I’ve decided to make this Q&A a regular feature
Last week the S&P 500 leaped nearly 2% and the Dow closed above 17000 for the second week in a row. I sent you an alert over the weekend explaining that this is really a bear market rally and we shouldn’t expect these highs to last. Predictably, readers have a lot of questions about the behavior of stocks right now – as well as about NIRP, MLPs, shady private equity practices, and other skullduggery.
This economy is circling the drain, and I’m happy to explain why.
Here’s what you wanted to know…
Stocks:
Q: Are you still negative on DB? They recently purchased back their bonds, but I am reading that this may be considered a sign of weakness. Are they still worth buying a put on here? ~Marcel G.
A: DB has not solved its problems. Rather than buying back debt it should be raising more equity and fixing its internal problems with financial controls. It should also radically reduce the size of its derivatives book. I don’t think the sell-off is over.
Q: Does the private equity meltdown mean we should get out of stocks like KKR? ~Fred E.
A: I expect the private equity stocks to drop another 20-40% before bottoming. They will then offer good value. They are well-positioned to take advantage of the credit market downturn to make new investments. If you can hold them for the long term I think they will rise sharply when the credit markets recover but for now they are dead money.
Q: Hello Michael, General Motors has posted excellent results and has a good dividend. Management seems to be making very sound, shareholder-friendly decisions. Why does the stock not respond more favorably? ~Aaron Y.
A: A lot of very smart people have lost money on GM. I think the poor stock performance is due to concerns about management’s ability to lead the company. There have been too many scandals and problems to give investors confidence. It is a cheap stock (as is Ford) but it just seems to have a problem gaining the confidence of investors. What’s more, auto sales are up because of record auto lending right now – and in February, subprime car loan defaults reached their highest level in nearly 20 years. The car industry is a shaky one to be in right now.
Currencies/Commodities:
Q: Isn’t the strong dollar actually a good thing(for small businesses and the working class)? A strong dollar and low commodity prices puts the power back in the hands of the people. That would be further enhanced by an actual interest rate that would return some wealth to our savings. The BEST way to reduce the debt burden of the world economies is to quit borrowing money for useless things we cannot afford, reduce spending, and get off our bums and work. Please correct me where I go wrong here. ~Carroll O.
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