Hi Everyone,

I have not talked about the financial markets in a while, so I thought I give you an update of where I think we stand.

I still believe that the current rally, which is about 3 months old, is a bear market rally and the market will eventually retreat back.  There were some signs earlier this week that the retreat might have started, but we shall see.  Some of the reasons for that are the following, some of them I mentioned before:

• In order to have a sustained rally in the stock market, company profits need to support that.  There can not be any sustained rally without increasing profits.  This is certainly not the case right now.
• We are likely through the worst of the GDP contraction, but it will not be party time over the coming 12 months or more.  There is still so much deleveraging to be done in our economy in credit cards, commercial real estate and to a lesser extend in residential real estate.  The rising unemployment is not helping residential real estate either.
• There are huge problems facing Europe, especially Eastern Europe (former communist countries), but also Germany, Austria just to name a few.  Germany has huge issues with their large export oriented economy, Austria with their bank’s involvement in non performing loans in Eastern Europe.  Eastern Europe has seen considerable currency devaluation at the same time when 60 plus percent of the mortgages and small business loans are in Euro and Swiss Francs.  Just picture your mortgage payment double in six months because your home currency lost half its value.
• All the spending of our government will have huge negative effects on our economy.  Most of the spending is not even stimulative in the private economy, and all it will do is considerable inflation within a few years that will kill any kind of recovery we might have as well as profits in the private sector.  The only stimulative that the government should do is enhance jobs in the private sector, and that is not happening.

I still think cash is king and there is no rush to move into any investment.  Any kind of fixed income investments is riskier than the stock market as the value of those will plummet as interest rates and inflation are starting to creep up.  One opportunity I do see is rental real estate if you can get a property very cheap out of foreclosure and create decent cash flow.  In inflationary times, real estate is a good investment and rents will go up as inflation does its dirty trick.  For that to work, you better do your due diligence and home work on the property.

As always, I welcome your questions and comments.

Cheers,

Patrick