Guest Author - Tony Daltorio
This past week saw a historical event for the US economy. The Federal Reserve has in effect lowered short-term interest rates to ZERO. Longer term interest rates are also being pushed down by the Federal Reserve. These interest rates are nearing the 2% mark.
The Federal Reserve also pretty much stated that they will "print" as much money as necessary to get the US economy going again. Let us hope the Federal Reserve stops short of what occured in Weimar Germany in the 1920s.
UPCOMING NEW YEAR
With the new year just around the corner, I wanted to give my opinions of what areas of the financial markets that investors should continue to avoid and in what areas investors should begin to invest some money.
AREAS to AVOID
There are several areas that investors should continue to avoid like the plague. In the stock market, investors should continue to stay away from all financial companies - banks, brokers, insurance companies, etc.
As last week's Bernie Madoff $50 billion Ponzi scheme scandal showed, there are still many more ticking time bombs waiting to go off in the financial sector.
I would also avoid anything to do with consumers such as auto companies, retailers, and technology companies.
I would also avoid US Treasury bills and bonds. Treasuries have already moved up greatly in price - that is why they are yielding 0%. The only direction now they can move is down in price.
AREAS to INVEST
Because of what I would call Wall Street stupidity, there are many areas that have been so beaten down that they can now be called bargains.
Although avoiding most US Treasury bonds, I would invest in other bonds. One type of bond actually is a special type of US Treasury bond. These bonds are called TIPS or Treasury Inflation Protected Securities.
TIPS are US Treasury bonds so they are very secure. These bonds are indexed to the CPI or Consumer Price Index so they will protect you against future inflation. These particular bonds have been sold off by Wall Street because they are expecting deflation greater than what happened during the Great Depression in the 1930s.
Deflation just won't happen - inflation will return. Why? With all the Monopoly money that the Federal Reserve is creating out of thin air, history shows that inflation will result, not deflation.
Another area to invest in that has been beaten down by Wall Street is corporate bonds. Even during the height of the Great Depression in the 1930s, corporate defaults on their bonds reached 15%. Yet right now, Wall Street is pricing in default rates greater than 25%.
Again it won't happen. I do not expect 1 in 4 US companies to go out of business like the nuts on Wall Street do.
Both the TIPS bonds and corporate bonds can be bought individually. In fact, TIPS can be bought directly from the US Treasury with only a $100 minimum purchase.
These bonds can also be bought through mutual funds or ETFs. The symbols for a couple of the ETFs are HYG and TIP.
There are also several sectors in the stock market that investors can buy. These sectors would include "safer" areas such as food and drink stocks or a realted stock such as McDonald's (MCD).
The sectors which have been down the most by Wall Street would include industrial stocks, material stocks, and energy stocks.
Think about it - sooner or later, the US economy will recover. When it does these companies will benefit greatly. Why?
Because, thanks to Wall Street, major energy and materials projects such as copper mines, offshore oil drilling, alternative energy, and planting of crops have been either postponed or outright canceled.
I fully expect that when the US economy does recover, we will see major shortages of oil, natural gas, metals, food crops, and industrial products. Once mothballed as they have been, it take years to bring these necessary major projects back on line.
One final area for investors to consider - Gold. Wall Street hates gold but I look at gold as insurance similar to insurance on your home or car. Put a little bit of your money into gold. Consider it financial insurance.
Look at the horrible year 2008 has been. Yet despite all the Wall Street attempts to drive down the price of gold, gold has more than held its own. Gold is a good way to preserve the purchasing power of your wealth.
Please feel free to contact me directly or through the Forum if you have any questions about the article or any other questions on investing.
