There are a lot of uncertainties permeating the market right now, not the least of which is healthcare reform. Will that reform entail a public option that could add $1 trillion to the deficit?  How is reform going to be financed?  And is it going to mean higher costs for employers across the board, or just the healthcare insurers?

Investing is made infinitely more difficult when 18% of U.S. gross domestic product (GDP) is hanging in the balance.

And you still have to consider:

• That unemployment is likely to keep rising, perhaps over 10%.
• That the U.S. Federal Reserve’s policy of quantitative easing is slowing down.
• That there is almost certainly a second wave of home foreclosures on top of the current commercial real estate epidemic.
• And that retail sales are still a long way from recovery.

There is also reason to believe that the U.S. dollar will continue to be weak, though it probably won’t sell off precipitously.

The U.S. dollar has weekend against the Euro lately, having fallen 0.8% Friday.  Technically speaking the chart shows a traditional “cup and handle” formation that could lead to an acceleration of the dollar’s downward trend.  Gold prices, up about 13% Friday, confirm this trend and could soon break through the $1000/oz resistance.

Fundamentally, if the economy – encumbered by high unemployment and a relapse of the housing market – does not pick up the dollar could be further imperiled.

Weakness in the dollar will also be affected by the Fed’s withdrawal of liquidity, which is likely to proceed at a gradual pace.

Finally, diversification away from the dollar among the world’s central banks is taking place, albeit at a slower pace than many analysts have suggested, and that too, is weakening the dollar.

Let’s concede that there is no currency that could supplant the dollar as the world’s major reserve currency. So, it’s unlikely that the world’s central banks will simply abandon the dollar anytime soon. However, we must also acknowledge that a reduction in the weightings of the U.S. dollar within central bank reserves is already underway.

An Aug. 14 article by BNP Paribas currency strategist Ian Stannard in Euromoney recently described this gradual shift in currency reserves.  The article noted that only 62.5% of global currency reserves are in U.S. dollars, down from about 66% in 2005.

So I do not anticipate a sudden shift in central bank reserves, but rather a continuation of the measured restructuring we’ve seen so far. Thus, the slow weakening trend in the U.S. dollar is likely to continue.

So, in this very uncertain investment scenario, I prefer to go for more secure returns in bonds.  And we can achieve great diversification at a cheap cost with the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD).

For starters, its weighted average coupon of 6.26% offers a current yield slightly north of 6% at today’s prices.  Investors are assuming interest rate risk, which means that if interest rates climb, the value of the bond has to come down.  But in the short term, there is no immediate threat of inflation.

Looking at the major holdings of the fund – which has no single position that accounts for more than 1.26% of its total holdings – I see some names that have demonstrated continued stability and others that have shown recent signs of improvement, such as American Express Co. (NYSE: AXP).  So I do not expect any major credit spread hiccup here.  I certainly do not see any hiccup that a 6.26% coupon would not compensate for.

For an additional hedge against dollar weakness, I suggest you revisit my June 8 recommendation of the iShares SPDR Gold Trust ETF (NYSE: GLD). You may also consider buying a bit of the PowerShares DB US Dollar Index Bearish (NYSE: UDN) fund.  Do not go overboard. Err on being light, rather than heavy on hedging, since timing currency moves is very difficult.

Recommendation: buy iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) at market.  Consider hedging part of the US dollar risk by buying the iShares SPDR Gold Trust ETF (NYSE: GLD) and PowerShares DB US Dollar Index Bearish (NYSE: UDN). Both funds should account for a fraction of your position.  Have a 5% stop loss on UDN (**).

Source: Buy, Sell or Hold: The iShares iBoxx $ Investment Grade Corporate Bond Fund

Greetings from Delray Beach, Florida.I’m writing to you this morning from a beach house that sits about two blocks from the ocean.

The windows in my little red-tiled bungalow are filled with palm trees; all the furniture is made of wicker (or maybe bamboo).

It might sound like a vacation, but it isn’t. (Then again, it isn’t exactly tough being asked to stay in places like this.) On Friday, it’s back to Nevada, and then more traveling shortly after that.

When you’re used to going 110 miles an hour almost all the time, as I am, it sometimes takes a change in routine to make you realize you’re exhausted. That realization happened for me on Wednesday, after a day’s worth of plane travel.

Taking time out to walk along the beach, or do a little hiking in the mountains, or even something as simple as finding a quiet spot in the park and stretching out on a blanket is no small thing. Whenever I forget how important it is to step back and relax, it’s only a matter of time before I’m rudely reminded again.

Occupational Hazards

It’s vital to be able to “step back” from life once in a while. The same is true in business, and it’s true in markets, too. For traders and investors who watch the markets closely — who follow all the zigs and zags — it’s very easy to get overly caught up in the game.

I was reminded of this, too, by an excellent quote from the latest issue of Grant’s Interest Rate Observer. (Grant’s is one of my favorite reads; definitely an acquired taste, though.) Here it is:

Professionals in the change-anticipation field fare little better than the amateurs at divining the big turns, possibly because the experts overreact to the little turns. They labor under the occupational hazard of the itchy trigger finger.

That statement is so, so true. I think of the trouble as being “too clever by half.”

