These jittery markets are likely to move at the slightest hint.
If it’s slightly positive news traders jump in, not wanting to be left behind on the next bull run. If it’s bad news, there’s a scramble to get out in case it’s the start of the next great sell-off.
Last Thursday the Federal Reserve spooked investors. After Wall Street closed, the Fed announced interest rates would be going up. The market wasn’t expecting this at all. The futures markets dumped.
But there’s really no need to panic just yet. The 25 basis point hike applies only to what’s called the discount rate. That’s the rate the Central bank charges on short-term loans to other banks…
Why we’re not worried about interest rates
It has nothing to do with the fed funds rate. That’s the US equivalent of our base rate – the rate which affects the ordinary man on the street. In fact Fed Chairman, Ben Bernanke, made it very clear that the Fed’s policy would “remain accommodative”. In other words, no plans to hike rates.
So why the sell-off in stocks? It’s simply that traders read too much into it… and panicked that the easy times are over. When interest rates start going up, that’s bad for consumers. It’s bad for businesses. Together, that’s bad for the stock market.
But rather than just taking Bernanke at his word, there are plenty of reasons why the Fed just cannot raise rates yet. To start with, the economy is just not ready for it. There’s too much at risk.
Bernanke is not about to risk undoing all the good work that has been achieved by quantitative easing. The cheap money of the past two years has started to stimulate growth. He needs more time for this to be sure that the US doesn’t face the feared double-dip recession.
Nor is he going to risk seriously damaging the already sick US housing market. If he raises rates, that’s going to hit borrowers hard. And that’s potentially disastrous for real estate. And the vicious circle that will follow on from another slump in that market doesn’t bear thinking about.
At the end of the day it looks like Bernanke’s move on the discount rate was merely to shut the critics up. He wants to show that the Fed calls the shots, not Wall Street. Even if he’s not ready to raise the base rate yet, he just let the world know that he will when he’s ready.
How to invest in uncertain times
But right now, there’s no need to worry about interest rates just yet. The thing to do is to keep buying stocks that you like… and to bring in a little portfolio diversification so that your wealth is not all tied up in one asset class.
Here at The Right Side, we are a broad church. We welcome all faiths. Opposite me, for instance, with just a couple of screens between us, is Theo Casey.
Right now, Theo’s worried about the markets. If you’ve read his latest report, you know that.
However, that doesn’t mean that you should completely abandon the stock market. There are a number of defensive, high yield opportunities that investors should be stocking their portfolios with right now. Here’s Theo:
“We’re focussing on companies that have three key attributes:
1. Significantly lower risk than the market. We’re looking for ‘bond-like volatility but stock market-like returns.“We hold a number of stocks that have just these characteristics. Right now, our particular focus is on pharmaceutical companies. It is the pharma stocks that held their value in the 2008 bear market. Only drug stocks and tobacco stocks proved to be resilient. That’s why we have three holdings in this market right now.”
2. High dividends. We’re looking for companies that offer a good payout but also are at little risk of cutting that payout in the future. We’re looking for those companies that ‘cover’ their dividend two or three times, i.e. they are very cash rich.
3. Sector dominance. We pick winners. This is not the time to be taking punts on the next big thing. We want proven success stories. The types of companies that bully their sector peers, that can afford to buy out rivals and that have key non-cyclical products and services.
Theo is serious about what could lie ahead for investors. He believes we could be entering troubled waters. But he knows well that it’s important to stay in the market. And he’s got the strategy to do that… read about it here:
How you could bullet-proof your portfolio.
Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
Bigger than the Falklands?
Meanwhile, at the other end of the scale, we have our friend Tom Bulford. Tom really is going after “the next big thing”. He admits it freely. Tom is a master of the highly risky penny share market.
He gets into shares with huge promises. And he gets in early. If these stocks pay out, then they can make serious returns.
Tom believes he’s uncovered the next great small cap oil explorer. This isn’t the Falkland Islands, by the way – although his readers are in one Falklands play and have been for a couple of years. He reckons that one could pay out soon… and if you’ve been watching the news, you can see what’s on offer.
The Falklands oil story could soon turn into a frenzy. And it’s perhaps too risky to get in now. But this next place is not yet in the media… there’s still a chance to get in early.
This new idea is somewhere you’re even less likely to think of as an oil-rich place. But Tom reckons that could change. The 11 billion barrels of oil that could be there could make this the “last big oil find”, as Tom describes it.
Have you seen Tom’s new report on this? Exciting stuff if you’re looking for high-risk/high potential reward plays. If Tom’s right, every small cap speculator is going to want a piece of this. It’s a classic penny share oil play.
I’ll send you full details tomorrow.
Good investing,
Frank Hemsley
For The Right Side
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