Kevin Woghiren

You’d think this was Pamplona, Spain but no, that rumbling sound you hear in the equity markets is the sound of optimism in the form of investors shopping frenetically for bargain stocks. The recent announcement by the Federal Reserve Board and the Obama Administration to improve liquidity in the U.S. economy by buying up long term U.S. debt securities and toxic assets from the private sector is the cause of this. Most critics will argue that this will only increase America’s economic problems, but I say yes and no. Yes, because this lowers the dollar’s value and increases inflation and the public debt; no, because we avoid deflation, stimulate spending, and not have to fully rely on foreign governments to buy up our debt. Essentially, the Federal Reserve is printing more money (monetary policy) instead of the government using taxpayers’ money (fiscal policy) to improve the status quo.

With this action by the government, I can now declare with confidence that the fear is out of the markets. But don’t confuse fear with uncertainty. It took about a year for economists to confirm that the U.S. economy was in a recession and thankfully I do not think we have to wait for another year to hear that we are in a depression because, quite frankly, I think we just avoided one.

However, with the fear gone, due to the expected extra liquidity in banks, I still think that uncertainty will continue to linger on and high volatility in the markets will remain. April and May are two key months that will set the tone for the remainder of the year. Key reports that come out in those two months are US Trade balance data (Apr 9), the 2009 Quarter 1 GDP report (Apr 29), and unemployment data (May 8). If all these reports are able to meet or beat analysts’ expectations, I believe that the uncertainty in the markets will substantially decrease and that consumer confidence will begin to regain its footing.

So, have we reached a bottom or are we near one? My answer: Sort of. Although, I do not prefer using stock indices to represent the U.S. economy or it’s future performance, I will use the Dow Jones Industrial Average for tradition’s sake. With that being said, I am going to say that we are near a bottom and predict the range of 6400-7000 as the bottom for the Dow Jones Industrial Average; the S&P 500 is a harder read since it fell too fast for my comfort in 2008. The caveat: this all depends on actions taken towards improving world trade and how soon the Federal Reserve’s plan actually gets to the private sector, specifically, small businesses and consumers.

My advice to investors in 2009:

Short term investors should buy up bargain stocks with attractive dividend yields to counter higher capital gains tax.

Long term investors (5+ years) should buy up both dividend yielding  and non dividend yielding bargain stocks to benefit from a lower capital gains tax and/or high dividend payout.

“Operations in Iraq and Afghanistan and the war on terrorism have reduced the pace of military transformation and have revealed our lack of preparation for defensive and stability operations. This Administration has overextended our military” were the words spoken by the then President-elect Barack Obama in regards to America’s costly and prolonged war fronts. Soon after winning the presidency, the Obama Administration outlined an exit strategy out of Iraq to be placed in full effect as of August 2010. Living up to his promise of improved political relations with the international community from his presidential campaign, President Obama has been able to set a deadline for the conclusion of the Iraq War, begin constructive dialogue with Syria, Russia, and Cuba, and most recently, allude to possible negotiations with the Taliban (or Taleban) in Afghanistan. Yes, you read correctly…negotiate with terrorists!

After the Pakistani government negotiated a truce with the Taliban in February of this year, the outcry from the international community was one of disappointment and a lost hope for the innocent civilians, mostly the women and young girls, living in the Swat valley of Pakistan. If the Obama Administration does proceed with finding a middle ground with the Taliban and ending America’s occupation of Afghanistan earlier than suspected, I think that an outcry of disappointment  from the international community would be unwarranted. The reason being that the United States of America is not the governing body in Afghanistan. The Obama Administration and its allies know that Afghanistan contains a complex and eclectic collection of political factions and tribes and winning any type of war there would be best handled via diplomacy rather than military force. Call it what you will, but this is in no way an act of cowardice, but rather a wise move by the Obama Administration.

I believe that the occupations of Afghanistan and Iraq should conclude at the same time next year but America’s support for both the Iraqi and the Afghan governments should continue to strengthen in order for both governments to effectively fend off insurgents. America’s lack of a strong military presence in both countries by August 2010 will not necessarily equate to a resurgence of insurgency. President Obama has a greater problem at hand in Afghanistan than the Taliban; his Administration risks further weakening ties with Afghan President Hamid Karzai’s government if the occupation is to continue. History reminds us that the Afghans do not like military occupations and America’s current occupation risks being compared to the Soviet Union’s 10 year failure there in the 1980’s. The best route to long term success against the Taliban in Afghanistan is to exit the country after successful negotiations with some of the moderate tribes there and assist Afghan President Karzai with military intelligence and hardware. What can not happen is Afghan President Karzai negotiating  a truce with the radical wing of the Taliban and making the same mistake as Pakistan.