Current Investment Climate Calls for Extreme Caution
Wednesday, March 12th, 2008
By George Leong, B.Comm. for Profit Confidential
Oil surged over $108.00 a barrel on Monday and this generated increased fears amongst investors concerning its negative impact on the U.S. economy. As I said in a recent commentary, oil has a real chance to break above $110.00 a barrel in the near term, although there could be some profit taking given the overbought conditions.
Add in the troubled housing market and declining housing wealth and you need to be really concerned. As I have commented in previous columns, the reduction in home wealth could cause a “poverty effect” to occur that makes homeowners feel they are less secure. This in effect would negatively impact consumer spending going forward. There is still no evidence of a near-term reversal in the housing market. Some pundits have already said that the housing market is in its own recession.
Recently, a report came out that the percentage of equity held in homes by Americans declined to below 50% for the first time since 1945, when records were first kept, according to the Federal Reserve. This is a concern, as debt in homes on average is now greater than the equity. The percentage of debt to equity could rise further if housing prices decline.
According to Moody’s, estimates call for about 10.3% of houses to have zero or negative equity by the end of March, which will clearly impact consumer spending.
The reality is that you need to be concerned about the negative implications of a weakening housing market that shows little evidence of turning around in the near term. The economy is under the real threat of a recession this year and this will impact stocks, especially cyclical companies and small-cap stocks.
Prudence would be a good strategy in this investing climate. Taking unnecessary risk can leave you vulnerable to selling and force you to the sidelines.
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
