Monday, August 08, 2011

US Credit Downgrade New Profit Opportunities


I don't have a buy or sell stock pick this week after the last two weeks price action and now that the USA has lost its AAA credit rating. I suggest continued caution to the long side on all global stocks. With the extreme sell-off in the last two weeks, I would be looking for an upside rebound short squeeze short-term then looking again to sell-short after that. The market has been ripe for a sell-off for quite some time. Last week it supposedly found a trigger to sell-off big. Who knows and who cares. What matters is how to make money out of it all is the bottom line now and going forward with all the new portfolio rebalancing going on.

With what has happened in the markets in the last two weeks, I would be looking for a possible US dollar rebound, and a continued stock and commodity sell-off. The real reality for the world is for slower growth, and deflation which would suggest lower earnings and lower stock prices. For buying long on stocks, I would be putting it in China and Hong Kong dividend and growth stocks, along with parking it in Chinese Yuan.

According to Steve Reitmeister Executive VP of Zacks Investment Research, a basically breakeven finish for stocks on Friday was a fitting end to the week. With the market down about 12% from its peak, the valuations are very tempting to some. But others are looking at the same set of information and cannot sell stocks fast enough. Here are a couple great examples of this bi-polar scenario from Friday.

Government Employment Situation shows 117,000 jobs added versus expectations of 75,000. The glass is half full view believes that beating estimates is a reason for stocks to rise. And they did for a while. The glass is half empty view notes that you need 150,000+ jobs added each month to just keep up with population growth. So we are only slipping further behind and a reason to sell stocks.

Or how about the "new and improved" solutions in Europe. Those seeing the half full glass pushed the market higher on the news. Those with a more pessimistic slant believe that Europe's problems are too large to be solved and this new plan does not stop the economic damage to come. Their trades brought the market back to breakeven by the finish.

Now throw in the S&P downgrade of US Government debt and clearly the glass is half empty crowd will have the upper hand in the near term. And that is why the risk remains to the downside. But that is the playbook for active traders. More patient, long term, investors may be able to snap up incredible values now and hold out for profits further down the road. Which strategy is right for you depends on your internal make up.

The only strategy I abhor right now is sitting in all cash. That is for cowards and I am glad that some banks are starting to charge fees to customers for their cash holdings (an emerging trend to keep your eye on). The market allows us to make a profit whether it goes up, down or sideways…but that is only if you get off the sidelines and get in the game. So pick a strategy and get going!

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