Proposed Solutions

The head of the US Federal Reserve, Mr. Bernanke, is an acknowledged expert on the causes of the Great Depression. According to current thinking, a bad recession was turned into a depression by ill-advised monetary policy in the early 1930’s. With this sense of things in mind, the FED is following the so called Bernanke Doctrine. These are steps prescribed as a preventative to deflation. Number one on the list is to print money. In addition the remedy includes the massive purchase of US treasuries which serves to drive interest rates down. And, this doctrine prescribes the massive purchase of foreign currency which serves to reduce the value of the US dollar. Simply put the FED is printing money to buy US debt and shipping dollar overseas. This policy may well have its intended effect of staving off deflation. However, it is not just the USA that is loaning money to banks at low interest rates, printing money, and buying foreign currencies. The net effect will be to inject an awful lot of capital into the global monetary supply. The sum of these efforts will not affect just direct investment in China. The weak Chinese manufacturing report is in many ways a symptom and not the primary disease.

What Is an Investor to Do?

If the Euro Zone is really heading into a recession this year investors will want to avoid Euro Zone stocks and at least look closely at fundamental analysis of individual stocks. If the US economic recovery, however slow, is for real, US stocks may well be a better choice. China has its own host of problems, political as well as economic. China may well decide to look inward, stimulate its economy and maintain employment with more infrastructure projects. Despite the recent weak Chinese manufacturing report China has large currency reserves. It may choose to spend those reserves to prop up its economy before Mr. Bernanke’s policy cuts the value of these reserves in half. After years of rapid growth China may be experiencing a “Microsoft” effect. When you grow to a certain size, rapid growth is very hard to maintain. Thus the weak Chinese manufacturing report may be a warning to investors to be careful in picking investments in China.

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Here is a quick look at gold prices over the years. Obviously prices fluctuated during each year while here we only have the high price for the year. When the USA went off of the gold standard in 1971 the price of gold in dollars started to climb. Throughout the inflation driven 1970’s the price of gold increased nearly twenty fold. At the same time, however, bank CD’s were yielding 14% and more at the end of the 1970’s. Then gold hit its upper limit around $600 an ounce and fell to half that price. It languished in the $300 range for nearly twenty years before falling into the $200 range. It was from that low point that the current, more than decade long, bull market in gold began. If one compares the 70’s and early 80’s to the last ten years one might wish to avoid gold as an investment. We are a decade into a bull market at a time when the world economy is starting to mend. Although gold has done well for more than ten years the real question is, is Gold a profitable investment today?

But, before you totally avoid gold as an investment let’s think about how the US and other nations intend to work their way out of the financial collapse and recession that began in 2008. Trillions of dollars in equity disappeared when markets collapsed in 2008. Stimulus programs by many governments have kept credit flowing but at the expense of simply printing money. The US Federal Reserve is buying US Treasuries in order to drive down interest rates. This is part of the so called Bernanke Doctrine. Europe and China are following suit. If the way out of the recession is to print money then the gold bugs are right, buy gold and retain value while fiat currencies fall by the wayside. On the other hand, take look at the path of gold for the last thirty years and compare to strong stocks. Procter and Gamble and Exxon/Exxon Mobil are selling at more than thirty times what they sold for in the 1970’s and have paid continual dividends as well. And, these companies did not go into hibernation for nearly twenty years like gold did from 1981 to 2000. As always, if you are looking to invest in gold or avoid gold as an investment, pick stocks to invest in, or wondering about picking up some cheap real estate do your fundamental analysis first. And avoid investments that you do not understand.

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Over the long term investors need to apply fundamental analysis to BAC and other bank stocks in order to decide if they are likely to be profitable over the years. One obvious factor is that these stocks have been beaten down during the recession and are suffering from other factors such as lawsuits by the US government regarding the nature of mortgages that they sold to Freddie MAC and Fannie MAE. If the economy does not right itself and things do badly for these banks they could go bankrupt, need to restructure, and become long term losing propositions. On the other hand the current dismal market may have underpriced these stocks. Thus, buying BAC and other bank stock in the short term could be profitable in the short term.

An alternative to using options as a cue to buying BAC and other bank stocks is to buy call options one’s self. Investors can purchase options on blocks of 100 stocks, pay the current price for the options contract, and the purchase the stock at a nice discount if goes up on price. Some of the best stock investment in a declining market can be scouted out by watching the options market. If an investor buys call options on a stock like BAC he only stands to lose the price of the options contract is the stock takes a nose dive. He is essentially taking out insurance against a fall in stock price. On the other hand, if the stock soars in price, he will execute the options contract and purchase the stock at the contract price, known as the strike price, no matter how high the price may have risen.

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Although a good stock investment may come as a “tip” from a friend or your stock broker you need to always investigate before buying. This has to do with doing your own fundamental and technical analysis before every buying a stock. Great deals typically do not last very long in the stock market. When someone discovers a good stock investment that was previously overlooked the rest of the market commonly catches on and bids up the price of the stock. Thus, a stock tip may have been profitable yesterday but, unless you are truly a unique person on the inside track, nearly everyone else will have heard about the stock in question and already have bid the price up. At this point investors need to remember that they do not lose money by not investing. Trying to get in to a market rally at the very end in order to eke out the last few cents of profit is commonly a way to lose money. Unless you have a large staff researching investment opportunities for you it is wise to stick with what you know when looking for a good stock investment. Investing in beer may not require a taste for beer but will require knowledge of brewers and their markets. Investing in gold does not require an eye for fine jewelry but rather the willingness to follow the factors that drive the price of the precious metal.

A good stock investment might be investing in oil if you believe that the world’s current economic doldrums will rectify themselves and that global manufacturing will pick up in the next year or so. Any stock and any market sector is a possible money maker. The key to finding and exploiting a good stock investment is hard work, study, conservation of capital, and timing.

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