Thursday, July 9, 2009

It's summertime but the livin isn’t easy.

In my last posting I suggested that the price of oil could decline to $50 and the yield on the 10-year T-Bond could reach 3%. I still think that could happen and it may well happen faster than I thought it could. As of this posting, July 9 the price of oil was $60.57 down over $13. The yield on the 10-year T-Bond is 3.40% down from just under 4%.

I suggested in an older blog that I thought the S&P 500 could test 800 to 810 before we would see a run at 1,000 later in the year. The current level of the S&P 500 is 882and the next major level of support is 870 to 875. If we close below 871 we could quickly see 856 on the S&P 500. We may well go down quickly before the vast majority of investors realize we are down so much. Once a majority of investors sees that we have come down so far we will see a wave of panic selling. Those people who have seen a recovery in their portfolios will get scared and will be concerned that we could go all the way back to the previous bottom of 666 on the S&P 500. This last panic selling will set a new bottom and be the catalyst for the market to move up and challenge the 1,000 level on the S&P.

We still haven’t come to grips with the fact that the recovery, when it comes, will not be as robust as many people are currently thinking. I know you have heard me say this about the recovery for sometime in this Blog. I realize that to most of my readers this is old news and just like my prediction on housing of 2006, because you read it here first, when the main line starts suggesting what I have already said it seems like old news.

If I’m right about the correction, what should I be doing in my account? If you are a client of mine, not much because you already have a high level of cash that we can deploy if prices fall low enough. If you don’t have at least 15% cash then start selling your laggard stocks that did not recover when the market went up and think about what you want to buy and at what price. Just like when you go to the market you should have a shopping list, you need a shopping list for investments. What should be on your shopping list? Look at the stocks that lead the recovery that pay a handsome dividend. Go back and look up the Blog on the Nine Brothers, now Eight Brothers.

You might want to look at ten-year high quality muni bonds for the tax-free income. One of the challenges with municipal bonds is the credit quality. You might live in California but you should be careful in buying California bonds. In the past by buying your state bonds you could save federal and state income taxes. Today you might be better off having some of your money out of your state for safety and diversification.

Make your list, set a price and if what you want to buy gets close to your price buy half of what you were going to buy. Watch and see what happens and if the price falls after your initial buy then you spend the next 25% of the 100% you had to invest. If the price stabilizes, spend the rest of your money.

Soon you will be receiving your June statements. I have had several clients call me and ask if I would talk to a friend or family member about helping them with their investments. I said to them I could only handle so many clients and provide the level of service I want to provide to those clients. If you know someone that needs help let me know and I’ll call and see what I can do to help him or her.

Dan Perkins


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