It seems like the market as a whole is overvalued.  Commodities have enjoyed a hefty run up, more sizeable than any other time of inflationary uncertainty and the stock market continues to lose hundreds of points day by day.  You could go with money market accounts that barely yield 2% or you could continue down the path of holding cash, and still losing money.

Its hard to make wise investments here.  If the market would allowed to freefloat interest rates similar to how the price of everything else trades, then interest rates would be 15% and at least you’d have somewhere to stash your cash.  The market is devaluing itself further from intervention from both the Federal Reserve and traders trying to steer clear of the actions of the FED.  This is all self induced.

Even the best, often touted as the most solid investment is falling out.  Real estate which is supposed to only appreciate with time and never lose a cent is seeing 15.3% drops across the country.  There is no avoiding the real estate pitfalls just like the drop in the stock markets and the bloated commodity prices.  Quite simply there is no good place to invest.  Keep cash and you lose to inflation, buy commodities and you’re in at the top, real estate is dead and money markets pay nothing.

The best investments are still out there though.  This stock market is full of value plays, especially in companies that do the bulk of their business overseas.  You see, when we can trade US dollars for assets that earn in nondollar denominated currencies we jump up and down with excitement.

That being said I think there is no better investment both in the emerging markets and in the automaking sector as Tata Motors.  Tata Motors has the emerging market automaking business firmly in its grasp.  It is producing a new $2500 car aimed directly at the Chinese and Indian markets and while it won’t have AC or adjustable seats, this thing is destined to be a hot commodity.  The kicker, the Tata Nano is said to get up to 50 miles per gallon out of a small two cycle engine.

Further, Tata Motors is great with cost cutting and recently took in Jaguar in a deal with Ford.  Now the company is loaded with luxury automaking and deep discounted cars for the emerging markets.  Plain and simple, Tata Motors is prepared for any market outcome.  Tata Motors currently trades at a tiny PE ratio of 8 and a PEG of .45.  This stock is severely undervalued, beaten down by Indian inflation concerns and the rising price of oil.  Nonetheless, this stock is sure to break out when the Nano comes to market.  Emerging market customers are sure to snap up the brand new car each for $2500.  A buy for the long term.

The drop in housing prices should bring more buyers.  But the facts are simple, the amount of sales are down slightly while the purchasing price is down substantially.  The housing market, in attempt to correct itself, is running prices lower and the amount of buyers is following.  This shows that the market is not yet balanced.  If it were, the drop in prices would bring a rise in sales.  The amount of home sales are down 2.5% from a year ago while the median home price has dropped by 5.7%.

What’s the reason for this disparity?  Its quite simple.  Sellers are unwilling to drop prices to the market price, instead willing to hold on until prices pick back up to their chosen price.  Many sellers have a set price and are unwilling to sell at a loss, this creates an artificial market floor because not all of the market participants (or any for that matter) are acting rationally.

The fact that prices have dropped 5.7% and the amount of home sales is down as well tells me that the housing market still has a very long way to fall.  In many markets prices were up 200-300% in just a few short years and only about 15% of that has been deflated.  Without any stimulus or Greenspan era rates, real estate prices are likely to continue their descent especially after the recent data.

To create an equilibrium demand for housing I think we’d have to see another 10-15% drop in prices across the board which would mean probably a few percentage points in most areas and huge drops along the coast an highly populated areas.  The Midwestern states probably have the least to lose but a few months on the market as those homes didn’t see much of a boost from the boom.  The coasts are going to lose it all, the amount of homeowners upside down is huge and the number of homeowners willing to sell is small.  Too many people are afraid to take a loss and unfortunately it will be something they’ll have to do.

Real estate should be at the bottom of your investment portfolio.  Its difficult to say whether we’re hitting a bottom or if there is still room to fall.  The events of the market have much more to do with prices than anything else.  Bernanke could screw the economy to throw a bone to the real estate market or he could pull a Volcker and save the economy while thrusting real estate to bottom bin investment grade.  Either way, proceed with caution.

Treasury Inflation-Protected Securities, or TIPS, are starting to gain some traction with senoirs and fixed
income investors looking for a bond like return while still being adjusted for inflation.  With TIPS, your capital is adjusted each year to reflect the current changes in the CPI.  TIPS come with a fixed return or coupon that is generally less than Treasuries but have an important benefit in high inflation.  Traditional treasury investments are not protected by rising inflation while TIPS are, thus they have a lower yield.

