The Great Recession Is Definitely Over! Where to Now?
By Dr. Steve Sjuggerud
Wednesday, June 24, 2009
I am certain the Great Recession is now over.
Nobody else has come out and said it yet. But it's true...
I've laid out the recovery "Script" many times in the last few months, both in DailyWealth and in my newsletter True Wealth. A long sequence of events had to happen to get us out of this... in roughly the order below. It all happened – quickly:
Corporate bonds bottomed. Then copper. Then stocks bottomed in March.
Consumer confidence hit an all-time low in February at 25.3. It soared recently – hitting 54.9 in May. That's an impressive recovery!
The same thing happened with my best end-of-recession indicator... the ratio of Coincident Indicators to Lagging Indicators (CILI), put out by the Conference Board. When it bottoms, the recession is over.
The CILI ratio bottomed in February and March at 89.5. The latest numbers came out last week. The bottom that was hit back then has held.
Remember, bottoms in consumer confidence and this CILI ratio typically come at the very end of the recession. These bottoms both happened months ago... This recession is over – it ended a month ago (and I said so, before anyone else, right here).
So the recession is over... Do we have smooth sailing ahead? Should stock prices soar?
Not so fast...
Remember, to make the big money, you have to buy stocks when things look bad... You have to buy in a recession.
In the True Wealth issue that came out just one week after the March 9 stock-market bottom, I wrote, "I believe the entire stock market could rise by 50% from its lows last week in the next 18 months."
When I wrote that, it seemed foolishly optimistic. Consumer confidence was at record lows. The stock market was in a death spiral. Companies couldn't refinance their debts... so they were selling assets at fire-sale prices. Things looked just terrible.
But that's when you have to buy. That's when you get the great bargains. So we stepped in and started speculating. Trough to peak, the stock market rose 40% in three months.
Today, things feel almost normal again. The stock market feels safe. You DON'T want to buy stocks when things feel safe – after the market is up 40% trough-to-peak in three months.
Now, I expect the market will waffle back and forth between two competing thoughts from investors...
· "I'm feeling bold, and I want to take a risk." (Everything goes up but the dollar and Treasury bonds.)
· "I'm scared, and I don't want any risk." (Everything falls except the dollar and Treasury bonds.)
Which will win for the rest of this year? We can't know. In March, it was obvious we hit an extreme of negative sentiment. That was a time to buy. But now? It's not so clear-cut.
Sentiment trades are usually only good for about three months... The sentiment trade off the March 9 bottom ended June 9. So the market could fall from here. But it usually continues to rally six months after the end of a recession. So we could have another six months of a good market.
Since we can't know, the best plan is to diligently track your trailing stops, particularly on speculative investments.
We're staying in the game with stocks. The Great Recession is over and we want to be along for the ride. But we've got a finger on the eject button through our trailing stops.
Good investing,
Steve |
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YOU DON'T HAVE TO TAKE BIG RISKS TO MAKE BIG MONEY
About four months ago, Steve made one our boldest claims of the year: "The Best, Safe Investment of 2009 Pays 19% Interest."
It's a little crazy. After all, you usually have to take big risks to get a 19% yield. Businesses normally can't pay out that much cash and keep a safe business running.
But as Steve detailed, there's an extraordinary loophole available to income investors right now in what we call "virtual banks." Virtual banks are a group of businesses that borrow money from the government at low interest rates, then turn around and loan it back to the government at high rates. It's all in the name of encouraging homeownership.
One of our favorite virtual banks is Hatteras Financial (HTS). As you can see from today's chart, the government's policy of "lending cheap and borrowing dear" is great for HTS's share price. Shares are up 23% since Steve revealed the stock to True Wealth readers... and they've thrown off a safe 13% in dividends in less than a year. It's more of the True Wealth motto at work: You don't have to take big risks to make big money with your investments. Click here if you're not yet a reader...
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Dino Giacomazzi, whose great- grandfather started the Giacomazzi Dairy in Hanford, California, in 1893, said he had no choice but to sell 100 cows, or 11 percent of his herd, in the past four months. Rising feed prices and a world surplus meant it cost as much as $17 to produce $10 of milk.
"Producers are in an absolute state of panic," said Giacomazzi, 40. "To spend 100 years building a dairy business and see much of that equity disappear in a year is very troubling."
Farmers plan to shift the pain to consumers. The National Milk Producers Federation in Arlington, Virginia, will pay dairies to slaughter 103,000 U.S. cows in coming months. Milk futures prices will double next year to a record $23 per 100 pounds (43.5 kilograms) as the herd shrinks by 171,000 head, the most since 1989, said Michael Swanson, a senior economist at Wells Fargo & Co., the largest lender to U.S. farmers.
– Bloomberg
California, which is struggling to close a $24.3 billion budget gap, faces the prospect of a "multi-notch" downgrade in its credit rating if the state's legislature fails to act quickly to produce a budget, Moody's Investors Service warned Friday.
Moody's decision to place California's general obligation debt on alert for a possible "multi-notch" downgrade stunned state officials.
The state's current A2 credit rating is Moody's sixth-highest investment grade and makes California the lowest rated of the 50 states.
– Newsmax
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