Well folks. the U.S. stock market has certainly been on a roll, the Dow Jones Industrial Average hit record highs this week, Mergers and Acquisitions are happening at a torrid pace, Companies have lots of cash, interest rates are still relatively low, the Bond market is very strong and there is more liquidity out there that investment bankers are drowning in it. So will the good times keep on rolling? Well there is certainly a strong case for it, but there are some warning clouds and if you have stocks, bonds, RRSP (excluding GIC's) and/or real estate holdings, you should be aware of them.

Cloud #1; THE U.S. BOND MARKET

Right now, short term U.S. rates such as the 2yr U.S. Treasury notes are yielding more than the 30yr U.S. notes. When investors start seeing an inverted yield curve, a recession usually happens. If we get an economic slowown, corporate earnings will get hit and the stock market suffers. Bonds right now are pricing in two interest rate cuts from the U.S. Federal Reserve, and I am not sure why.

Although the Housing and Auto sector are weak, the rest of the economy is not exactly cooling off like a teenage boy in a cold shower after his first date. The Consumer sector is going strong, Oil is still above $60 a barrel, the Services sector is chugging ahead like a steam train and other commodity prices are holding steady.

If the U.S. Bond Market is wrong, and the U.S. Federal Reserve does not cut interest rates in 2007, the Bond market will take a hit sending a ripple throught the U.S. and Canadian economies. If inflation stays strong, then the Federal Reserve wil raise interest rates and the Bond Market will COLLAPSE. That will cause all these Mergers and Acquisitions to come to a halt, U.S. Companies will be forced to pay higher interest rates to finance any takeovers and liquidity will soon start to disappear. This will really hurt both Investment banks who are driven by Mergers and Acquistions and Retail banks who do a lot of mortgages.

Cloud #2 THE U.S. CONSUMER

Although I did note above that Consumer spending is strong, thats also a cause for concern. The U.S. consumer is now more in debt than ever have been, especially with mortgage debt. With all these Sub-Prime lenders giving mortgages to people who can't afford them, those poor lending practises will come home to roost. It will be a lot sooner if the U.S. Federal Reserve starts to raise rates. Over the past few months, it has been a rising tide of homeowners have gone into mortgage defaults and this has caused home prices to drop and debt levels to rise. Remember, the U.S. consumer represents 2/3 thirds of the U.S. economy, if they go, so do U.S. domestic corporate earnings.

Cloud #3 TOO MANY HAPPY INVESTMENT STRATEGISTS AND BANKERS

I start to get concerened when all these Money Managers are to think alike. You ever hear the saying "When the future looks brightest, its time to SELL!!!" Right now all these Mutual Fund and Hedge Fund Managers think that the market is in a Goldilocks scenario and are ignoring some big warning signs. These people move the markets, and I would hate to think what would happen if they start getting panicked at the same time, lets just say it would not be pretty, and if a lot of these Hedge Funds have larger positions that go against them, we would see an easy 20-25% off the market highs.

CONCLUSION

I am not saying that the market is going to crash tommorow folks, or that you should run out and sell all your mutual funds, bonds and stocks. You should always be invested in good companies, but one should be careful nowadays and stay away from risky investments.

I personally think that U.S. Federal Reserve will not cut interest rates for the first 6 months of 2007, and the Bond market will take a hit. Inflation will probably not rise dramatically from here, but it won't be coming down either. I bet there is a stong chance that the Federal Reserve does not raise or lower interest rates. Which would hurt the bond market, and a correction would occur somewhere in the 10-15% range in bonds. The Stock market might intially go down, but would recover.Large Cap stocks would hold up unless the U.S. economy ends up in a tail spin. The U.S. dollar would take a hit on the downside too, but thats time to be in Companies who generate a lot of revenues from abroad. Stocks like Mcdonalds, Altria (aka Phillp Morris, which I own shares in), General Electric and Coca Cola. Any correction or bear market year, would provide a GREAT opportunity to purchase excellent blue chips.

If the market does do well this year, I think Large Cap stocks will outperform the other investment classes, as a lot of money is pouring into this sector, and the S&P 500 will give a return around 10-12%, but I still believe the Bond Market will be in for a correction and would then stabilize.

Which stocks should an investor be in? Here is a list.

1) Altria (MO-NYSE) I have owned this stock for a lot of years, also known as Phillip Morris. I bought it when tobacco litigation was growing concern and I picked these shares up at $25 a share and the dividend yield was 10%. Today they trade just under $85 and you get a smoking 4% yield. Its a still a great buy, the company has diversified into the food sector, they generate a lot of cash and are very shareholder friendly in terms of dividend boosts and share buybacks. A lot of analysts think this stock will hit around $95.

2) General Electric (GE-NYSE). This is probably one of the best run companies in the world. They have a triple AAA credit rating, a juicy 3.1% dividend yield and an excellent management team. This stock is also a good indicator on the U.S. economy and they have a divisified industrial portfolio and they own NBC network. They sell goods to just about every country in the world and a fantastic product line up. This stock trades just over $36.

3) Oracle (ORCL-NASDAQ) I own shares of this company as well. This technology firm is one of the largest commercial software companies, they have a strong balance sheet, good growth prospects due to acquistions, favorable product appeal and the stock is well off its all time high of $46 during the technology bubble in 2000. Earnings are growing at 20% and the stock trades at fair value, if the technology sector starts to rev up again, these shares will trade at a premium as investors will look for growth stocks in a slowing economic environment. They trade around $18. I bought them at $19.

4) PFIZER (PFE-NYSE). I talked about this stock in great length in my last blog, and I will reiterate. They have other experimental drugs coming down the pipeline, lots of cash,a triple AAA credit rating and a juicy 3.8% yield. These shares trade at $25.56 and I purchased them at $24.57. Its a great time to buy this beaten up blue chip drug company.

5) BERKSHIRE HATHAWAY (BRK.B-NYSE) Ok I will admit this company's class B shares are not cheap at $3675.00 a share. But they are worth every penny. This company is the largest shareholder of Coca-Cola and it has larger positions in many other blue chips like American Express and Altria just too name a few. They also own GEICO insurance.The manager is of course Warren Buffet and his return to shareholders is nothing short of spectacular. The next stock I buy is this one. So much for my summer vacation.

Ok, thats it for now. If you want too, you can leave a comment, just click on Comments on the bottom of my blog. I would appreciate it.

Marko
trader7230@hotmail.com

Invest safely.