Market Musings 2007 10 27

Markets are at interesting cross roads. The major market indexes are close to new highs, but rolling over. This is a technical description implying a loss of buyers as market levels reach the new highs. Hence a lot of market participants are reducing exposure to the stocks, mutual funds and ETF's.

I have already increased cash in managed accounts to about 80 percent by selling leading stocks like AAPL, RIMM and others. They look extended and will be going through some healthy corrections.

A lot of high expectations are built in for another rate cut next week, based on trading of several interest rate spreads. Gold Spot prices jumped up also, as reduction of the rates will impact dollar value against other currencies. A lot of inflation is being built in for next year or so. If you travel to Europe, you can feel how expensive things are and how much value dollar has lost.

So, a fed rate reduction may have some short term upside, and it will help financial companies like banks and some export companies like Caterpillar, YUM, KO, PEP, BA and others. But, it will require imports to be more expensive like Chinese goods and Indian Software Services. STAGFLATION will be more used in the future, as inflation creeps into our inflation measures. As you all know, Markets are always difficult to predict. If the interest rates are not changed, there will be a lot of concern about recession etc, although we still have a positive growth rate of the GDP.

I wish I could feel better about some stocks... GOOG has a significant market cap. But, their sales are less than Microsoft's earnings. We all realize that MSFT is cash rich, but, how will GOOG do better than MSFT, as law of large numbers hit Googles increasing revenue and earnings. That is scary, as market continues to focus on earning increases. There is a similar situation for WMT, a giant in retailing.

So, I feel safer with some cash in my accounts. A long term investing attitude looks foolhardy, especially, as I get older. We should invest more percent of our portfolio in foreign stocks or stocks with foreign exposures. Dollar based bonds may not hold value either. If you can hold bonds in Canadian Dollars or Australian Dollars, Indian Rupees or Chinese Yuans, you will be better off in fighting inflation.

Please remember, all of investing is about saving the value of your investment dollars from ravages of inflation in the long term and hoping to make it grow in real terms....