Investors' Tempered Giddiness

Stock markets are up on the first day of trading of the new year. Investors seem as optimistic as the financial 'experts' in the press. Today's headline of the Seattle paper is, "Happy days may be near again." (Note the 'may') Explanations for this enthusiasm range from belief that 1) Obamanomics is working, 2) vast infusions of printed money will go into the market, and 3) Republican control of the House of Representatives will put us on a pro-business course. Only time will tell.

Unbridled exuberance is normally a sign for pros to get ready to sell everything. What gives me confidence is that all of the enthusiasm has been tempered by scepticism on just about all sides. Many of the experts who advise buying also council extreme caution. They are saying buy now but be prepared to get out. It looks like another bubble ahead, but not just yet. The problem they are seeing is the high levels of debt of corporations, banks, cities, states, and of course the US government. In other words, the profits shown by companies, especially banks, are based upon low interest borrowing and transfusions of government stimulus (QE2) money. Given the high unemployment and sinking housing market, the boom looks more like another make-believe bubble.

Personally, I have a small SEP-IRA with Vanguard Funds. This is in a fund of dividend paying stocks and a precious metal mining fund. Both of these did well, although the stock fund, heavy in hi-tecks, underperformed the S&P. I will maintain this mix. Dividends may be seen as a replacement for bond interest. Bonds will be weaker with climbing interest rates and the increasing default risk with municipals. Also, companies faced with bleak outlooks for investment, may put their money (whether borrowed or earned) into their own stock and into dividends. Gold and silver continue to look good because of all the uncertainty. (I have heard that there was weakness today that predicts at least a temporary pull-back in gold.)

If and when the bubble bursts, everything including gold could go down. Unfortunately, the small investor can't go short in Vanguard Funds.