A Resilient Economy, an Opportunistic Market
Wednesday, January 2, 2008 | John M Is this Spam?I hear a lot of talk. You know, the talk, “We are in or about to be in a recession”. “The housing market is going to hell in a hand basket”, and my favorite: “China is going to become economically superior to the U.S. in a few years”, and so on and so on.
The negative “talk” is constant, yet things are not as bleak as the media tries to portray.
First, the economy has been slowing a little, but even so, we are not even close to a recession. In last 12 months, 1.5 million jobs have been created. GDP growth remains strong, and in the third quarter of 2007 real GDP growth rose 4.9% on the heels of 6 years of continuous growth averaging 2.8% a year. Unemployment is low at 4.7%, curved by 51 consecutive months of job creation, marking the longest period of uninterrupted job growth in U.S. history.
The falling dollar, which critics love to point to as a negative factor, is actually creating increased consumer demand from European countries. Exports for September 2007 are up 13.6% from September 2006. Since most of our imports come from countries where the U.S. dollar remains strong, we have felt little effect from the dollar's fall.
The economy has shown great resiliency to rising gold and oil prices coinciding with a falling dollar. The housing market has had a dual effect: creating a drag on the economy as well as uncertainty in investors. This is a true testament to the diversity and strength of the U.S. economy. Is there another economy in the world able to remain so steady under so much adversity? The talk we hear of doom and gloom is just that, “talk”.
Remember over the summer as gas prices hit $3.50 a gallon, the “talk” said it was headed to 4 or 5 dollars a gallon based on price gauges by oil companies. Gas was so high no one would travel over the summer and vacation destinations would feel the effects. Nevertheless, the summer came and went as summer travel increased. Oh, and gas that was on its way to $5 a gallon retreated to around $2 and some change before the end of the summer.
During this year's oil bomb, oil prices have risen north of 50%. Bears argue rising oil barrel prices will have a major effect on the economy. But looking at the situation, gas pump prices are not rising in connection with barrel prices and the effects have been minimal.
A few years back all the “talk” took aim at outsourcing. Outsourcing unwanted customer service jobs to India was going to be the downfall of our economy. Since 2003, 8.3 million jobs have been created, marking the largest sustained run of job growth in U.S. history. Even with all the “talk”, jobs have increased since outsourcing began.
That’s the thing about our economy; the “talk” in the long run does not have an effect. You have to be able to see through the static coming from mainstream media and look at the indicators. Look at the economy, not the “talk” surrounding it. Remember that the media makes a living out of negativity.
Putting all the economic mumbo jumbo behind us, this is a great market to make money, and this emotional market is creating many investing opportunities.
I have made two trades in the last month and a half. I entered Countrywide Financial (CFC) and proceeded to take a beating from $13 to $9 a share. On the other hand, I rode Apple from $164 to $192 per share. This is a turbulent market, not a bear market, with emotions acting as the the driving force.
You have to remember, in any emotionally driven market like the one we’re currently facing, there will be huge swings on the upside as well as the down side. Therefore, instead of following the herd mentality, you’d be better off looking for historic opportunities.
In this type of market, investors look for stable stocks that are able to withstand economic downturns. It's no coincidence Apple (AAPL) and McDonalds (MCD) have taken off this year.
With all the negativity out there, there is still a lot of money waiting for a bullish opportunity. We can see this in the huge market rallies stemming from any sign of positive economic news. Thus, the Street hangs on every economic announcement and reacts accordingly creating a reactive market, not a bear market!Investors know emotion is dragging the market. Chris Rowe from The Tycoon Report said that a “stock chart is a picture of human emotion”. Well there is no place on earth where human emotion manifests itself in the raw like it does in the stock market.
Uncertainty has created a situation where any negative economic data or earnings announcement is followed by a sell-off. And because of what we continue to see in the financial sector, emotion continues to pummel stocks way below industry average P/E ratios -- think Freddie Mac (FMC).
Understand that bubbles are created on the upside as well as the downside, and these market sell-offs certainly created downside bubbles -- think Citigroup (C).
The key is to zero-in on the stocks with low valuations that remain the strongest, financially and organizationally, in their industry. The next step is to create a plan of how and when you will enter the position.
Investors who understand market cycles understand the stock market is creating great buying opportunities. If you are too nervous or not savvy enough to make money in today’s turbulent market, you could focus your attention on buying opportunities when the market begins to turn to the upside.
The economy’s strength should reassure you that the economy can survive and the market will rebound. Take some solace in the fact the negative atmosphere around the economy has not created an intensified sell-off. If the economy is able to withstand the “talk” and any increased economic pressure, get ready for for a big bull charge.
