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How to Protect Your Portfolio from the US Fed Rear View Mirror Actions

Portfolio / Global Stock Markets Jun 03, 2008 - 09:01 AM GMT

By: Keith_Fitz-Gerald

Portfolio

Best Financial Markets Analysis ArticleThere's one thing you can almost always count on with the government: Coming late to the party.

The release of the U.S. Federal Reserve's minutes from the April 29 and 30 meeting of the Federal Open Market Committee (FOMC) included several “pronouncements,” none of which you're hearing from the mainstream press and all of which we here at Money Morning told you were coming months ago.


Four things to think about:

  1. The Fed's doom and gloom forecast of 0.3% to 1.2% gross domestic product (GDP) growth represent the FOMC's views from over a month ago. Since then, we've had a meager round of data showing that a recovery may be building and that there is, in fact, growth. First-quarter GDP was revised upward to 0.9%. And while that might not be as high as some would like to see, it's still growth… and right on schedule for a possible late-2008/early-2009 pickup.
  2. Investors who are looking to the Fed for guidance are driving with their rearview mirrors. The Fed's data is almost always delayed more than the markets, which means that the smart money has most decidedly and almost certainly priced in the Fed's “news” months ago. Smart investors have already been taking positions. In fact, that's what they have been doing since the March 17 lows. They're also waiting with baited breath for further deterioration in the Fed's next comments as a result of higher oil prices in recent days… so they can buy in at even better levels.
  3. All inflationary measures are rising and have been for over a year now… despite the fact that the Fed has apparently only just recently noticed inflation is rising faster than it would like. And it explains why commodities, some consumer durables and other traditional hiding places continue to defy all odds and rise despite record high valuations like oil, for example.
  4. The Fed isn't running the show and never has, despite what the media and most people seem to think. And “nowhere,” as legendary investor Jim Rogers pointed out when I talked with him recently at his home in Singapore, “does the Federal Reserve Act say the Fed is supposed to bailout Wall Street.” Which means that uninformed investors may be reading something into the Fed's actions that the Fed itself isn't charged with.

Federal Defense

Now here's what to do:

First, when the markets get sideways and uncertain, it's important to realize that having the proper portfolio structure will save the day - regardless of who's at the helm (big money) and who might think he's at the helm (Fed Chairman Ben S. Bernanke),

And by “structure,” we don't mean individual stocks or allocation. Instead, what you need is an assemblage of stocks concentrated on the trends of the time, such as energy and inflation, for example.

Traditional diversification, while better than nothing, is just a proxy for having no clue about how to select smart investments. It's like rearranging the deck chairs on the Titanic. It might look pretty, but it doesn't work when the entire market goes down at once, as so many investors found out between 2000 and 2002 and again recently.

Structure, on the other hand, is a deliberate attempt to manage risk. That's why famous investors like Berkshire Hathaway Inc. ( BRK.A , BRK.B ) Chairman Warren Buffett , George Soros , John Templeton and Jim Rogers concentrate their risks, rather than just spread their money around willy-nilly. [Editor's note: Click here to find out how you can obtain a free copy of Jim Rogers' new best seller, " A Bull in China ."]

Not only do certain sectors bounce faster but they also fall less. And those same sectors can kick off huge income as they go, which means that investors who “buy” into this argument are ahead of the game far sooner than those who don't.

Second, pay particular attention to unstoppable global trends. Then place money squarely in front of where they meet. This is not rocket science. For instance, the world's electrical systems are antiquated or nonexistent, which means they need to be updated and simply built in the first place to meet demand. Which is why there's an estimated $16 trillion behind the trend.

Other “unstoppable trends” include the emergence of China, inflation, energy, and even war, which, in a sad testimony to our times, is a growth industry.

Third, think like a plumber. A little water in the wrong part of your house can do a lot of damage, so it's important not to let it get out of control in the first place. We're not referring to micromanaging a longer-term portfolio here, but unless you're a day trader or even a swing trader, there's no reason to be constantly tweaking your portfolio in search of smaller profits when it's the bigger picture that matters.

News and Related Story Links:

By Keith Fitz-Gerald
Investment Director

Money Morning/The Money Map Report

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Keith Fitz-Gerald Archive

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Comments

Chris
03 Jun 08, 14:41
Elaborate on Federal Defense

While your article on "Federal Defense" was interesting and made sense you never discussed what are the specific themes and companies in that structure. It was all generalities with no substance. Can you please elaborate?


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