Currently TIPS return a less than stunning 1% per year.  Thanks to the credit crunch and general market worries, investors have poured capital into TIPS seeking income with protection from the high inflation that we are currently seeing.  The downside is that the yields on TIPS are terrible even after being adjusted for inflation.

This is how TIPS work, say you invest $25000 in TIPS at the 1% rate.  This will produce an annual income of $250 in interest payments.  If inflation were to rise by 4%, your principal will be adjusted by 4%.  Your $25000 bonds quickly become $26000 bonds because of the 4% adjustment.  The next years payment will be on $26000 rather than $25000 and you’ll receive a payment of $260 the next year.  In theory, TIPS make a great investment because you’re always beating inflation, even if only by 1%.  The problem comes in the way government calculates inflation which is centered around certain products and services and doesn’t represent a true growth in money supply or truly higher prices.

Right now the government would have to report inflation higher than 2.2% to make TIPS better than standard Treasury bonds.  The possibility for 2.2% inflation is great, but the possibility for government recognized inflation of 2.2% isn’t as great.  Much calculation is done in the inflation statistics which ultimately hides the true inflation amount.

The better bet for protecting yourself and your capital from inflation is in commodities like gold and silver where the supply remains relatively constant and prices rise and fall due to rising inflation or deflation.  To mimic the returns of TIPS, an investor should seek investments in gold and silver mining companies that pay a dividend.  Chances are that you’ll be able to find plenty of stocks with a 1%+ dividend and the rising cost of gold will cancel out inflation.   Add capital gains on top and you’re already doing better than a government adjusted security.  TIPS just aren’t the right way to go.

Here we’re going to hit on a new topic: Jury economics and how you can really feel the market bubbling when the juries appear.  Two hedge fund managers for Bear Stearns were indicted on securities fraud and could face years in jail for concealing problems in the Bear Stearns funds that were backed by various loans, mostly in the subprime industry

Its not soon after a market meltdown that information appears about the arrest or indictment of people on certain charges, especially when in regards to $1.4 Billion in hedge funds.  The indictment of these two managers is just the beginning for the hedge fund giant, as Bear Stearns probably has hundreds of more problems than just its hedge funds.

The problem with Bear Stearns is that these two hedge fund managers had quiet talks in between themselves about a future collapse in the sub prime market while they continued to promote the funds as a great buying opportunity.  At this point it seems hard to hang these two just for a failed fund.  Sure the fund might have been carrying too many debt backed securities but that is what hedge funds do, they speculate.  Now the investors are looking for anyone to blame for what was a part of a greater market meltdown.  What happened to Bear Stearns was not case specific, the subprime mortgage blow ups mixed with billions of bad debt in the form of real estate transactions were not very solid investments.

What the public has to come to terms with is that this is just a common happening in the financial world.  As banks, especially investment banks fail, it is usually due to one large fundamental change in their investments.  This usually includes the fact that billions of dollars in due loans were going bad and their borrowers were unwilling to pay.  Don’t blame the trader, blame the problem.  People are broke.

We’re reaching the definition of stagflation.  A faltering economy and higher and higher commodity prices.  This is what we saw in the 1970s and 80s and now again in 2008.

Stagflation is defined as a period of stagnant economics and rising prices.  Surely we see this, GDP growth is negligible, the price of commodities such as food and energy are through the roof and any hope for future prosperity comes from inflation growth.

Inflation
Inflation plays a key role in this bad economic period just as it does in any downturn.  When housing was falling apart and the banks blew up, namely Bear Sterns, the central bank started flooding the banking industry with liquidity in the form of freshly printed money.  The government started sending out economic stimulus checks to fulfill the belief that inflation in the short term holds down unemployment.  The macroeconomic trade off looked pretty good.  But even the unemployed numbers aren’t holding up like they should.  The inflationary cycle is being heated up by energy prices that act as a short term deflationary prospect and limits inflation in the US.  Money exported is as good as being out of the money supply.

Commodities
Higher commodities prices are the direct result of high inflation, but not just over this year.  Since the end of the gold standard in 1971, more dollars has popped out of thin air.  True money supply, or M2 money supply is up nearly 400% just in the last 15 years.  Now that commodities have caught up to the money supply due to a global economy, the United States is paying for the last 20 years of deficit spending.  Also leading to stagflation.

GDP Growth
This has been discussed plenty of times, but the only GDP growth that we are currently seeing is due largely to inflation.  The banks have a fresh $500 Billion in liquidity, thats 10% of the current M2 money supply.  If inflation runs this rampant but prices only advance by a few percentage points, there is a belief by Wall Street that the economy is growing but its due to a greater amount of money not a greater amount of productivity.

