Todays Market Drop

I am not surprised at today's market drop and would not be surprised to see it continue on down for awhile. But nothing is certain in this market that sometimes seems to have Teflon when it comes to bad news. Most traders noticed that sometime in March of this year many defensive stocks began to move upward with mutual funds buying more of them for protection going forward. The STI Hedge Fund trading portfolio, as you would have noticed if you read my posts, has been dropping stocks and positions that were more concerning. ARCC, NYB, PGH, CWH, HPT, and RGC are all stocks that we have dropped from trading this year. All of these are good companies, but if the economy is slowing these smaller capital companies will fare worse price wise. Frankly the economy slowing is not news if you again have been reading the blog. We have lamented constantly about never knowing any economic expansion lasting long without housing participation. Housing in the last week has shown it is not only not participating, but it is going downward at an ever increasing pace. At this point I again tell you if you want to make the best investment currently available going forward buy a house. You can negotiate a good buy and get some generational low financing rates. The federal reserve and Obama administration has made it clear that if you are a saver you are to continue to be screwed with low rates. If you are a borrower you are getting the deal of a lifetime.

There is also the fact unemployment is not in a positive trend. No matter how much the media trys to spin it anyone who has day to day contact with business knows few places that are hiring long term positions. Actual unemployment is in the range of 16% or so if you use true figures. That is not about to change if we continue to pay long term unemployment benefits no matter how cruel that sounds. Many people drawing unemployment are not accepting the new normal of a lower pay future or going to school to learn new skills. Only the rough edge of no money tends to focus the mind to that reality. States are also not wanting to accept the new normal of much less revenue long term coming in the coffers. The only way to do that is to cut expenses, cut staffing, and get right with future revenue. Again a cruel fact, but fact nonetheless. Here is the truth, we are not going back to a strongly growing economy within at least one generation due to past and recent federal fiscal mismanagement. We must begin to install growth policies sooner rather than later.

If anyone knows what happens next please e-mail me because I would like to know. With QE2 ending, the federal government mired in indecision, federal spending totally out of control, states cutting back due to lack of revenue, and companies such as Walmart saying publicly that business is taking a downturn something has to give. Either the federal reserve decides to keep adding sugar to the pot and trying to make the economy turn back up or we get a downturn that might not end pretty. A sugar high sooner or later has a hangover and we might be there this time. Politically President Obama, looking at reelection has put himself in a hell of a mess. The stimulus has bombed and no one, his party or the other party, wants any part of the political suicide that would result from further stimulus.

Most more seasoned economists know that likely the best medicine back two years ago would have been to let the markets take the bad medicine needed to clean out the debris and with appropriate federal action of cutting tax rates we might have been pulling out of the economic problems about now. All that is to say we still got trouble and the best thing to do when you got trouble is to buy long bonds and get in defensive stocks. The problem with bonds is which ones to trust and with interest rates down so low there is no down anymore in rates and therefore no up in bonds prices left to gain. Most stocks in our trading portfolio now are of the defensive variety. The only exceptions are SCCO, SDRL.and DO. All three of these are doing business outside the US and will likely not get by the political and fiscal mismanagement here. If I was to pick out the most defensive stocks in the group now they would be, MO., DUK, HCN, PFF, SO, and BCE. But any of the stocks there are pretty safe and if the market does take a tumble of significant size and prices take a plunge, these shares would hold up better than most. We also know they would likely keep paying their dividends and once the economic downturn is over prices would move up nicely.

So the best path is to be patient, keep good quality stocks, and wait and see.