Best Investment: Stay out of the trap
Today's Financial News - Posted March 19, 2009
The American economy is motoring into uncharted waters. Oil and gold are climbing, while the dollar is weakening. Fortunately for investors, the path to take is obvious.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): We are witnessing a fundamental shift in the American economy. In the name of short-term economic gains, we are putting our future in the hands of fate.
On my way into the office this morning, I tuned into NPR’s morning business report. The reporter was discussing yesterday’s trillion-dollar announcement from the Federal Reserve. When he got to the obvious question of inflation, all he said was, “that’s something the country will deal with later.”
I listened intensely for several seconds eagerly wanting to hear some sense of sarcasm or a chuckle in the background, but all that came was some new-age music, leading into a story about Sri Lanka. He was deadly serious.
I was stunned. I was astonished. But even more so, I was embarrassed. How could our nation – or more succinctly, our culture – be so obsessed with the present that we will essentially doom our future?
As I write, there are three indicators that investors had better be paying attention to, oil, gold and the value of the dollar.
Nailed it
If you read what I wrote yesterday, before Bernanke’s announcement, you know I said to think about buying oil if the Fed buys Treasuries. The increased pressure in inflation will lower the value of the dollar and increase the price of crude.
The idea could not have been better timed. As I write, oil is trading for over $51 as the value of the dollar continues to decline. Do not expect a run to $100 anytime soon, but see this as a technical breakthrough that will lower the resistance to further climbs.
As for the dollar, after showing some strength earlier in the year, causing many analysts to raise the notion of dollar/euro parity, it will now take $1.37 to buy one euro. No wonder Russia and just about every other country dependent on a strong dollar are calling for a new global currency. They are slowly going broke.
Going forward, the American dollar will remain one of the world’s safer currencies, but its demand is obviously waning. The more money our leaders toss into a quick fix, the worse the long-term outlook.
One important thing to remember is all it takes is the stroke of a pen to unleash a trillion newly minted dollars. But it is going to take an incredible amount of work and plenty of pain to reel that easy money back in. The Federal Reserve has some incredibly tough, politically challenged decisions ahead.
The impact on your portfolio
Currency traders are having a grand old time raking in profits as the markets swing wildly. Yesterday’s 2% swing in the dollar is enough to get any trading drooling.
Unfortunately, the action is creating nightmares for the CFOs who depend on swaps and futures to hedge their company’s international exposure. Expect tales of unexpected losses thanks to the weakening dollar as the nation’s few remaining exporters report their first-quarter earnings.
Companies like McDonalds (NYSE:MCD) and Wal-Mart (NYSE:WMT) enjoyed a strong dollar, but now that the pendulum has swung in the opposite direction expect to hear of earnings declines.
Of course, with inflation worries growing in the minds of forward-looking investors, the price of an ounce of gold is on the rise. After plunging below the $900 level, the precious metal is back on its journey above the critical $1,000 mark. Right now, it will take $956 to buy just an ounce of gold.
Do not expect to see gold stay at these prices for long, especially if the equities markets make the move to the downside that is surely on its way.
Over the next week, the bullish pressure that has kept the markets moving ahead this week will lose steam.
We are just a few weeks from the start of the year’s first earnings season. If today’s results from FedEx (NYSE:FDX) are indicative of what is to come, we are in for a long April.
My recommendation? Take a long, hard look at shorting the major indices. Put options on the SPDR ETF (AMEX:SPY) are a good place to start.
This financial mess is far from over. Do not get lured into the trap.
Next Article: Protecting Detroit from bankruptcy protection
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