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Should I Believe in this Stock Market Rally?

Stock-Markets / Stock Market Sentiment Apr 11, 2009 - 12:28 PM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleAnswers to Your Most Pressing Questions

Good morning! As you might imagine, I'm getting a lot of questions on the markets lately at various conferences around the world so I thought I'd share a few of the most pressing with you this morning:


Q: Should I believe in this rally? -Joanne D.

A: I want to believe in this rally. I really do, particularly since it's building in such a way that it might last for a while albeit with a few hiccups along the way. But the longer-term answer is no, I do not. While I think we may have seen a bottom, I doubt very seriously that we've seen "the" bottom. The fundamentals simply don't support that. However, that doesn't mean we can't participate along the way, though. Bear market rallies can produce healthy profits just as readily as true bull market rallies.

Q: What should investors be doing now? -Chuck D.

A: Everybody's different but history suggests two things.. First, it pays to concentrate on globally diversified companies with strong earnings and real cash flow, not fancy financial engineering because this helps build up a thick layer of financial armor. And, second, investors generally want to be long inflation and long commodities. Not only do they tend to lead the way out of crisis if we have seen the bottom, but if we haven't commodities and related companies don't typically go down as much.
Take, for example, the fact that stocks can go to zero, and no commodity ever has that I am aware of.

Now it is important to note that during recessions, the supplies for many commodities tend to go down. People aren't opening new mines, they're not growing more crops and they can't get loans to do either anyway if the credit markets remain locked up. So the fundamentals are actually improving in that supply is going down which means that when demand resumes, prices will rapidly climb. Speaking from Zurich, legendary investor Jim Rogers recently told Maria Bartiromo to buy a tractor and become a farmer. And he wasn't kidding.

Q: The world's central bankers seem convinced that printing money is the way out of this. What do you think? -Ed B.

A: My answers are academic at best because Washington has already committed to a course of action that will take us deeper into debt and ultimately hurts far more people than they help. In my mind, they've dismissed the lessons that history has bestowed upon us. No nation in recorded history has ever bailed itself out for anything other than a short-term basis by printing money the way they are. They're gaining liquidity at the expense of value.

This crisis has never been about a lack of liquidity. It's been entirely fabricated because there was too much easy money out there and too little control over it. While I don't know what will happen in the interim, the end result is extraordinary inflation and that's what Central Bankers are risking. It seems pretty foolish to me to risk the entire nation to save a few companies. There's no question people are hurting right now but Washington is only making the pain worse under the guise of making it better.

Q: Should we have let GM and the financials go under? - Jason C.

A: Yes. We've had failed companies throughout history. These companies are functionally insolvent anyway. We need to stop throwing good money after bad. People need to understand that at some point you simply cut your losses. This is one of the key messages in Las Vegas for compulsive gamblers and I think the world's central bankers should listen. This will leave America in far worse shape than it should be. We need to be making investments in growing assets that will make this country strong again and this includes real businesses with real products. Fancy financial engineering is going to be viewed in rear view mirrors the way that dinosaurs are viewed today...extinct.

Q: Is there anything investors can do in the meantime? -Stuart G.

A: The same sorts of things we've done in the Money Map Report throughout this crisis and which we continue to do today. First, we've established a safety-first mantra at all times and any new investment must meet this criteria. Second, we continue to confine our choices to only those companies with real earnings and real products that can carry them though rainy days like we're experiencing now. And, third, we are only taking on new positions to the extent they're generally long inflation, long resources or outright opportunities on a tight leash with strict stop losses in place that will help us harvest gains but more importantly keep us from devastating losses in the event the markets deteriorate from here.

Best regards,

Keith

Money Morning/The Money Map Report

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