What will the Fed Do?

2 of the 3 economic reports we got yesterday were
disappointing, to say the least. New claims for unemployment jumped to an
8-month high and the Philadelphia Fed’s manufacturing survey made a huge
swing lower. Only leading indicators for July came in as expected.

The results of the manufacturing are worrisome. Business
activity retreated for the first time in over a year in the Philadelphia
area. That’s caused at least one investment bank, JP Morgan to lower its 2010
GDP estimate.

Even though July’s leading indicators still point to slight
growth, there’s no doubt the U.S. economy has weakened considerably in the
last few months. Of course, that’s not news to many Americans. Fidelity
Investment is reporting that hardship loans from 401K accounts are on the
rise.

The market will be
looking for the Fed to fulfill its promise to act if economic conditions
deteriorate. Clearly, conditions have deteriorated. The Fed could step up its
Treasury bond purchases, but that may not be the most effective move. The
Fed’s current Treasury buying campaign has ramped bond prices and crushed
yields.

That’s not good for the stock market, even though it keeps
interest rates low.

What should the Fed do? What can the Fed do?

The Fed has discussed creating a small business loan program
in the past. That might be more effective than its “pushing on a string”
measures like bond purchases. I’d like to hear what you think. What should
the Fed do? Write me with your suggestions [email protected] and we’ll discuss
on Monday

Now, I have a
couple items of reader mail:

Tom wrote:

Ian, You always seem optimistic on the market. I don’t
see that at all right now. If you look at all the indexes on a 3 day chart
you see a head and shoulder pattern unfolding on all of them. A lot of
indicators are breaking down. Sept. and Oct. are traditionally the worst 2
months of the year for the market. I think we are in for a big correction in
the next couple of months.

Yes, I try to keep a positive frame of mind. And that does
extend to the stock market and the economy. I don’t simply ignore the
negative, but it’s the positive that interest me most.

I love investing, and I love the innovation and creativity
that I see in many of America’s companies. And so I try to stay aware of the
economic conditions that allow innovation and creativity to thrive.

With that said, I agree, September and October could be
difficult months. I’ve written recently that the weak economic data we’ve
been seeing will cause investors to question 3Q earnings estimates, just like
they did before 2Q earnings. And that would lead to lower prices across the
board.

My advice is to buy the dips, buy the panics. I added
several top-notch stocks to the
$100K Portfolio during the depths of the European debt crisis. And if the market sells
off ahead of 3Q earnings on double-dip recession fears, I’ll take the
opportunity to add more quality holding to the
$100K Portfolio .

In baseball, they say things are never as good as they seem
when you’re winning, and never as bad as they seem when you’re losing.
Investing, like baseball, is about the long-term. And I firmly believe the
stocks I’m buying now will be worth more down the road.

R. asked:

I am wondering if the companies you recommend in the
Daily Profit free article are good today 19.08.2010 or if the volatile market
is going to drop and so will they?

R. is referring to the fertilizer stocks I mentioned after
BHP Billiton’s (NYSE:BHP) bid to buy Potash Corp of Saskatchewan
(NYSE:POT). TradeMaster
Daily Stock Alerts’ Jason Cimpl has
been tracking to high-growth fertilizer stocks for his members.

Now, yes, sure, if the stock market drops, it will likely
take these two stocks with it. That’s usually the way it works. But over
time, I think both of these stocks are big winners. Their products address a
market need, their growth is solid, they have competent management, and the
valuations are very attractive. Over time, those factors will win out over
market volatility.

Rob wrote:

Hi Ian,

I am a new self directed investor (June) that has now
escaped the grasp of high mutual fund fees. I enjoy reading your columns; you
have a knowledgeable common sense approach to investing. As a Canadian, do
you have any advice as far as following your $100K plan with respect to
currency fluctuations?

I am 45 years old and my spouse & I have been with a
few different financial advisors in the mutual fund game since 1993. It took
a long time to see the writing on the wall and enough losses that forced me
to cut my losses and get out. Presently I have the majority of portfolio in
iShares ETFs, and a few blue chip stocks, some good, MSFT & KO, some not
so good, BP.

That is where we are.

I look forward to hearing from you.

Congratulations Rob. You’ve taken a brave and bold step. As
a Canadian investor, you might be a bit reluctant to exchange your string
Canadian dollars for U.S. dollars. But how you manage the exchange can add to
your returns from investing in U.S. stocks.

Of course, the flipside is also true. If you convert to U.S.
dollars and the dollar weakens, that will have a negative impact in your
investment returns.

ETF’s are a great way for an individual investor to get
sector-specific exposure, and avoid company specific issues. But just be sure
the ETF you buy does what it says it does. There are several ETFs out there,
like the Natural Gas (UNG) and Oil (USO), that seek to track the underlying
asset price. In the short term they do, but over time, they fail to keep up
because of the way they are constructed.

I also like your focus on Blue Chip stocks. But don’t
overlook small cap stocks as a way to boost your returns. I hope you
enjoy
$100K Portfolio and I look forward to us growing our wealth together in the years to
come.