Defining a period of stagflation isn’t easy as its usually made known during or after the fact.  Investors should start putting money where the money is, into consumer staples.  Even in an economic backlash, people will still demand the staples of life.  If the economy keeps worsening, investment dollars will flow into staples, pushing up the price for these stocks.  Get them while they’re cheap.

Market stagnating without the help of the Federal Reserve

Many analysts are suggesting that this may be the bottom for the financial markets which have had a rough few months and now touching on March’s lows.  The Federal Reserve has been inactive, giving people a reason to believe the drops are over but what happens if the Federal Reserve quits completely.  Now that we’ve seen at least a month with no activity we can see what kind of picture is painted in a market without the Federal Reserve and Ben Bernanke to throw the market a bone.

There are a few catalysts for Fed action circling in the market.  Out of control commodity prices are pushing the Federal Reserve to raise rates and fight inflation while the banking industry is calling for more liquidity.  When a “private” branch of the government, founded by the banks is calling for money, its almost certain that they’re going to get it.

The calls for liquidity from investment banks like Lehman Brothers and Washington mutual are scary.   The lenders need cash and need it quick, without action its likely that many of them will fail.  The entire economy has been centered around credit, borrowed and unborrowed and the liquidity in the homes of millions.

If the rally of the markets is going to continue, the federal reserve needs to act quickly.  Otherwise its dow 10,000 before we know it.  More coming soon

Is it Washington Mutual which has its fair share of exposure to the subprime market and has lost 85% of its value in just a few short months or is it Lehman Brothers which struggles for additional capital to keep its core business afloat.

Deciphering bank failures is difficult, but it seems sure that the cycle will continue.  Through the 1980s and 90s savings and loan busts one common trend was familiar, real estate blowups.  But the problem was much more isolated, the world watched as Texas real estate, primarily Houston and other areas saw extreme growth in pricing until supply caught up with demand and the bubble burst.

Today’s problem is far greater in that it is no longer an isolated problem.  Though the coastal areas and big cities have seen the worst declines, its safe to say that the United States as a whole is going through a “real estate recession” now worth $4 Trillion.  The $4 Trillion figure is made equally scary by the fact that the economy will have $4 Trillion of equity that can be borrowed against.  HELOCs and second mortgages fueled the buying frenzy that resulted in the overexpansion of Starbucks and growth in home retailers like Home Depot and Lowe’s.

Back to the topic at hand, it appears as though many of the largest banks are just a few quick steps away from the next Bear Sterns.  Washington Mutual can’t raise money, Lehman has extended its hands to investment banks in Korea and Bank of America is trying to tell itself that a high dividend is sustainable.  Only time will tell, but one thing should be made certain: the financials are no place for a prudent investor.

The idea that oil may be priced too high has started to hit the masses, through the media and through the photosphere.  I think now it has been decided that oil is indeed built largely on speculation and its price the product of highly leveraged futures accounts.  Now that the price is up and many billionaires made on the energy bubble, it might be time that the tides turn to lower energy prices and a short term grasp for air when the pump reads $3.20 instead of $4.00.

This week showed a lot about the speculative impact in oil trading.  Simply on news that one (1) Merril Lynch analyst suggested $150 oil by July 4 pushed oil up $11 in one trading day.  A mere suggestion was enough to send prices up almost 9% in one day, the last time this happened Yahoo was $120 a share with the internet bubble in full swing.

Had this market been dictated just by supply and demand, the price of oil would barely move on the day to day.  An analyst prediction wouldn’t have sent the price to meet the predicted amount, instead the price would stay moderate.  Higher demand or a lower supply should be the only thing affecting price, but the problem comes in that demand isn’t for the use of oil, instead its for the holding of oil.  All the speculators that have locked up supply will unleash it when the price drops, adding even more supply to a falling market.  If it all works out the way it should, where net buyers start liquidating their positions,  the price of oil should drop by as much as 30%.

Markets work so perfectly in a market where people buy for consumption rather than speculation.  The trader with Goldman Sachs has no use for 100,000 barrels.  They won’t even use that in their lifetime, they will though hold that supply so that no one else can use it and drive up the price.  This is what we’re seeing now, so much oil and oil futures are held by investors instead of the typical clientele: airlines, delivery companies, gas stations.

