Investment opportunities in 2008
Where will the Investment Opportunities be in 2008?
Yes, the market is at risk of being in the early stages of a multi-year bear market
Yes, the U.S. economy is slowing and may go into a recession late in 2008 or 2009
Yes, the global economy is likely to slow down in 2008 but is unlikely to fall into recession.The global economy is stronger than the U.S. economy and appears to be running six months behind the U.S. economy. . The current economic recovery has lasted for 6 years, versus a historical average of 4 years.
What is the cause of the current economic malaise?
The fundamental cause of the problem is the low-interest rate liquidity bubble engineered by global central banks during the 2001 – 2004 timeframe. This has been compounded by the loss of lending discipline and over-leverage at both the consumer and corporate levels. The natural course of action is a recession that forces the revaluation of assets and de-levers the system.
The current credit problems require a substantial reduction in the level of borrowings and leverage in the global financial system. Asset prices ramped up by excessive debt need to adjust. If the adjustment takes place via a crash, it would devastate an already weakened banking system.
Alternatively, the Federal Reserve appears to be de-leveraging by creating inflation through more aggressive monetary policy. Increased inflation allows values to fall in real terms. Higher inflation reduces the value of borrowings that must be paid back allowing for a reduction in leverage. This strategy is dangerous. Inflation can lead to a significant transfer of wealth from investors to borrowers. Inflation is tough to stop once started – remember the 1970’s and early 1980’s.
This trick can only last for a limited period of time before investors react. Large foreign investors and governments have started to diversify away from the dollar and switch from financial assets to real assets, reflecting higher inflationary expectations. This should continue to result in a weaker dollar and declining financial investments that are internally leveraged. The cost of long-term money is likely to continue to increase.
It has become clear to me that the US government has chosen this strategy which should continue to depreciate the dollar and risk future inflation. Thus, strategy may succeed as long as global labor costs are being lowered through the addition of Chinese and Indian workers. In the long run, the dollar is not a good place to preserve purchasing power in a global environment. Gold, commodities and foreign equities are the safe haven to retain purchasing power in the event of a future dollar or inflation crisis.
We expect the Federal Reserve will lower interest rates by 25 basis points at the January meeting due to the fragility of the banking system. They may continue to lower rates to the 3% to 3.5% range during 2008. Global central banks are likely to follow.NOYES CAPITAL MANAGEMENT, LLC Retirement Planning, Financial Planning, Investment Management www.NoyesCapital.com 973-267-8120
Where do we plan to find investment opportunities in 2008?
We believe there will be good investment opportunities in 2008, but investors’ portfolios should be managed in a more conservative manner. This may result in lower returns if we are wrong about the direction of the market. Our theme for the year will be dividends, interest, and buying on panics. In particular, we will look for investments that have pricing power and can keep pace with inflation.
1) We intend to maintain client’s core portfolio investment allocation at a level that can be sustained for the long-term. This is a portfolio combination of US stocks, foreign equities and fixed income that can and should be permanently invested. It is reflected by the lower range of your target asset allocation in your Investment Policy Statement (IPS).
2) On top of your core portfolio allocation, we intend to maintain commodity based investments. These may include energy stocks, precious metals funds and commodity indexes. These offer some protection in the event of increased global inflation.
3) We intend to maintain a high relative portion of foreign stocks and bonds in your portfolio. We believe these investments will outperform US investments until the de-leveraging is completed.
4) We will use preferred stock funds and convertible stock funds as a lower risk substitute for higher risk equities in financial institutions. This is what "smart money" foreign investors are doing when investing in Citibank and others.
5) Municipal bonds and high quality bonds continue to be attractive.
6) Income REIT’s are likely to become viable again in 2008. We will look for opportunities to add this investment class back into our portfolios. Historically, real estate is seen as an inflation hedge.NOYES CAPITAL MANAGEMENT, LLC Retirement Planning, Financial Planning, Investment Management www.NoyesCapital.com 973-267-8120
Positive and Negative Market Factors:
I try to stay focused on the intermediate term trends for various investment choices and economic trends. My opinions are as follows:
NOYES CAPITAL MANAGEMENT, LLCRetirement Planning, Financial Planning, Investment Management www.NoyesCapital.com 973-267-8120
Our overall investment strategy for 2008 is to remain patient and invested according to your Investment Policy Statement.However we are likely to see a shift in the performance of asset classes as some previously leading sectors suffer and new leaders materialize. Sector allocation and fund manager selection will be keys to performance in upcoming quarters. We strongly believe that a diversified portfolio should continue to perform well over the long-term. I remain optimistic that 2008 will be a successful year for investors.
Scott P. Noyes, CFA
________________________________________________________________________®, CFP® is the President of Noyes Capital Management, LLC, an independent fee-only wealth management firm based in New Vernon, New Jersey. See www.Noyescapital.com.
Noyes Capital Management, LLC ("Noyes Capital") is a registered investment advisor with its principal place of business in the State of New Jersey. Noyes Capital and its representatives are in compliance with the current registration requirements imposed upon registered investment advisors by those states in which Noyes Capital maintains clients. Noyes Capital may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.
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For additional information about Noyes Capital, including fees and services, send for our disclosure statement as set forth on Form ADV from Noyes Capital using the contact information herein. Please read the disclosure statement carefully before you invest or send money.NOYES CAPITAL MANAGEMENT, LLC Retirement Planning, Financial Planning, Investment Management www.NoyesCapital.com 973-267-8120
My view of the U.S. stock market for the next six months
The possibility of a recession is causing extensive selling which may lead to interim lows by the end of January to mid-February. Target levels are 11,800 to 12,000 in the Dow and 1310 to 1330 in the S&P 500.
In my opinion, this low should be followed by a grudging rally into the summer as the economy remains more resilient than expected. Substantial easing from the Federal Reserve will force investors out of cash vehicles and back into stocks. Investors have been spoiled over the past five years and have had little tolerance for low returns.
A theme will be will be to focus on dividend and income stocks, particularly those sectors that have pricing power.
AN IMPORTANT DISCLOSURE
Noyes Capital Management, LLC provides information and analysis from sources and using methods it believes reliable, but cannot accept responsibility for any trading losses that may be incurred as a result of our analysis. Our advice should be deemed our personal opinion and not a recommendation to invest.
Individuals should consult with their broker and personal financial advisors before engaging in any trading
activities, and should always trade at a position size level well within their financial condition.- The economy is starting to slow and may enter a recession in the second half of 2008 or 2009;
The stock market is being supported by several Positive Factors
- Human Nature
- Stocks remain cheap to bonds
- Strong global growth
- Low unemployment
- Washington vacillation – Good for business. – Unemployment remains at the low end of long term trends. More working citizens sustains consumption. – Strong foreign markets helped US companies export and maintain their growth; – The earnings potential from stocks, using current earnings projections, remains greater than from bonds. Stocks are cheap relative to bonds; - After four years of good markets, investors are prone to supporting the market and will buy on dips. Fear levels are increasing but remain relatively low;