One of the fascinating features of the investment business is that every day is different. The change in interest rates, the price of oil, earnings news, climate change, political developments and audit/ethics surprises – even comments by the Dixie Chicks — can disrupt individual stock prices and sway entire markets.
In this very young year, already we have had a rebound in oil prices, a surprise change in the effective leadership of Israel, a defiant challenge to the world by Iran's leaders, an ethics scandal in Japan and a rights-hype reaction to U.S. government wiretapping. On the surface, these events should be enough to frighten any stock market. A closer look, however, shows us nothing more than ordinary events taking place in our dynamic world. News today is covered by thousands of reporters working for hundreds of publications. All are charged with finding significance in each day's news. It is no surprise that many events with absolutely no national or world economic significance get coverage on the financial pages. The saturation level of news reporting puts a special burden on investors to separate the real news from ordinary chatter. Most of the recent news has been in the chatter category.
We all need to develop some level of scrutiny if, for no other reason, than to lessen our stress when absorbing the news. Here are some of the potential items that I consider to be stability busters.
<li> A serious terrorist attack. The United States is long overdue for something newsworthy. However, blowing up a bus or a power station would probably not cause significant lasting economic damage. The recent acts in London were short-lived in significance.
<li> A genuine political meltdown. An Iranian display of an actual atomic weapon, a government revolt in a developed country, or some country invading another would be examples of significant developments.
<li> Lack of a solution to the U.S. automobile company crisis. An unaddressed bankruptcy of GM or Ford could cause an economic ripple effect.
<li> An out-the-top oil shortage. A lasting shortage of oil that sends prices way up and causes true stoppages in the production of energy-related supplies – power, gasolene, and heating oil. The Katrina shortage was not a good example.
<li> International disaster. A monstrous earthquake or series of quakes, bird flu pandemic or other disaster that effect millions of people. The recent tsunami and even the series of U.S. hurricanes had little lasting significance on the world economy.
<li> Dramatic change in interest rates. There has been little reaction to the small changes of last year.
<li> Dramatic change in inflation. Without the spike in oil prices, the inflation scene has been relatively tame.
While any of the above events could occur at any time, the world is somewhat stable and the most visible economic track is business as usual. That track has been one of rising dividends, rising earnings, job growth, a solid economy and a firm stock market.
In such a climate, investors still have their hands full. To be prudent, they have to recognize that not very many investments are cheap.
There is some cheap real estate, there are some reasonably priced bonds and there are some cheap stocks. The markets are not under-priced, however, so caution is required. On the other hand, there is no reason to avoid investments in this environment.
L. Dean McGowan, Sr. VP Investments, UBS Financial Services, 5080 Spectrum Dr. Ste 1000W, Addison Tx 75001. 972-450-4322, 1-800-288-1515 (US & Canada), toll free from Mexico 001-800-010-1323. McGowan will be in Guadalajara February 16 and 17 at the Holiday Inn Select. He will be in Ajijic at La Nueva Posada Febraury 18-24. To make an appointment, call his office. There will be an investment workshop Monday, February 20 at la Nueva Posada Hotel at 10 a.m. The public is invited.
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