for the direction that markets take moving into the days of July and beyond, however, if the last two years are any indication, the general tendency of the market is arguably negative, as July and August have proven to be some of the toughest performing months for US equities in 2010 and 2011.



 With an ecosystem, where everyone seems to be concentrated very carefully on macro events, you could very well be wanting to know whether stock picking may be a lost art and you’re probably correct. So long as the fundamentals are ignored for individual stocks and market sectors rather than the macroeconomic issues, there is little hope for individual stock picking to produce gains. In the event that you are already invested for the long-run, the most effective strategy at this time is to hedge your investments by purchasing put options on the names that are most at risk of a financial disaster similar to the Lehman Brothers/Bear Stearns meltdown of 2008, which would be the banking sector and financials.

Those people who have not decided to put your money back to work this year (or even since 2008) might do best by not dipping your toes yet into the “long” end of the pool. With so much uncertainty yet to play out, as well as the European chaos, and health care concerns, there is the November election as well as the prospect of the Fiscal Cliff, which still need to be decided.



Economic indicators within the last month have already been soft in most cases, including jobs, consumer spending, manufacturing sector expansion, producer and consumer prices, in addition to inventories and pending home sales are typically pointing towards a sharp downturn over first quarter numbers. The Federal Reserve and European Central Bank seem to be handcuffed by the lingering effects of the high price of oil that persisted in the winter and therefore are hesitant to raise liquidity or extend quantitative easing initiatives, which have fueled equity market appreciation in the last Four years.

Provided that consumer demand remains reasonably constrained, we can expect corporate earnings to be anything but blockbuster. Since the housing crisis, net worth has fallen in the US of households by nearly 40% and with a significant slice of the population maturing into retirement, spending is expected to continue to slow for the next 10 years for at least that portion of the population.

From the broad view, there continue to be remarkable headwinds to any appreciation of the equity markets, bond markets remain to be the most popular investment preferred by those searching for returns in the form of coupon appreciation, however interest yields continue to fall as international and domestic savers are willing to forgo return on investment capital in favor of return of investment capital. So the point is that now is not the time to buy stocks or bonds, but instead keep the maximum amount of cash in dollar denominated investments until not less than the end of the year when better visibility into the developing issues becomes visible.

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Sound Financial Advice - Protect Your Assets From Deflation and Inflation

The surprising precursor towards downfall of values of overinflated assets worldwide is going to be something a lot of us count on, yet at the same time completely take for granted; the price of a gallon of gas. There's really no more emotional purchase that Americans are required to make and as the biggest group of consumers as a percentage of GDP of any developed nation, they also have the most to lose as the price of this commodity reaches record highs.



Rising gas prices are a catch-22 problem for the US Federal Reserve. In reaction to frozen markets, the Fed eased monetary policy to encourage confidence and borrowing following the 2008 sub-prime crisis that nearly took down world markets. A necessary evil that developed in reaction to their unprecedented easing of money was the debasement of the US Dollar compared to other currencies. In the shift from the strong dollar, the price of all dollar denominated commodities have what's now becoming the final leg of a marathon run towards high prices not found in history.



At the same time, geopolitical events haven't cooperated. Iran, Iraq, Nigeria, and Libya are in a state of upheaval. As major producers of the light sweet crude necessary to produce the gasoline consumed by the US and various demanding buyers, the losses to production in these volatile times has been a big cause for the increase in prices. At the same time, the closure of various refineries as the shortage of refinery capacity has touched off a speculative rush in gasoline, which threatens to push the price over $4 per gallon. Once this happens, a chain of events will unfold which will trigger unprecedented revaluations involving all asset classes.



Inflation which induces Deflation

Few things are more destructive than inflation, when it comes to the purchasing power of consumers. Nothing, that is, except for major deflation, like that which developed over the Great Depression of the 1930s. While the US Central Bank and central bankers worldwide have done everything in their power to stimulate the expansion of loan demand and thus inflate their currencies, the unintended results of their actions is crushing the purchasing power of commodities. As these commodities have risen compared to the purchasing power of the consumers who demand them, there is a cost, and beyond this aspect, consumers begin to demand less gasoline and their consumption behavior for all goods changes likewise.



American consumers have witnessed high prices at the pump before. In 2008, at the peak before sub-prime crisis, the price of gasoline caused many individuals to make important choices, one of those was if they should pay for a tank of gas, or to come up with a ballooning loan payment because their adjustable rate loans climbed with monetary tightening by the Fed, wary of overheating inflation. While following it’s dual mandate of promoting full employment and maintaining inflation at a target rate, the Fed continues to be tasked with a conundrum. As monetary conditions are eased to allow for expansion in the money supply, the relative valuation of the dollar has weakened, causing inflation in commodities, generating stronger inflation, which in 2008 was growing faster than employment.



Unintended Consequences



As a consequence of rising gasoline costs, consumers typically trim down non-essential expenditures. These discretionary costs comprise nearly 2/3 of GDP the united states so when they decline, so too do the revenues on the businesses employing them. The negative feedback loop that occurred once this happened in 2008 forced employers to trim down their payrolls and lay off as many people as they could. This in turn exacerbated the shrinking demand for discretionary goods and caused more companies to lay off much more people. Behind the scenes of layoffs and inflation, US consumers are aging into retirement en mass, nearly 80 million baby boomers are one step closer to retirement, and in a natural progression, are in the process of deleveraging and getting less products or services.



Gas prices are the fulcrum for the start of deflation for the reason that destroy disposable income, the lifeblood of the US consumer. Despite it’s best efforts, the central bank cannot fight this process by lowering interest rates to recreate additional growth in demand because once higher gas prices enter into the system, they impact prices of several other products or services that inflation turns into chief concern; not unemployment. In times where the prices of food, transportation, shipping, and everything else with a petroleum product input in its production becomes just slightly inflated in value, the demand for that good or service will fall incrementally. This incremental reducing of demand has a cascading impact on the demand for all services and goods consumed and suddenly this process takes on a mind of it’s own and can't be reversed.

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