Friday, January 29, 2010

Mama Fortuna's Crystal Ball Is Getting Clearer

We all know two givens: the economy is lousy and, at some point, it will get better. Prognosticators, from CNBC talking heads to Mama Fortuna, have all been seeing blurry images of the future. Is the crystal ball half full or half empty? Since March, fueled by government largesse, investors thought they were seeing a return to better times. But they weren't peering deep enough into the ball. They saw what they wanted to see, became believers, and stopped gazing.

There are a few other givens that you don't need a crystal ball to devine. A massive, debt induced recession will not be cured in two years; stocks will not go straight back down; interest rates are going to continue to rise; and no one knows how to effectively time markets, certainly not the CNBC folks and not even Mama Fortuna.

If rates are going up and we're going to be battling the effects of excess debt for years, it's not wise to own leveraged companies even if they were the stars of 2009. A declining market doesn't make short selling a riskless endeavor. Market bouncebacks can be violent to the upside and make borrowing stock a lousy investment. M&A will be big this year and being on the wrong side of a large buyout premium can be painful. Long positions should be in quality, dividend paying, low debt companies. I'd write covered calls against those securities.

As uncle Warren says:" the first rule of investing is don't lose the investment." My crystal ball is telling me to be very cautious the next few years, take advantage of rising interest rates, and don't fully commit to equities unless we see a huge downdraft, and then continue to be wary.

Mama Fortuna's crystal ball is now clearly telling me to quit typing as there is an angry lady on the veranda who has been waiting to play gin.

1 comment:

E Sylvia said...
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