October 25, 2009

Capital Gains/Dividends/The New Normal

While I'm mostly a fan of dividends  - this week I've turned over to capital gains!  Of course, there is some risks involved because when one is investing for capital gains, there is always the chance that you could get a capital loss!  I usually love investing for dividends because there is not much chance for loss, and there is a monthly or quarterly check in the mail from a company that I've invested with.  So one may ask - why turn to capital gains this week?  Well, my reason is simple - MONEY!  Or maybe a little greed....  I'll let you decide. 

Stocks are still very low considering the downturn of the economy - so there are still undervalued companies out there that are ripe for the picking...and profiting.  This week I've placed a small wager on Sprint/Nextel as they gear up to release their earnings this Thursday.  I think this company has the potential to beat analyst's estimates....but we will find out if I'm wrong or not.  If I am right, then there will be a nice reward....if not, then a penalty to pay.  Which is why I normally do not invest for capital gains - but I consider myself a well rounded investor and if I'm wrong then it will be a lesson learned.

Everyone is waiting for the economy to return to "normal" because we are still not where we were when the economy was at its highest in 2007.  Nevertheless, there are talks about the economy being in a "new normal" where it will be more difficult to predict where the market is heading and it will be more volatile.  I think the economy is already where it needs to be given that the highs of the 2007 credit era was inflated due to excessive lending of loans with a lack of financial responsibility to verify the backgrounds of people applying for credit. 

The Dow is above 10,000.  The S&P is above 1,000.  The recession is over and the American economy is doing OK, since 80% of companies have posted 3rd quarter profits already.  When companies continue to post profits, it is an indication that consumers are beginning to spend - and this indicates that companies will eventually begin to hire some new talent to keep up with demand.

Our next horizon is the potential inflation ahead - the government has been the biggest spender during the recession, and has printed hundreds of billions of dollars to keep the economy "afloat"...  So a potential area for investing will be commodities, because commodities increase as inflation increases...  So investing in oil, coal, corn, wheat, etc.  are good alternatives to make money during inflationary periods.  

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