Brother, can you spend a dime?

Fellow investor, 

Caterpillar (NYSE:CAT) missed earnings expectations and announced 5,000 job cuts. Home Depot (NYSE:HD) is cutting 7,000 jobs. And Sprint (NYSE:S) plans to ax 8,000 employees. 

And yet stocks are up today due to a surprise jump in existing home sales for December. 

Some analysts say the economy won’t recover until the housing market stabilizes. Others say unemployment is the key to recovery. Still others think the credit markets are the critical variable. Get loans going again and everything will be OK. 

Paulson started with troubled assets. When it became clear that wasn’t working, he started to recapitalize banks. But that failed to jumpstart the credit markets, too.                                     

President Obama is trying to put money in people’s pockets with a tax refund and give hope for jobs in 2010 with his stimulus plans.  

*****Catch-22, vicious cycle – call it what you want. The U.S. economy has deep-rooted problems. It’s no secret that roughly three-quarters of GDP is consumer-spending. 

For the corporate CEO, the job cuts start when spending–and hence revenues and profits–starts falling. And that won’t change until people start spending money. And there’s no reason to think a few hundred dollars in tax refunds will get things moving. 

In my opinion, perhaps the biggest impediment to spending is asset prices. Namely, homes and investments. When you watch the value of your most important assets fall precipitously, it takes the fun out of spending money. 

So far, not much is being done to stabilize the housing market. And frankly, I’m not sure what could be done. The government can’t underwrite the value of people’s homes. And you can’t force people to buy. 

Prices must get cheap enough that potential buyers can’t stand to stay on the sidelines any longer. That appears to be what drove the jump in sales for December. But that seems unlikely to be sustainable. 

Now, for some more reader mail… 

*****Sylvia F. hits a common theme: About my 401K. I have not moved money out of my previous investments (very diversified) and I continued to put the same amount of money in. It seems pretty foolish to loose more then I put in every month and it gets more and more uncomfortable. Is stopping my deposits into the 401K (past what the employee matches) a good move? Should I continue the deduction but invest into the money market fund rather then mutual funds? Should I just stop looking and let things stay the way they are?    

Obviously, it’s been no fun watching retirement accounts take massive losses. And I know, it’s not much help to hear that the losses are only on paper until you sell and make them real. But at the same time, now is not the time to scale back your 401K retirement plan contributions. If anything, I’d advise increasing them. Here’s why… 

Right now, stocks valuations are very low. Could they go lower? Sure. That’s always possible. But the upside is a compelling story, too. 

Think about it this way. When the Dow was at 14,000, not many investors were thinking about stopping their 401K contributions. But how much upside was there, really? Now that stocks are cheap, investors want out. But this is when stocks actually have a lot of upside over the next few years. 8,000 to 12,000 on the Dow is a 50% gain. 

Especially considering your employers matching contributions, you should think of this as free money. For every dollar that’s matched, you could be making $0.50 over the net few years. That’s a pretty good return. And if you can afford to up your contribution, it will pay dividends down the line. 

The one thing I’d consider changing is your choice of funds. There are undoubtedly good and bad investments right now. I realize you’re limited by what your plan offers. Still, you maybe able to maximize your returns with the right funds. I’d stay away from anything finance or consumer spending oriented. And international funds are probably not best, either. Focus on biotech/healthcare, energy, and even technology for better results. 

*****PJA asks about Bank of America (NYSE:BAC): I bought 4860 shares of BAC at $19 and have seen it go south but I am not selling, because I believe it is a good company and eventually it will com back t that price and perhaps more…Its now at 7.14 and the Missus says that if I feel that strong about it we should by another 4000 at that price to hold for about a year or so. What is your take on BAC to buy more and hold? 

 Well, I can’t say I like any investment in financials. I don’t like BAC at $19 or $5. There’s simply too much risk for me. And so I can’t advise doubling down on BAC. I don’t see any way BAC gets back to $19 in a year, or even two. Put your money in a stock that has upside and pays a dividend. I’m always a big fan of energy MLPs. These stocks operate pipelines and have relatively steady revenue streams. Plus, they pay nice dividends. 

