What Veterans of the 1973-74 Bear Market are Buying Now

Don't Worry - Be Happy

The financial community is dishing out this pablum, and have been feeding a steady diet of this stuff to us since September of last year. Eventually they will be right - but that doesn't mean anything. Like the weatherman that always predicts sunny weather.

The policies being put in place by Obama will prolong this recession, and make the recovery much slower than it otherwise would be. Most of the stimulus spending is timed for the next congressional election cycle, not for making a difference to the economy today. After 2010, we'll be facing big tax increases across the board - income taxes, social security taxes, energy taxes, and taxes to pay for government health care. Those tax increases will stop any recovery in its tracks.

The only thing that Obama can do about it is to flood thw world with cash - so Bernake said he'd print $1B in the next few months to jump-start the economy. That, in turn, will give us an uptick in inflation in about 12-18 months from now. So this recovery will get relatively little fiscal stimulus in the short term, and suffer from higher taxes, higher inflation, and slower growth in the medium term. As cheap as stocks are, they probably are a fair reflection of the economic and earnings environment over the next few years. Any near-term uptick in the stock market is far more likely to be a technical correction from the recent collapse in stock prices than the start of a bull market.

Where to invest? Muni bond yields beat treasurys hands down. Some utilities that don't have too much exposure to coal-fired power sources will hold up well. Domestic natural gas producers that benefit from new well-drilling techniques (hydro cracking tight deposits) are a good bet. And companies that live off of non-defense government contracts will be ok.

Where not to invest? Coal producers. Automotive. Airlines. Retail. Luxury goods. Financial sector. Health care sector until the government health care plan is resolved. Treasury bills (the yields stink). Hedge funds (very uncertain regulatory environment). Commercial real estate.

Finally, I'd say that there are signs that the housing market is bottoming out. Sales activity is picking up, mortgage rates are low. Buy a house if you plan to live there, especially if it is a simple house in a good neighborhood. Rental property, however, may stay vacant a long time because the number of households in the US is contracting right now.

Ernie Banks of CA @ Apr 06, 2009 13:53:39 PM