The following is an interview I had with Capital Wave Forecast editor and former hedge fund manager Shah Gilani:
Q: What are the chances for a true crash?
Gilani: A potential for a crash always looms out there. Unless the Fed comes to the rescue, we could get what didn’t happen last year. Last year, a crash was staved off because of the QE2 announcements. Ironically, the market was down 256 points almost to the day last year. We’ll have to see if the Fed comes to the rescue this year. Unfortunately, we never know which card the Fed is playing. It’s like a game of Three-card Monte.
Q: What would happen if the Fed intervenes?
Gilani: The markets could take off if that happens. People might be thinking: I missed last year. It could be like hearing a starter pistol, and the train is the Fed with a handful of cash. So people would jump back in, and we could see a big pop in the market. If you’ve got the backing of the Fed, you jump in with both feet.
The market has gone up because of the monetary stimulus since February 2009. Where did that stimulus go? It didn’t go to building infrastructure. It was used to bail out the banks. The Fed gave the money to the banks so they could rebuild their balance sheets. The Fed wanted the banks to get healthy again. And where did all that short term money go? To the stock market! And to buying commodities. The Fed engineered a stock market recovery. The idea was to create confidence and improve investor sentiment.
Q: Is there a downside to QE3?
Gilani: The downside is if the Fed threw a party and no one came. The negative is if it doesn’t work.
Q: What strategies should you use?
Gilani: First, you should be nimble. Read economic data. Everyday it comes out, read it. Be quick on the trigger and get out. If the Fed makes a move, get out of that train and switch gears.
If you’re an investor, you have to be defensive. There is always time to make money and to get back in. It’s now a stock picker’s market. I want to be in stocks that have plenty of cash flow, has global reach, and supports a nice, fat dividend. I’m not looking for high flyers but stability and preservation of capital.
Q: What else should you buy?
Gilani: If you have money, apply it to strong, international companies with good dividend yields. I like Merck, Rathion, and Microsoft.
Q: Are you nervous about September and October?
Gilani: Always! Especially this September and October. If the Fed doesn’t come in soon, I’d be concerned if the economy doesn’t show better numbers, and if the global markets slow down and pull back.