*****Don wants to set things straight regarding bailouts: Your passionate words written about the structure of the "bailouts" is understandable unless you look at the bigger picture. The bailout is nothing more than a government backed loan for the various institutions. What is basically happening is that the government has become the lender of tax payer money to the borrowers. These loans are repayable.  

I agree on all counts. And despite my "passionate" words regarding bailouts, I do understand that they are the lesser of two evils. Without bailouts of the banks, and even the automakers, there’s no doubt that the economic situation would be far worse. 

The US government is now a money-manager, managing taxpayer’s investment in the financial sector. Sure, we may make money at some point. But the banks themselves are very unlikely to make a return to the mega-profits they were making up until 2008. 

A large percentage of those profits was based essentially on the lie of sub-prime mortgages and the thriving asset-backed mortgage market. They won’t be back, and neither will the stock prices those profits supported. 

*****Russ wants to hold my feet to the fire: I told you to wake up and smell the red ink. You claimed an Obama rally. The market tanked 330 points and your email today did not even go near your lousy projection. Predicting markets is nearly impossible, but at least you could admit such blunders–unless your politics does not permit a deep analysis of the mistake. 

I was looking at the potential for an Inauguration Rally on January 5. I wrote: 

At the same time, however, the Dow is up against resistance already. And clearly, the serious economic issues facing the U.S. haven’t changed over the past few days. The Dow closed at 9,625 on Election Day, November 4. And I can see a certain symmetry of another move to that level on or around Inauguration Day. Though I’ll also say, and this is no slight to Obama, I’d sell Dow 9,625. And I will recommend selling some Daily Profit stocks if the Dow makes it that high. 

That actually doesn’t sound like a forecast to me. But nonetheless, stocks didn’t move higher. In fact, the opposite happened. Stocks sold off hard. Of course, Russ doesn’t appear to give any credit for the first time I suggested an Obama rally on November 18. Two days later, the Dow roared 1,500 points higher. 

But that’s the way it goes in the forecast business – people tend to remember the misses more than the hits. 

Now, as to whether that big drop on and after the Inauguration is directly related to Obama’s policies is a matter of debate. Seems to me, Obama is intent on keeping Bush’s tax cuts and may even be increasing them. And that drop also came at the start of earnings season. 

My politics have little to do with it. When making a market forecast, you’re essentially predicting how investors will react to news. There’s no doubt that many Americans are excited about the change that Obama represents. It’s not a stretch to wonder if some of that enthusiasm will spill over into the stock market. And as an investor, it’s irresponsible not to examine potential catalysts, both positive and negative. 

So I’ll continue to examine what’s driving the stock market. And I’ll continue to assess how stock prices will react. And sometimes, hopefully rarely, I’ll be wrong. 

*****Colleen wants to know what’s driving oil prices: now that oil prices seem to be on the rise AGAIN, Would you say it is speculators causing the price increase AGAIN, or something else? 

First, let me say that the world "speculation" gets a bad rap. Speculating simply means attempting to anticipate a price move. Anytime an investor puts money on the expectation of a price move, it’s speculating. 

So from that perspective, nearly all asset price moves are based on investor speculation. 

As for oil, there are a few things at work. Yes, there is speculation, and some of it is based on no more insight than the fact that, since the prices fell from $147 to $35, there must be value. 

That’s simplistic, obviously. Just because a price falls doesn’t mean it’s going to reverse course. Prices do what they do for a reason. And the recent moves for oil are based on the expectation that production cuts and en eventual global economic rebound will take oil prices higher. That’s probably true, but how long will it take? 

It’s already apparent that OPEC members are not observing production cuts. And there are no signs of an imminent global recovery. To me that suggests a trading range fore oil prices. Buy low and sell high. 

I use the US Oil Fund (NYSE:USO) ETF as the best proxy for oil prices. The trading range for this ETF is fairly well-established. Buy it when it drops to the $28 range and take profits in the mid-$30s. After hitting $34 today, the USO is probably closer to a move lower than higher. 

*****As always, thanks for your comments and questions. Keep ’em coming at [email protected]. 

*****Finally, I just want to let you know that we made the first investments in the $100,000 Recovery Portfolio on Friday. You can view the $100,000 Recovery Portfolio video conference HERE.