Guys, sorry to come off like the "voice of doom", but I think we are in a situation where if we do manage to scrape by it will be a very near thing.
re: bargains. I would disagree with you somewhat. There is perhaps 70% of the entire market which could be considered bargains at today's levels if (again big if) nothing else happens that derails the long term economic picture. The media, financial gurus and the public is totally focused on the top 50 of the S&P. I can walk down through my portfolio and come away with probably 10 names that are "bargains" relative to what I think they should be at. The problem is they are likely to get slammed with the continued collapse of the larger caps.
re: interest rates. The curves are currently inverted and it is not really a function of our govt's propensity of issuing short term interest paper vs. long term paper just so they would look good. Rubin started to do this right around the time that he took over and after Benson kept talking about not defending the dollar. It also post dates the S&L bailout and it was the correct thing to do. The reason it was the correct thing to do is it allowed you to moneterize a larger fraction of the debt at a time when you could see via demographic trends that the demand for money was going to decrease. They raised taxes to lessen the demand for money by the US government and they used foreign money which flowed here once the dollar started to recover from the climatic lows to finance the debt. In a nutshell, that is why the govt is making out by issuing more short term debt vs. long term debt. Remember the screams about how they were bankrupting the country by issuing the short term paper vs. long term bonds and how it was a sham? Actually in this case they were very smart, acknowledging they were in a cycle where the US would see lower interest rates going toward "historic norms" near the 3-4% level and setting a tax policy to accentuate the positives of the cycle. I don't see any reason to re-issue 30 year paper until we reach those lows again (circa 2003-7).
So why is the yield curve inverted? Safety. If you are from overseas and looking to lock up a relatively good interest rate and hedge against your currency declines, the instrument of choice is the 30 year US government bond. Simple supply (low) and demand (high) dictates that this instrument will tend to drop as long as there is fear amongst the majority of the world and as long as the US looks like a safe haven. The long bond was actually down yesterday as money flowed from the bond market to the equity market. Think of the long bond demand as a bigger money market and you can see the picture where bonds and stocks move in opposite directions for a while.
On the bright spot of the day, the aftermath of this, no matter how it turns out, is that actively managed money is likely to once again beat out the indexes and small caps will once again provide the superior return to justify their risk.
I'll decline to play the guessing game because so much of my outlook depends on the outcome from the meeting in SF.
I'm fully invested so I am not anxious for the market to continue to fall, but I am also not willing to sell good stocks which are beaten up by the market turmoil.
If I had to make a suggestion of a group that is also too beaten up and is on the "bargain" table with the blue light flashing, it is the small to medium sized US banks. This is the old Peter Lynch theme where there are too many banks for the country to use, so they will eventually consolidate at take out prices around 2X book value. These are the little banks that are peppered thoughout the east coast and into the midwest and are a little more sparse on the west coast. If you do not have a ton of money to buy a hundred or so representative banks, then consider BTO which is a closed end fund run by John Hancock. After hitting a 52 week high in May of 14 15/16, it touched 8 5/8 Monday before rebounding. I don't know where the bottom is, but when we get a Fed easing and some help on the inverted yield curve, US based banks which have _zero_ exposure to foreign markets will once again stabilize and provide nice returns.
You can extend this theme to insurance stocks as well, but there isn't any direct play on that consolidation. To play the insurance consolidation you have to buy the consolidator. I own CNC, which just swallowed a boat anchor in Green Tree Financial and do not recommend it until their financial statements become a little more transparent. The best plays are probably worldwide with AIG, AXA and ING and now the CCI/TRV merger. Insurance stocks benefit when interest rates drop because they hold bonds. The need for worldwide financial service is only going to increase because of this turmoil and I suspect that CCI and CMB as well as some of the Largest european banks are going to be able to buy banks in the third world for pennies on the dollar before this is over. Re-read some of what happened in Korea and Thailand and you can see that the trend has already started.
Just like the oil service sector it is probably too early to buy these "sector themes", but they are worth remembering IMO.
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Dave
PS, I didn't start out with any special knowledge of economics, monetary issues, or international dealings, but I did have country funds in Latin America for a number of years with minimal success (still do). Every time I lost money, I tried to understand just a little more. ;-) |