When it comes to exploiting the “big turns,” there’s an aspect of humility plus wisdom that’s hard to pin down. It takes humility to spot something big and obvious without getting too fancy about it, or getting too clever in the analysis. It also takes humility to take a shot and be wrong, maybe more than once. And it takes wisdom to put all the pieces together the right way.

The Importance of Sitting Tight

The other hard thing is that, most of the time, the biggest profits aren’t in catching the turn anyway. Real fortunes are made with traits like patience and grit and fortitude… sticking to one’s guns and not getting put off by setbacks.

Jesse Livermore put this so well in Reminiscences, he is worth quoting at length here. (Still planning to get you that report of selected quotes, by the way.)

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at their very level which should show the greatest profit. And their experience invariably matched mine — that is, they made no real money out of it.

Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.

The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.

The Weekly Perspective

One of the ways I try to “step back” on a regular basis — when I don’t have time to crash for 10 hours and skip the 24-hour news cycle in an ocean beach house, that is — is by looking at weekly charts.

There is just something great about a weekly chart. Because each bar represents five trading days, and because the full width of the chart covers months or even years, the day-to-day “noise” just gets filtered out.

Looking at nothing but short-term charts can make you feel like the white rabbit from Alice in Wonderland after a while. I’m late! I’m late, for a very important trade! Weekly charts are the cure for that malady. If you can remember that the biggest and strongest trends are more like slow-moving glaciers than zippy little sports cars, you’ll probably be better off.

The short-term advice seems to be “buy tech and buy financials.” Pundits are newly excited by glimmers of strength in beaten-up names like AIG (AIG:NYSE) and Citigroup (C:NYSE). Good news from Google has also helped the tech sector get some oomph.

To go with all this, the dollar has rallied a little in the past few days. The thought — or rather hope, at this point — is that the Fed may be close to finished cutting rates, and will try out some tentatively hawkish language in their meeting next week.

You might say that fear is taking a breather here. Precious metals and treasuries, two natural go-to areas when anxiety levels are high, are selling off in result.

To which I say, “Bah, Humbug. A pox on your weenie breakouts and short-term jitters.”

Be Wary of False Dawns

There’s nothing wrong with a little change in the weather, of course. Markets have to breathe in and out; nothing goes straight up or straight down. (Not forever, at any rate.)

The trouble with bear market rallies, though, is that the optimists are often far too eager to declare victory. Every lull in the action is a hint that the worst could be over. Every uptick that lasts for more than two trading days is a sign that the worst has passed.

Take a look at the Russell 2K iShares, for example. While the big indexes are rallying, the small-stock universe is still struggling. The green line represents the Russell’s 200-day moving average; we’re still well below that. Small-cap companies are a better bellwether for how things are going, in my opinion, because small business is closer to the pain. The little guy is feeling $3.50 a gallon gasoline a lot more than some behemoth like Microsoft.

Speaking of behemoths, the large-cap indexes are closer to their 200-day moving average thresholds, and in some cases flirting with a crossover. A permabull might look at that and say “Yep, we’re going to take that maginot line any day now. Just a matter of time!” Whereas the flexible trader merely raises an eyebrow and notes it might be time to play Whack-a-Mole again soon.

The problem with the recent shiny-happy talk is that bear market rallies often last long enough to pull in the foolish or the over-eager… and then promptly fail when the max number of buyers have been roped in.

That’s why, in an environment like this, it makes more sense to look at the big indexes with a skeptical trading eye, as opposed to a hopeful investing eye. I forget who said it first — maybe Jesse Livermore? — but it’s quite true that “hope is not a strategy.”

Why Ask Why

Remember that awful beer slogan, “Why ask why, try Bud Dry?” (To be honest, I wish that I didn’t.)

That’s the phrase that comes to mind here. Those who want to be cheery “just because” are shrugging their shoulders and saying “Why ask why?” To which the answer is, “Because it’s better to work with logic than emotion, genius.”

There’s nothing wrong with pessimism or optimism per se. It’s just more helpful when opinion is attached to fact… when there is a logical analysis of some kind.

Take this newfound hope that the worst is over, for example. Does it really make sense to think that there’s nothing more to come? That consumers had to go through just a wee little bit of belt-tightening, and now, even as food and gas prices are going through the roof and mortgage resets are coming through in waves, everything will soon be okay again?

Does it really make sense to think — or to hope, rather — that the worst of the financial news is baked in the cake, even as the smaller regional banks around the country are preparing to hit us with a fresh stream of write-downs and failures?

And most of all, is it really sane to pretend that the “Austrian End Game” — this cycle of boom and bust we have been working through for years and years and years — is just going to clear itself up now, and step quietly aside with no finale or fanfare?

It’s all well and good to be flexible, to go long or short for a quick trade. But it’s important to always have reason and logic behind one’s actions.

Smart traders adhere to this general rule of thumb — even the purely technical ones. If you’re going long because of a short-term breakout, fine. That’s your reason for being long. But without firmer grounding, that isn’t reason to stay long if the breakout fails. It isn’t reason to suddenly start feeling all shiny and happy about a situation without logic behind your change in sentiment.