Many stocks are trading at single digit P/E ratios and valuations that make the market look cheap. Although I am not too much into fundamental investing, I have to consider fundamentals when trading. Value investors are working overtime right now trying to distinguish whether these valuations are of actual value or whether they are pointing to a weaker earnings outlook.

What Am I Doing?

Sitting it out for now. If I am not in the market, I can’t lose money. I see companies hoarding cash, retailers reporting mixed numbers, employment not improving, and terrible housing data. The technicals of the markets say there is more room to the downside but with any earnings season around the corner, volatility is the only certain thing in the markets. Some stocks will win and others will lose, I will sit on the sidelines and wait.

Exports and Imports

China exports a flood of goods to the US and has for many years. The trade deficit has been in China’s favor since at least 1985 according to the US Census and has significantly increased over the years. Both countries need each other but who needs need whom more?

China Is The Largest Holder of Debt

China is the largest holder of US debt account for almost $900 billion in January. Not only are they making the products that the US buys, but they are also financing our government’s day-to-day activities. If China were to pull out of US treasuries and start investing elsewhere (which has begun), how does the US government finance it activities because they can only raise taxes so much on an already suffering consumer?

Who’s Manipulating Currencies?

Some of our elected officials claim that China is manipulating its currency and keeping it undervalued. The Chinese Yuan, which is pegged to the US Dollar, may be undervalued or could the US Dollar overvalued? What is in it for the US if the Yuan is undervalued? Yuan higher, US Dollar lower…China would have more money to buy discounted treasuries?

“It is the single biggest step we can take to promote U.S. job creation, particularly in the manufacturing sector. We plan to move forward with revamped legislation on this issue in the coming days,” said Senator Schumer.

Unless the currency is undervalued to the point that it would revalue the currency at 300 times what it’s currently at, I really don’t see it bringing jobs back to the US but rather inflating the prices on most of the (made in China) products we buy (look around, your probably staring at one now).

If the US government is starting a trade war over currency manipulation then maybe we should rethink some of the roles of the Federal Reserves. Coincidentally, this same organization manipulates the US Dollar through interest rates and the print more button.

Buy Gold

One of the safest and most popular ways to trade or protect your portfolio from inflation is investing in or trading gold. The easiest way to invest or trade gold is through the SPDR Gold Trust ETF (GLD). Looking at the chart below you can see the GLD has performed well gaining 60% over the last three years when compared to the dollar at which lost 6%. If you are looking for another way to trade gold, try looking at the Market Vectors Gold Miners ETF (GDX). Gold miners significantly increase their profits when inflation picks up; as gold moves up, mining companies profit margins expand.

Treasury Inflation-Protected Securities

Treasury Inflation Protected Securities are another way to trade inflation. ETFs like iShares Treasury Inflation-Protected Securities ETF (TIP) give you a real rate of return, do not expect to make a significant amount of money here but rather reserve the value of what you have. What happens when global inflation occurs? Try looking at global ETFs like SPDR DB International Government Inflation-Protected Bond ETF (WIP) track global inflation. Looking at the chart below again you can see TIP outperformed the dollar returning 16% while the dollar lost 6%.

Buy Commodities ETFs

Commodities are a great way to trade inflation. Commodities tend to move more rapidly than the other two ways mentioned above. Commodities ETFs like PowerShares DB Commodities Index ETF (DBC) have big price swings and should be traded and watched carefully. Buying into commodities at the wrong time can devastate a portfolio but when used right they can produce huge gains. You might want to buy the individual commodities like crude oil along with a gold ETF previously mentioned.

Whatever ETF or tracks you choose to use, do your research before getting into them. Make sure you have a good case for an increase in inflation. These ETFs will not do much good to you in a deflationary period.

The picture below was from CNBC on 1/4/2009:

Is there anything in the picture that is good news?

Back to the letter I received yesterday. The credit union that issued the card could no longer afford to give me such a low interest rate, which was a variable rate. The rate I was paying was below 6%; according to the credit union, this rate was no longer profitable for them because of the current economic conditions. It had nothing to do with members’ credit score. So they decide to change the terms to a minimum 8.9%. I thought the bailouts objective was to make money cheaper? Maybe my credit union has realized that money is getting too cheap and this is what caused the financial crisis to begin.

Today, GMAC Bank gets a $5 billion dollar bailout and decides that it can now offer 0% financing for 5 years on new vehicles and that it has lowed the acceptable credit score to 620. Is the government paying attention to any of this mess? Isn’t that what got us into the credit crisis in the first place? How is GMAC expecting to make a profit? They definitely aren’t going to make it off interest…so it has to be fees.

Why the government should take OUR money back.
Any bank right now that lowers their credit standards hasn’t learned their lesson. Why is 0% financing combined with lower credit standards not a good idea? If I give you a dollar and you pay me back a dollar, I have made $0 profit. Now, if I loan you that dollar again and you don’t pay it back, I have lost money. Could they survive on fees alone? Are they hoping that the current economy will force late payment fees? If the economy wasn’t losing jobs and was in good health this might not be a problem but how many people are there right now worried about losing their job any day?

I think the bailouts are just getting way out of hand. What do you think?

The Federal Reserve cuts rate to a record low of zero to 0.25%. Not only did the Federal Reserve make unexpected rate cut but also said it would “employ all available tools to promote the resumption of sustainable growth.” The markets reacted with a strong rally and the Dow ending over 350 points to the positive side for the day. Will this mark the bottom, are markets ready to turn, or just a one day reaction to news?

What changed today that was different from yesterday? Answer: money got cheaper…but was cheap money the problem to begin with? Cheap money is what got us where we are now but people don’t need cheap money; they need money…period. We need liquidity in the credit markets not discounted prices.

What is the Federal Reserve saying about the economy?

Is United States Dollar worth holding? Is Treasuries worth investing in? Personally, I would rather put my money in a high yield savings account rather than in treasuries. Savings accounts are always a safe place to put money, at least to the guaranteed FDIC limit currently at $250,000 per account; but there is a possibility that with treasuries you could lose money.

The Fed also stated that it would leave interest rates at “exceptionally low levels for some time.” This statement should not leave people thinking the economy is in a good position as it symbolizes that things are likely to either get worse or stay at current levels.  The Fed is running out of options as rates can’t go lower than zero; let’s hope they get something right soon!