Please welcome once again Dr. Chris Kacher, co-founder of the website selfishinvesting.com, managing director of mokainvestors.com, and co-author of the recently published Wiley book, “Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market.”
Q: In recent weeks, the market has been served up bad news then good news and seems to have trouble finding direction. What are you doing to navigate when you have so many back to back Gap Up & Gap Down days & Up Volume and Down Volume days, and what is your view on this erratic behavior?
The fed’s quantitative easing serves to prop the market but it has been fighting against the flow of negative sovereign debt news out of Europe vis a vis Ireland, Portugal, and Spain, as well as China’s monetary tightening policies, so it is not surprising that this market is screwy and volatile with all the gap-up, gap-down opens we have seen over the past couple of weeks. The fed’s quantitative easing makes the market rise, but this negative flow of news makes the market fall. That said, these directionless periods are generally brief, and my market direction model thrives on trending periods, either up or down, which more than make up for these directionless periods, and thus accounts for its ability to well outperform the general market averages over every cycle as can be seen by its track record on selfishinvesting.com.
Now QE2 (quantitative easing part 2) means the fed is, in effect, inflating the world. World central banks will continue to print money, with the Fed at the vanguard of it all. Foreign currencies must keep pace with the falling dollar otherwise such countries will price themselves out of the market. Of course, the way the fed sees it, the falling dollar means the US can pay down its debt with cheaper dollars, and the US stock market will continue to rise as purchasing power of the US dollar falls.
As for talk about deflation, Bernanke is a student of the Great Depression, and he won’t let deflation occur because it would mean the current levels of US debt would effectively increase because it would be paid back with fewer dollars. So in general, expect precious metals to continue moving higher, and the purchasing power of the dollar to continue to erode, until this quantitative easing comes to an end.
Q: There is talk that the US will support Europe with an even larger aid package, potentially to the tune of $1 trillion. What are the future implications of this aid package?
Last Thursday, there was news about the US helping the Euro Zone with an even larger aid package. This simply means more money will be printed. Ultimately, there may be a very high price to pay for all this printing of money by central world banks, led by the federal reserve. And the inevitably higher interest rates that ensue might force all the world Governments to reconsider their “printing” decision as financing may become “out of reach” if yields rise too high. In the meantime, money will chase hard assets such as precious metals and other commodities. Stock markets can continue higher as well.
Looking out into the future, increased taxes and tariffs as well as rising interest rates will kill the equities market, but the timing of this is probably still out to 2011 or even 2012 as the federal reserve has a lot of ammunition in the way of quantitative easing practices, and has indicated they will continue to ease.
Q: Despite this directionless, erratic market, are there any stocks that have managed to do well?
Most all of the stocks we’ve been recommending have well outperformed the general market. It goes back to our stock philosophy that leaders outperform and can often even buck downtrending markets. Such stocks we have recommended over the past several weeks include cloud computing stocks such as VMW (VM Ware), APKT (Acme Packet), CRM (Salesforce.com), RVBD (Riverbed), FFIV (F-Five) as well as stocks capitalizing on the video-on-demand digital download revolution such as NFLX (Netflix), ROVI (Rovi Corp), and ACTG (Acacia Research). Incidentally, NFLX’s plan to work with Apple TV and become an internet TV preferred provider is helping to fuel the boom in this stock.