Earlie from Earlie:
Well, here we are again, with the frequently nasty September/October period at hand. Do the markets swoon or do they ramp? Herewith a few modest observations as seen from Earlie's weed patch as we contemplate the coming autumn promenade..
- The damage done to investors in general has been far more widespread and significantly nastier than is generally understood. The majority of mutual funds have been holed at the waterline, pension assets have been eviserated, and above all else, many individual investors have been cratered. I have spent considerable time this summer digging into this situation and as bearish as I have been, the extent of the damage really shocked me. This damage has many implications, not the least of which is that, contrary to the baloney emanating from CNBS, there are few bucks on the sidelines and precious little desire on the part of their anxious owners to see those anaemic survivors spent on stocks. At the professional money manager level, there are serious worries about the losses, redemptions, and stocks in which some are "buried" (i.e., stock ownership that is recognized as being too large to allow selling without destroying current stock prices). At the retail level, while there is as yet, no real panic, nevertheless, there is also no real impetus to buy (hope, yes, but commitment, NO). Not well understood is the fact that MANY individual investors have been completely broken! At the brokerage houses, the environment is similar to that found at a wake. Lay-offs have been heavy, client suits are endemic, IPOs have become next to impossible to launch and "deals" are few and far between. This evolving landscape is important, especially for those who are inclined to play the Vaderian game. Yes, bear marker rallies can be violent and near vertical, but in this environment, they are unlikely to develop legs. Neither the cash nor the buyers are available to sustain them.
- We are now well into the second year of a true "profits implosion" across much of N. America. No matter how one choses to aggregate the profit numbers, in every case, those numbers are down big and showing no signs of rebounding (analysts' silly forecasts to the contrary). At the same time, corporations have taken on and are now encumbered with historic debt. As with our first observation, few investors seem to be aware of how important and how ugly this situation is. It is one thing to hump a balance sheet with bags of debt when sales are rising and profits are fat, as the SERVICING of that debt is possible. Unfortunately it is quite a different beast to deal with when sales are falling, and profits are non-existent. The phrase "when it rains, it pours" was probably born of such circumstances. Unfortunately, a large number of N. American companies are in just such dire straits and even more unfortunately, most are likely to trudge down the same dreary road to the bankruptcy courts. What is fascinating to me is that so few investors seem to recognize the point at which the assets of these derelicts really belong to the debt holders (in all but name). Consequently they continue to trade the stocks even as the company slides ever deeper into the debt trap and ever closer to a date with a judge. Too bad they don't do something as simple as peruse the prices at which the company's bonds are trading. If they did, surely they would balk at buying the stock of a company when the bonds trade at 30 cents on the dollar. Once again, these are new circumstances that have powerfully altered our investment environment...... and not for the better.
As I have noted many times in the past, lay-offs have enormous impact on our economy and on our investment circumstances. Among the many things that we need to be aware of is that lay-offs have NOT abated and that the economy's response to continuing lay-offs tends to be parabolic, not linear. Put another way, in the face of a fairly constant rate of lay-offs, the economy's reponse tends to be minor at first, indeed almost imperceptive. But as the lay-offs continue, the economy's response tends to accelerate and, as one might expect, it also overshoots to the extreme. We are now approaching the end of the second year of heavy lay-offs with little respite in sight. And in spite of the "forced feeding" of liquidity emanating from the FED, consumers are beginning to pull in their horns. As this continues (and it will), the response curve will steepen. Again, this is a very new item in our investment environment, and an item that weighs against being bullish.
- As one examines the various economic sectors, one is struck with how the ranks of the sectors that are still in good shape continue to shrink. Yes, auto sales have held up (although only as a result of pulling next year's sales into the current year through "zero percent financing"). And house sales continue at a hectic pace (although again, some tattiness is starting to show up) which holds up the durables numbers. And yes, the defense industry continues to hold its own. And while a few more sectors could also be added, the sectors that are in deep doo-doo are legion and far too lengthy to list. Airlines, trucking, shipping, air cargo, retail sales, computers, semis, optical, telecom, office real estate, farm implements, aerospace, taxis, software, consulting, fast foods, tourism,...agriculture,.... one could go on. Again, this is relatively new to our investment environment.
On the plus side, interest rates are historically low and the system is awash in liquidity. Unfortunately offsetting this, the US. buck is in trouble and the bond pits are in a frenzy. Gold is shaking off the strait jacket imposed upon it by central bankers and around the globe, deflation continues to slowly but surely gain new footholds. Again, new circumstances that must be considered.
So where does it leave us? For me, the equation has changed dramatically during this past year and currently supports a more aggressive shorting stance. Time will tell if this perspective is accurate.
Best, Earlie |
