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Five scary investment scenarios (and the likelihood that they will occur)

The goblins still still lurk despite the massive October rally

Monday, October 31, 2011 – 12:25 AM by Guest Columnist Rob Isbitts
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Ron Isbitts: October’s rally was nice, but, as they say, dead cats do bounce.

Brooke’s Note: As chief investment officer of Ron Carson’s big RIA, Carson Wealth Management, Rob Isbitts is paid to see ghosts before they become embodied as bears. Here are the scenarios that have him nervous despite all the revelry of a rocketing rally.

October is often a scary month for investors. This year…not so much. Yet despite the treat that the first month of this year’s fourth quarter brought us, there are still some tricks waiting to be played on investors. And like Charlie Brown in the classic Peanuts Halloween TV special, investors had better look carefully in their baskets, er, portfolios this Halloween. October’s rally was nice, but, as they say, dead cats do bounce (OK, had to get one piece of gruesome imagery in there – this is a Halloween story, after all).

So, here are my five top choices for scenarios investors should be scared of, if they do not have a true plan to defend against these frightening possibilities:

1. Europe really IS that bad

The European Union has been declared dead and then come back to life more often than Freddie Krueger in the Nightmare on Elm Street movies. The good news in Europe is that there always seems to be another day, and as opposed to the U.S. Federal Reserve, the Europeans acknowledge that inflation could be a huge problem. They were willing to raise interest rates earlier this year to choke off some of that hyper-inflation potential. The thing is, they have no real long-term solution for the Greek, Italian, Portuguese, and Spanish debt load.

The Irish have something going for them – they are huge exporters, and there is reason to believe that Ireland will shine again. But before you think that the PIIGS are about to lose an “I” (yes, that is a Halloween/slasher film reference), keep this in mind: France is on its way to a debt downgrade, and while they stand next to Germany on the leadership podium at the endless series of Euro-debt crisis confabs, the fact is that France is getting closer to the weak sisters of Europe and further from German-like economic strength all the time. Is France the new “F” in PIIGS? (Can we print that? And even if we could, could you say it?)

2. The US recession continues…or at least it seems like it

Note that I did not say a new recession has started. Look, not only is “headline” unemployment running at 9.1% as of the September report, the U-6 unemployment figure, which includes the massive numbers of underemployed and long-term unemployed, is back up to 16.5%. When one out of six Americans who want to be fully employed is not, that is NOT an economic expansion. As the gap between the wealthy and the rest grows and grows, we are reminded that the Great Recession of 2008 did not end, it simply calmed down. That leads to the next big, scary issue:

3. The new breed of 'professional protesters’ gets truly organized

Occupy Wall Street may have looked like an elaborate piece of performance art featuring a band of modern-day hippies to many a few weeks ago. But keep this in mind: The rolls of the unemployed, many of whom are driving these groups around the world, are a powerful force because there are so many of them. While it’s a politically incorrect statement, I think there is a potential analogy between the beginnings of this grassroots movement, and the history of how Al Qaeda went from a loose band of frustrated factions to Public Enemy No. 1 and the biggest threat to our way of life since the Cold War.

The protestor groups have some very valid concerns and, as their numbers swell, have the potential to be a strong voting block. That’s great if they force change where needed (D.C., Big Wall Street, etc.) But it’s the collateral damage I am worried about. Specifically, I believe that long-term unemployment is at the root of our current global economic problems. It suppresses economic demand for goods and services (yes, Rolls Royce is still flying high, but what about the rest of the population?) That reduced demand causes industry to pull back production plans. Why fire up the factories if you are just going to end up with a lot of excess inventory? That, in turn, crimps consumer confidence. And consumer and business confidence are what drives economic growth. Confidence was a big part of Hannibal Lechter’s success too, but let’s move on to:

4. What if China gets really angry?

Where does an 800 pound gorilla sit? Anywhere he wants. Where does a country with 1.3 billion people and a lot of our bonds in its portfolio sit? On us, until we yell “Uncle!” It’s fashionable in D.C. and elsewhere to bash the Chinese for their suppressive human rights policies and certain business practices. But this is what built up while consumers and governments in the developed world were fighting over Tickle Me Elmo’s, iPhones for our eight-year-olds and flipping houses for a living. Meanwhile, the Chinese and another billion-plus people in India are taking a run at Westernization…and economic supremacy. The good news is that we will service their needs through our corporations, which will play a major role in feeding and entertaining the population in areas formerly known as the “Third World.” The bad news is that in the long run, this could become our primary role in the global economy, because our economy will be locked into slow-growth mode for the foreseeable future.

5. The global stock market ignores the previous four scenarios for now, and goes on its own bear-killing-spree

Be afraid of this one only if you are a stock market bear today. When I started in this business 25 years ago, there were no high-frequency traders, a “facsimile” machine was considered high tech, and financial advice did not come with sound effects through my TV. It’s a different market environment, for sure. In the short-term, prices can be moved dramatically by anything, and by the opposite of that anything the following day. Over, say a three-year period, the investment markets typically reflect a more rational assessment of how the world really is.

But investors are largely out of sync with that, and this misalignment of their true goals with their evaluation horizon of their investments makes the stock market look like a casino at times. I strongly believe this is largely due to a self-fulfilling prophesy on the part of investors, some in the financial media, and, yes, even some in the financial advisory business. So, more than ever, even if you think the world markets are one big Halloween nightmare, you must still allow for the possibility that the market won’t care about that for a while. It makes it tougher to sooth investor emotions in the short run, but if you can do it effectively, and extend your clients’ time horizons when all around you are shortening theirs, you will escape any market monsters that threaten your practice.

Happy Halloween!

Rob Isbitts is the Chief Investment Strategist of Carson Wealth Management Group and Chief Investment Officer of CWM, LLC, Carson Wealth’s affiliated registered investment advisor. With over 25 years of industry experience, Rob oversees investment strategy, asset allocation, security selection, and investment research for CWM, LLC and provides asset allocation and model portfolio research and recommendations. Investment advisory services are offered through CWM, LLC, a registered investment advisor. The S&P 500 is an unmanaged index that cannot be invested in directly. Past performance is not a guarantee of future returns. All financial figures quoted are taken from sources believed to be accurate though their accuracy cannot be guaranteed. The opinions expressed in this article were of a general and educational purpose only and should not be relied upon as investment or financial advice. For advice concerning your own unique situation please see your professional advisor. No investment strategy can assure success or protection of profits as investments are inherently risky and subject to market volatility.



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