Morgan Stanley Smith Barney's On The Markets: A Forecast from The Belly of the Beast

Back during the late 1990s' tech-and-Internet stock bubble my wife noticed that whenever television broadcasters or their Wall Street puppet masters predicted that a stock would go up, it would go down, and vice versa.  Therefore, if an announcer said that a stock was going to go up, it might be a useful strategy to sell short.   If she had followed that idea over the ensuring few years she would have made a bundle. But in investing timing is everything.  (Incidentally, if you followed the advice of people who told you to invest for the long term rather than try to time the market, how have you been doing since 2001, a ten year period?)

That said, to quote a cliche, even a stopped watch is right twice a day.  My stock broker recently forwarded Morgan Stanley Smith Barney's (MSSB) "On the Markets", its monthly market commentary.  The pamphlet makes a few points.  The headline on its cover is "Getting Ready for Higher Inflation" and, seven years after I first became interested in gold they are advocating a 5 percent position in commodities.  That suggests that gold is into the supposed third leg of its bull market, the first being the period of limited awareness and the second being the period of smart money awareness.  Now, the retail investor is being told to invest in commodities. The last leg is the bubble leg.

Smith Barney recommends emerging markets stocks and consumer staples stocks.  They also recommend REITs and TIPS, inflation backed bonds.  All of these recommendations key off the Federal Reserve monetary policy.  The early November quantitative easing will inject $600 billion into the monetary base, which likely will over time have a bigger effect on the money supply.  I have been receiving numerous credit offers in recent weeks, much like the early part of the last decade.  That means to me that credit offerings are expanding.  The stock market in general also looks good as the quantity of money drives interest rates hence the stock market. Because of the insane credit easing consumer stocks seem like a reasonable idea.  I recently purchased the US Philip Morris (MO) and am thinking of the international Philip Morris (PM).  Also, a few liquor stocks might be a good idea.  As the Democrats and Republicans squeeze the public to subsidize the stock market, there will be plenty of drinking and smoking.  MO pays a six percent dividend right now, and my stock broker recommended it as an alternative to cash or bonds.

I don't necessarily like the idea of REITs because of the real estate problems but emerging market stock markets like the BRICs (Brazil, Russia, India and China) seem like a good idea.  I disagree with MSSB's recommendation for long term bonds.  That is, unless you are planning to trade.  Incidentally, the same caveat holds true for stocks and commodities.  When inflation starts to counteract the economic value of the freshly printed money (the Fed has more than tripled the money supply since 2008 and the ultimate effects might be greater) the stock market will fall because real interest rates will start to rise.  So markets are increasingly treacherous and you need to invest for the short or intermediate term, not for the long term.  I don't believe in day trading or anything like that.  Rather, invest when something is low or likely to increase and pull out when it is in bubble mode.  I don't think we're seeing any bubbles now, although commodities are heating up and I think the stock market will too this year.

Happy New Year.