Weekend Report
by Dr Invest

2012 has been a year of contradictions, especially when it comes to the market. This weekend I read a Reuters article that really sums up the entirely of 2011. I am including excepts here solely for discussion.

Caroline Valetkevitch, writing for Reuters wrote: Wall Street may be bracing for a pullback as U.S. earnings season begins next week - if the clouds of profit warnings from bellwethers ranging from FedEx to Hewlett-Packard lead to a downpour of lower profits - or even losses.

 

Thanks to aggressive stimulus plans from central banks around the world, the Standard & Poor's 500 index <.SPX> gained 5.8 percent over the third quarter. That sharp rally occurred even as companies were struggling.

Market strategists and investors say U.S. stock valuations are broadly out of sync with earnings estimates. They forecast a pullback in stocks in the coming weeks as more companies report results and reduce expectations for the fourth quarter and beyond.

I approve of this article because it agrees with me. That is a very dangerous position AGGRESSIVE STIMULUS PLANS by central banks, even though businesses have been struggling.  What Ms Valetkevitch has written is not just good reporting, it is the truth.

"It's a divergence right now where the valuations as far as equity prices (are concerned) have soared, and are really putting in place a stronger economy and stronger fundamentals," said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio.

"But earnings will be the telltale sign," Lancz added. "And if the guidance isn't particularly strong, the market might be setting itself up for a little disappointment. I don't see a major correction, but I do see a pullback."

With tepid revenue growth, U.S. companies have been topping Wall Street's earnings expectations in recent quarters through cost reductions. That path to beating profit forecasts, however, will become increasingly difficult as many companies have already made most of the obvious cuts.

"Forward expectations are just too high," said Barry Knapp, managing director of equity research at Barclays Capital in New York.

This honest article paints a present reality, the economy is faltering and flailing while government stimulus pushes up stock prices portending a growing and strong economy.

WATCHING EARNINGS REPORTS

As companies report their earnings, we will discover the commitment of investors to the present elevated stock prices. Will government stimulus keep the investors buying stocks? I suppose it is possible, but at some time the contradictions between inflated stock prices and actual company profits will have to be resolved.

For the present, I remain invested with 1/3 of a $10,000 portfolio invested in TIP and BND ETFs and 10% of the $10,000 portfolio invested in IAU an ETF gold trust. A decline in gold prices is expected and would present itself as a buying opportunity. Another 10% purchase in IAU would bring the total held in gold to 20%. 

As many of you know, I am not a fan of gold, yet; the FED's commitment to a 40Bln monthly purchase of mortgages will surely devalue the dollar. The on-going stimulus purchases by the european central bank will also devalue the euro. These are the only reasons to hold gold. Suggestions have been made that gold could climb to $2K per ounce by the end of 2012. More radical gold-bugs suggest $5K, which just seems a bit too good to be true.

KEEPING A STOP-SELL

As I have always suggested, the only line between success and failure is a STOP-SELL. I promise this, things can go so quickly awry that you will not have time to deal with your investments. You need to prepare yourself for the worse, placing a STOP-SELL in place should the market suddenly turn downward.

Remember the first rule of investing: NEVER LOSE MONEY. And always practice the second rule of investing: REMEMBER THE FIRST RULE.

(Note: the above information is for entertainment purposes only and not to be used as investment advice.)