Current Risks in the Stock Market

The article below will tell you why I am into alternative ways of generating sources of passive income rather than look to the Stock Market.


By Jorge Malo

If you pick up the newspaper or see the news on TV, you probably noted that the Dow Jones Index is making new highs almost everyday. Everybody is happy, and as soon as the Dow closed above 13.000 for the same time, some analyst started to talk about the index going to 14.000 in 2007. Remember the year 2000?

Probably the main difference between the year 2000 and 2007 is the excess liquidity that today exists in the markets around the World. That excess liquidity has to be invested somewhere, and since the US economy is still considered a safe haven in the World of investments, sounds like a good idea to invest in the stock market where you can expect higher returns than the 3% or 4% you can get on US Treasury Bonds or bank CDs. The problem with this theory is the risks you are talking by investing in the stock market of an economy that is growing only 1.3% and with inflation rate higher than what is comfortable for the FED.Investors are betting all their money on the possibility that the FED will lower interest rates, but they are discounting all other risks that are currently present in the economy. First of all, we can’t forget that the FED has a mandatory obligation of keeping inflation in check. Their responsibility is not the growth of the US economy. Of course they will try as much as possible to achieve both aspects of the economic cycle: lower inflation and moderate growth, and that is the reason they have not raise rates yet; even-though inflation keeps been higher than their comfortable standards of 2%. Based on this reality, it can be expected that rates won’t decrease during the rest of 2007, and probably they will stay the same.

On the other hand, you probably noticed that you are paying higher prices at the pump than in the past. Also, your grocery expenses are increasing. The FED takes into consideration core inflation for their decision making, which is inflation excluding energy and food. The problem is that 2/3 of the economic growth in the US is consumer based. You as a consumer have a fix salary that you use to pass from one month to the other. If your gasoline and groceries bill increase by for example 30%, where are you going to get the money from? Unless you are among the few Americans that spend less than their monthly income, then you will have to increase your credit card debt, or spend less in unnecessary items. Finally, lets don’t forget that in two months hurricane season starts in the US. I hope it does not happen, but if another hurricane hits the Gulf Coast, or gets even close, you can expect to have an average gasoline price in the US over $4.00. Don’t you think that will be inflationary?

As you can see, with the Dow Jones above 13,000, and the S&P 500 at about the same level it was in 2000 before the crash, investors are discounting any bad news or risks that the economy presents. As I stated at the beginning, the reason for this is the excess liquidity in the World. Too much money following a few assets. As an investor in this market, you should take into consideration the risks involved and either decreases your exposure to the US and World stock markets (I think that in today situation Cash is King), or hedge your positions using preferably Options over Futures in the major stock indexes.

Disclaimer: There is a risk of loosing money when investing in derivative products such as Futures and Options over Futures. Consult with your broker before investing in this market.

Below are the means by which I diversify myself from the current stock market. I was heavily involved a few months back. But not now…hope to use the methods below to generate enough cash for me to scoop up cheap and valuable assets when the economy goes down. The smart ones love a downturn, the dumb ones dont. :)

- The Rich Jerk - Builds knowledge in marketing leading to wealth

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