Even oil billionaires are dumping their investments.  Richard Rainwater, the billionaire oilman made a $2 Billion fortune on a $300 Million investment in the 1990s.  Recently he dumped all of his shares, every single oil firm that he held was sold, for the express reason that he thought oil was a bubble.  This comes from a man that has made almost every penny he has from oil and investing.

One name that never seemed to get on the energy train is Warren Buffett.  He’s known for avoiding bubbles and eventually making the right calls, now it appears that he might have gotten around another bubble.  This market is set for correction to the supply/demand efficiency level that is from consumption not from speculation.  We’ll have to wait for the summer predictions to slow before we see any drop in prices, from the consumer side, lets hope it comes quickly.

Today was marked with news from the financial sector worried still about liquidity and solvency though low stock prices are starting the acquisition cycle.  Oil was nowhere to be found in the news as it reached daily “lows” of $123 a barrel, if you can call that a bottom at all.

The banking industry did startle investors a bit, but still not to the point of  a major sell off.  Lehmann Brothers, a banking firm that was on the brink of collapse due to subprime mortgage debt has sought and received plenty of financial backing in the form of new credit and another dilution of preferred stock shares which were sold for an $8 Billion infusion of cash, $6 Billion this quarter and $2 Billion to follow next quarter.  Some remarks were made on the topic of its ability to withstand today’s credit market, but many have stuck to the idea that the firm is solvent enough to continue and will be able to withstand any future troubles.  The street wasn’t particularly happy with its attempts to find new money, but the bankers had to do what they had to do.

The acquisition buzz should have been enough to garner any investor’s attention.  Smucker’s will buy out Folgers coffee in an all stock deal while Verizon is taking on ATT with its offer to buy the fifth-largest cell phone carrier AllTel for a whopping $27 billion.  The last few weeks have been filled with enough acquisition news for a year, these large mergers are very promising.

Generally when a currency is as cheap as the US dollar is today, foreign investment comes from far and wide to buy up US corporations.  While this remains to be seen today, companies with operations on other shores are taking to buying their domestic counterparts with capital gains in currencies.  Wall Street should welcome any future buyouts and acquisitions to boost the stock market.

For as long as oil stops making headlines, the market should rally.  Selloffs in the stock market occur each time oil tops a new number, $120 oil for the most part represents some rational buying but a lot of bubble.  If the price of oil were again to drop below $100, the stock market would rise another 1000 points without much concern.  High commodity prices are the only thing holding down prices right now.

The stock market has dropped, but the dividends haven’t.  Many firms are now paying hefty dividends, tribute to their previous high stock prices but also showing some strength in a time when the markets are hurting.   There are many good reasons to buy a stock with heavy dividends, not only are you protecting yourself from loss in the form of a quarterly or annual payment, you’re also buying a stock that is less likely to be sold off in the event of an untimely stock market downturn.

Buying a stock that pays a dividend not only gives an added boost to returns but protects to the downside.  If a stock pays a dividend of 3%, you can accept a 3% greater downturn than you could with any other investment.  Its practically free money.

The best part about high dividend stocks, though, might not be their dividends at all.  You see, investments are generally graded by their ROI, or the ability to produce profits on a certain amount of expenses or investment.  Few people take the time to consider dividends into their return, we’re more interested in seeing a capital gain of 20% than to see the stock pay a measly 4% every year but that dividend does more than just add to the bottomline.

When the economy moves to the negative, mutual funds, hedge funds and other investment vehicles move money around from one stock to another to keep their heads above water.  Its very simple, rather than invest in technology or the next hot product, conservative investments favor things like toilet paper or toothpaste and bandages.  Regardless of how the economy does, few people are likely to skimp on the necessities.  But there is another critical variable that mutual funds must consider, and that is the dividend.

When gazing at a balance sheet full of hundreds of stocks from large positions to small positions, the manager of the mutual fund is unlikely to cut those businesses that provide the highest dividend.  Dividends reflect a healthy company but also a healthy investment.  When returns are low, the difference between high yeild and no-yield stocks becomes even more apparent.  Why invest in the company without dividends when there are plenty of good investments with a 4-5% dividend?

Mutual fund managers are far more likely to hold onto those investments that give a fixed income to keep the balance of the fund up.  When stock prices are dropping across the board, those companies that pay dividends begin attracting investors who are more interested in hedging their bets than producing out of this world returns.  During economic times like this, high dividend stocks simply garner more demand and thus higher prices are the bidding wars begin.

If you want a safe bet, its in the form of high yield bluechips.  They’ve proven a solid business model and the ability to pay out a cash bonus every few months, so their inclusion in your portfolio is something that must be considered.