Paul Krugman's $2.9 Trillion Output Gap
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***Back in Time

***The $2.9 Trillion Gap

***Microsoft's Glitch

Fellow Investor,  

Seems like every day we dial the clock back another year or two. Friday, stocks closed at levels not seen since 2000. Yesterday, it was 1997. By the end of the week, we might be in yet another different decade.  

But I doubt it. 

I think there's little question that if you're buying quality stocks at these levels, you will be rewarded. We've discussed quite a few stocks in past issues of Daily Profit that should be good buys for at least a trade. 

And if you're interested in taking on a little extra risk for the chance at some outsized gains, you might consider LEAPS. LEAPS stands for Long-term Equity Anticipation Securities. They're options that are good for up to three years out. With the markets trading at such low levels, LEAPS could pay off handsomely. 

Just be careful of the volatility premium of any LEAPS you might consider. Volatility is extremely high right now, and you don't want to lose too much value to falling volatility as the market eventually rallies. 

In the next issue of Daily Profit I'll share with you my interview with LEAPS advisor Bryan Bottarelli who runs a service bringing in consistent gains on LEAPS investments. Be sure to check for that. 

*****I do want to point out that I have yet to "call bottom" on the stock market. And I won't until there are a few certain signs. However, I will say when I think a rally is coming, or if I think there's a drop coming.  

The current declines appear to be in relation to something we've talked about in the past, and that's how well stocks are priced for an extended recession. We felt pretty comfortable that stocks had priced in what happened last year. But what's to come… ah, that'd a different story. 

I really get the feeling that many investors, even the institutional ones, felt that enough stimulus and bank bailouts would provide some hope that things could improve. More and more, investors realize that recovery will be a gradual process. 

*****If you read the Barron's interview with Paul Krugman I included in yesterday's Daily Profit, you probably noticed that he referred to a $2.9 trillion output gap for the next 3-4 years. That's the crux of the matter. 

What he means is that there's a permanent 1%-2% drop in GDP for the next 4 years. That is output, measured in goods and services, that won't be made or rendered.  

That's significant. And clearly, there's no stimulus that can make up the difference. Nor should it be tried.  

Think of the artificial sources of capital that have fueled the US economy over the last decade. During the Internet boom, it was stock valuations. Then it was refis and mortgage backed securities. That represents trillions in income that simply does not, and can not, exist any longer.

Plus, we also have wealth destruction in the form of impaired assets. And I mean our personal assets here, like homes and investments, not some bank's exotic derivative instruments. And finally, there's high unemployment. 

And so, that's how Krugman arrives at his $2.9 trillion output gap. How can all that lost wealth possibly be made up by our wages and entrepreneurial endeavors?  

*****As a country, we have been living beyond our means. We will get out of debt. We will start saving again. And we will be the better for it. I completely disagree that our children will inherit massive debt. In fact, I expect they'll inherit a renewed respect for saving and hard work.

*****I ran across a couple humorous items yesterday. There was a report that a computer glitch at Microsoft caused it to overpay some recently laid off employees. A computer glitch? At Microsoft? That's rich.  

If it were me, Microsoft might get a return note that says, "Due to an administrative error, the extra money has been spent."

That's it for today...

Best regards,
Ian Wyatt

P.S. I've just recently launched my new small cap service called SmallCapInvestor PRO. It combines the very best of my Growth Report and Rising Star Stocks advisories services to bring you outstanding opportunities in the small cap space. The premise is simple: 1) find short term (1-3 months) double digit winners and 2) set up for longer term (12 months) triple digit winners. High quality small cap stocks can be bought for ridiculously low prices right now that can set you up for triple digit gains as we recover from this bear market. I know this because I did it before in 2001 - 2003 with Growth Report. We pulled in high triple, even quadruple, digit winners from the last recession. And I'm doing it all over again with SmallCapInvestor PRO.

I recently hosted an online video conference about the service and the sectors you should be in now. You can catch the encore presentation at www.SmallCapInvestor.tv. If you have a few minutes and you're interested in double and triple digit winners, I encourage you to check out the video.

Here's that link again: www.SmallCapInvestor.tv.





Posted 02-25-2009 9:35 AM by Ian Wyatt