U.S. Economy Is Running On Empty

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<TD style=”PADDING-RIGHT: 5px; PADDING-LEFT: 5px; PADDING-BOTTOM: 5px; PADDING-TOP: 5px; BACKGROUND-COLOR: #dddddd”><IMG height=211 alt=”Tony Sagami” src=”http://images.moneyandmarkets.com/1076/tony-sagami.jpg” width=150></TD></TR></TBODY></TABLE>
The first car I ever owned was a 1963 Ford Falcon. It was round, ugly and slow … and it took me two summers of hard work on my father’s vegetable farm to save the $100 to buy it.
I then stupidly used even more of my hard-earned money to doll it up. Boy, was that a mistake because no matter what I did to it, it was still a round, ugly, and slow car.
One year later, I traded up to a 1968 Chevy Chevelle SS. It was everything a hot rod was supposed to be: sleek, loud, and fast … very fast! Man, I loved that car. Unfortunately, I had to sell it to pay for college.
What’s this got to do with investing? Well, right now, when I look at the U.S. economy, I see a 1963 Ford Falcon.
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<TD style=”PADDING-RIGHT: 5px; PADDING-LEFT: 5px; PADDING-BOTTOM: 5px; PADDING-TOP: 5px; BACKGROUND-COLOR: #dddddd”><IMG height=263 alt=”Which would you rather drive — the sleek and fast vehicle or the slow and ugly?” src=”http://images.moneyandmarkets.com/1076/Tony-Cars.jpg” width=250></TD></TR>
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<TD>Which would you rather drive — the sleek and fast vehicle or the slow and ugly?</TD></TR></TBODY></TABLE>
Firing On No Cylinders
Our economy is slowing and there is no shortage of culprits to point fingers at: $4 gasoline, collapsing home prices, the burgeoning credit crunch, rising inflation, massive budget/trade deficits, Fannie Mae, Ben Bernanke, the war in Iraq, or even the uncertainty surrounding the Presidential election.
That’s bad, but here’s the most blaring warning signal I’ve seen: Even though stock prices have been under pressure, profits at American companies have fallen so fast that the average S&P 500 stock is now selling for very pricey 25 times 2008 earnings.
Yup, 25 times earnings. That, by the way, is the most expensive that U.S. stocks have been since 2000.
And now that the steroid shot of refund checks has worn off, I expect our economy to get even worse. Last week’s announcement that the unemployment rate jumped to 6.1% is pretty strong evidence.
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<TD style=”PADDING-RIGHT: 5px; PADDING-LEFT: 5px; PADDING-BOTTOM: 5px; PADDING-TOP: 5px; BACKGROUND-COLOR: #dddddd”><IMG height=181 alt=”U.S. stocks are down — and heading lower.” src=”http://images.moneyandmarkets.com/1076/Down-Markets.jpg” width=275></TD></TR>
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<TD>U.S. stocks are down — and heading lower.</TD></TR></TBODY></TABLE>
Four Ways To Keep Your Wheels On The Road
I’ll give it to you straight — I think the U.S. stock market is headed lower. A lot lower. And I believe that investors have four options to prepare their portfolios for the Dow Jones falling even further:
#1. Do nothing: If you think I am just dead wrong or have a very long-time horizon and a truly iron-lined stomach, you could choose to do nothing and ride out a bear market. In that case, a do-nothing, buy-and-hold strategy might work for you. 
I, however, am not in that camp. Why would I want to watch my portfolio shrink in value for months or perhaps even years when I can steer away from the danger before it happens?
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#2. Trim back your stock holdings right now: From time to time, you should take a look at how much of your money is allocated to each of the major investment categories — stocks, bonds, gold, real estate, natural resources, and others.
Whether or not you keep a formal target, you might consider decreasing the amount you have invested in stocks. You could then put the proceeds into something super safe like cold, hard cash.
Doing this will protect your wealth as the market goes down. Plus, you’ll have money on the sidelines when opportunities present themselves down the line. The only negative is that money market and T-bills rates are very low. 
#3. Use defensive measures: If you want to stay invested as long as possible, but still want to avoid a downturn, you should employ some sort of defensive strategy such as market timing or the use of protective stop losses.
To time the market, I personally use momentum and moving averages. They don’t help me predict the future, but they sure as heck do a good job of telling me what’s going on and helping me discipline my trading. With protective stop losses, you give your broker a price — below the current price — at which you’d like your shares to be sold. If the stock falls to or through that price, it should trigger an automatic order from your broker to sell the stock at the market.
#4. Hop on a faster ride: Depending on how much risk you can handle, one of the first three methods might work for you. However, in my book, the very best way to protect your portfolio is get out of the slow-growing, vulnerable U.S. market and into a high-growth international market.
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<TD style=”PADDING-RIGHT: 5px; PADDING-LEFT: 5px; PADDING-BOTTOM: 5px; PADDING-TOP: 5px; BACKGROUND-COLOR: #dddddd”><IMG height=207 alt=”The Chinese economy is on track for its sixth consecutive year of double-digit growth.” src=”http://images.moneyandmarkets.com/1076/Asian-Growth.jpg” width=275></TD></TR>
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<TD>The Chinese economy is on track for its sixth consecutive year of double-digit growth.</TD></TR></TBODY></TABLE>
For example, the Chinese economy is moving like my ’68 Chevelle SS. It grew by 10.4% in the first half of this year and is on track for its sixth consecutive year of double-digit growth.
Here’s my simple, two-part way to look at China and the rest of Asia.
Part 1: Everyone agrees that stock prices follow corporate earnings. You show me a company that is growing its profits and I’ll show you a stock that is going up in value.
Part 2: Show me an economy that is growing and I’ll show you a country where corporate profits are growing.
As long as the Chinese economy is booming, you can expect profits at Chinese companies to keep growing. So ditch the Falcon and hop into a Chevelle.
Best wishes,
Tony
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U.S. Thu 5/24/12, 5:16pm
Index	Last	Change


NASDAQ	2,839	-10.7

S&P 500	1,321	+1.8


Europe Thu 5/24/12, 11:51am
Index	Last	Change
FTSE 100	5,350	+83.6

CAC 40	3,038	+35.0

DAX	6,316	+30.1


Asia Fri 5/25/12, 11:12pm
Index	Last	Change
HANG SENG	18,628	-38.2

NIKKEI 225	8,564	+0.3

CSI 300	2,590	-4.9

U.S. Economy Is Running On Empty

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