Fourth-Quarter Forecast.

October 17, 2011

Forecasting tends to be a fool’s game. Which is likely why politics and finance are rife with them.
That said, there are certain trends and events which, for better or for worse, will impact the means by which we view, and operate within, this world.
Following are some of the issues upon which we remain focused in this year’s final quarter. We’ve also provided some brief recommendations as to how investors might prepare for what might lay ahead.
Russian Resurgence.
The Russian Bear has been employing a strategy that can be seen as passive/aggressive. The Russians have been working overtime to counterbalance U.S. influence in Europe and Asia. Simultaneously, the Russians have played nicely with its Eurasian neighbors, all the while leveraging its role as a global energy player to elevate its position.
The Russians have used the topic of U.S. ballistic missile defense to drive a wedge between EU members states internally, as well as with their American ally.
Further, the Russians will continue to revel in the U.S. state of affairs in the middle east, working behind the scenes to bolster their position while the Americans remain bogged down and in search of an exit strategy.
The Middle Kingdom faces continued inflationary pressure, and an economic slowdown as key trading partners face similar situations which will impact China’s massive exporting sector.
While China’s relations with the U.S. have soured a bit of late over trade and currency disputes, the Chinese government’s key concern right now is the relationship with its own people. With economic resurgence comes opportunity, as well as the need to continuously ramp up in order to meet the nearly insatiable demands of over 1.3 billion constituents.
Thus, the Chinese continue to spend on domestic infrastructure in an effort to keep pace with demand for jobs and opportunity. We hope they do.
The Chinese stock market has been an effective leading indicator for the S&P 500 these last few years. And Chinese consumption of basic materials and commodities has fueled the growth of much of the emerging world, which in turn provides opportunities for American corporations to reap profits from burgeoning middle classes.
If China’s economy drops into the abyss, the fuse on that firecracker will pass through much of the developed and emerging worlds.
The fourth quarter will see the market continue within a tight trading range of 1100-1220. Or, it may break higher or lower. Nostradamus would not be foolish enough to prognosticate on where this market is heading short term.
Neither will we. Yet, there will be opportunities.
Dividend stocks, like utilities, will provide four percent yields and low volatility market exposure. These can be purchased and held while you wait for the market to determine its next move.
U.S. Corporate and Treasury bonds are currently expensive, as the market continues to price in Armageddon. Emerging markets, however, have twice the growth and a third the debt of their developed nation counterparts. Emerging market bonds present opportunities for yield and appreciation. Some of these indexes yield over five percent, and have recovered nicely following the recent correction.
High yield bonds, at the BB range, offer solid yields and can serve as an equity substitute during volatile markets.
Of course, a range bound market offers other profitable opportunities. Options represent a means to capture solid returns without placing nearly as much capital at risk. Inverse funds enable one to profit when the market drops. However, each of these strategies entail risk and should first involve a conversation with a qualified advisor.
Finally, don’t be afraid to hold cash. Advisors will often say that keeping cash at times like these is pointless. Of course, many advisors don’t get paid for holding cash. Keeping powder dry for utilization when the market drops is always beneficial.
The fourth quarter will be volatile. Cash provides a stable chance to fight another day. Investing is about two things: risk and reward. Try and put money to work when those two things tilt in your favor.
As for what should be avoided these next few months, that’s easy. Steer clear of European equities and U.S. bank stocks. And don’t hold your cash in corporate money markets, but in short-term, U.S. government indexes.
Bottom line? The world is unpredictable. But a few maxims can keep you ahead of the curve. Save often. Protect capital. And don’t invest with the main stream.
Ovid said that “Luck affects everything. Let your hook always be cast; in the stream where you least expect it, there will be fish.”
Good luck, and happy fishing.

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