Last Friday, I made the argument that the FTSE looks cheap.
Perhaps I didn’t put enough emphasis on ‘looks’ as several readers asked why I’m not loading up on cheap stocks straight away. Especially now that it looks like the FTSE may have put in its bottom.
Today, I’d like to make my position clear and show you why I think you need to be careful.
I’ll give you four reasons why I think the FTSE made its mini-bounce of the past few days. More importantly, I’ll show you why that bounce may prove short-lived.
1. Beware those rotten bonds
Clearly the markets took fright from the ongoing European saga. Italy and Spain are big European economies – too big to fail!
The markets grew dubious about their positions and decided it was time for the politicians to show their mettle.
Problem was, the politicians were on holiday. So it’s been left to Europe’s central bank, the ECB, to show its mettle and buy up European debt. And as they’ve bought Italy, Spain, Portugal and Greece’s dodgy bonds, the markets have been placated.
But I reckon the benefits of this buying spree won’t last.
Loading a central bank up on rotting debt is simply not a long-term solution. It’s just storing up a bigger disaster for another day.
2. The short-selling ban changes nothing
European politicians are livid that the markets are smarter than they are. If they’re not moaning about the ratings agencies, they’re venting their spleen on speculators that seem determined to bring down their banks.
So now that the politicians have rushed back from their summer holidays, they want to flex their muscles and show the markets who’s boss. France, Italy, Spain and Belgium have banned short selling shares of banks and other financial companies.
Again, this has had the short-term impact of raising stock prices. “That’ll show them!” mutter the Eurocrats.
But is this sustainable? Not the way I see it.
In the end, all this ban does is reinforce the view that there’s a fundamental problem. The holders of these financial stocks can still sell. How long before they smell a rat?
OK, enough about Europe. But there’s trouble brewing the other side of the Atlantic too.
3. More debt. “Yes please!”
Now that the US congress has signed up to raise the debt ceiling, Obama can get on with driving the American economy deeper into debt.
Their ‘debt problem’ hasn’t gone away. It’s just been hidden away a bit and is sure to resurface. And this time there’s a timescale. Crucially for Obama, he was able to negotiate a deal to raise enough debt to keep the government ticking over into 2013. That’ll be after the presidential election.
Of course, ratings agency Standard & Poor’s can see what’s going on. They downgraded US debt. But the market already knew that US debt is dodgy. So no change there. They still buy US treasury bills as the ultimate ‘safe’ investment.
I mean, where else do you put your money? Only cranks buy gold – Bernanke tells us gold isn’t even money. That’s academics for you! (Of course, you and I know better – that’s why we’ve been buying up and continue to buy up gold.)
4. The Federal Reserve: To infinity, and beyond
We know Bernanke’s game-plan. His academic musings already let us in on the secret.
But the markets can be a little slow to cotton on. So when Bernanke made it clear that the Fed is going to keep interest rates at rock bottom for at least another couple of years, stocks rallied.
Another Fed induced bounce. The Fed’s playing the same game as it has ever since the dot-com collapse ten years ago.
Low rates give the stock market a fillip. And when that doesn’t work, more quantitative easing seems to do the trick.
Problem is, as I’m sure you know by now, this is only ever a short-term measure. But let’s not let the facts stand in the way of good news.
Where do we go from here?
I’m sure, like me, you’re fed up hearing the phrase: kicking the can down the road. It’s an overused way of saying that all their ‘quick fixes’, the authorities are just delaying the inevitable problems for another day.
But let’s stay with it; after all, it’s what the politicians and central banks are all up to.
And right now there are an awful lot of cans piling up on the horizon. That’s why the market is primed for trouble down the road.
I don’t know when the pile of cans gets too big to kick further. But I do know that dreadful things have a habit of surfacing in autumn.
That’s why I’m loath to concede that the market has put in its bottom.
Sure the market looks cheap. But I’m not ready to re-invest the reserves I carefully ferreted away over the last six months or so.
Despite what Bernanke says, I believe gold is as good as it gets right now. Don’t get me wrong, I still hold stocks – after all, I may be wrong.
I’m just not prepared to be fully invested right now.
What to buy now
My advice? The FTSE may look like good value, but I’d sit tight for the moment. There’s a good chance we haven’t hit the bottom yet. And in the meantime, make sure you own gold.
Chances are most Right Side readers are fully aware of the importance of owning gold right now. Hopefully you’re already prepared. But in case you’re not, there’s a simple way to catch up. That’s to construct yourself a portfolio of gold and gold-related investments. If you need some help doing this, I recommend that you take a look at Dominic Frisby’s Gold Profit Plan.
Dominic’s report explores the whole history of gold as money and why it is seeing such a renaissance right now, as the eurozone cracks up and the US empire crumbles. It also lays out a plan for building a gold portfolio, exploring the many ways you can get exposure to gold: bullion, coins, ETFs, funds, spread betting and gold stocks.
By all means consider the five high-risk/high-reward mining and exploration stocks Dominic reveals. Gold stocks are one area of the stock market that does look undervalued. But also make sure you understand how to construct a powerful gold portfolio. It could help you enormously in the months ahead. This report shows you everything you need to know.
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