Earlie from Earlie:
"So where are we and where do we go from here?", is a question that one hears much more frequently these days than has been the case (at least among my circle of investing pals) since the late eighties. A "sign of the times" might be an appropriate response, but that doesn't improve one's odds of surviving Mr. Market's machinations, hence each of us must attempt to answer that question.
My views on this topic are no more valid than are those of any other threadsters, but for what its worth in terms of stirring up some debate, herewith a few thoughts relating to the above-noted question.
Not to berate the obvious, but if one does nothing more than peruse a cross section of the reported results of the last four or five years, or a similar cross section of government stats, it becomes perfectly clear that the N. American economy is contracting. Worse, a close inspection of the latest data suggests that the contraction is intensifying (in spite of the views of our dear friends on Wall Street)...... and this in spite of the most potent liquidity engorgement of the banking system ever seen in history. Hmmmm.
Frequently, it is the unintended but nevertheless very real consequences of actions that come to dominate situations and this may well be the case with respect to Greenspan's manic printathon. Example? For this observer, it is becoming increasingly apparent that the US consumer, the guy the whole world depends on to buy its goods, is becoming both satiated and frightened. Satiated because over this past half decade he has been provided with the credit to buy darned near every conceivable item that he might need or want, and frightened because he used that credit excessively.
Historically, American consumers rarely worry about their debt levels, except when one item starts to threaten them,.... that item is LAY-OFFS. When lay-offs come in unending waves, two things happen. Consumers who become unemployed cease to be consumers and those who are still employed start to pull in their horns in fear of job loss. This is precisely what is going on across the whole of N. America today and the impact of this is visible everywhere. Obviously, in a world that is almost completely dependent on his continued purchasing, if this trend continues, we are in for serious trouble.
For any who might disagree with my contention that the US consumer is the linch pin holding the current global house of cards together, consider the following:
- corporate profits have imploded over the last few years (see government corporate tax receipts if you don't believe this), hence corporations are completely focussed on "cutting back", "getting leaner", etc. There are powerful reasons why they will continue to be so focussed including shrinking markets (fewer motivate consumers), falling revenues and sales, the above-noted implosion of profits, far too much global capacity in darned near every niche and above all else, corporate debt levels that are becoming difficult to service. Given these circumstances, only a new arrival from another planet might be forgiven for expecting to see a rise in corporate spending or a reduction in corporate employment downsizing.
- Governments across the US are returning to deficit financing (not that many of them every really moved completely out of this mode) but unfortunately, there is simply not enough free cash flow available on this planet to provide sufficient "borrowed" dollars to finance this. Obviously, the printing presses have been tasked with taking up the slack. This has already become apparent to foreign investors, who are quietly (and wisely) pulling out of US dollars (witness the 30% fall in the buying power of the buck if you need evidence of this fact). No doubt, they will soon do likewise with respect to US denominated assets. Who can blame them when Greenspan's presses so efficiently degrade the actual purchasing power of the buck with every rotation.
Now if my observations are not totally off-the-wall, then we seem to have a situation where there are fewer buyers of goods and services whose actions actually benefit the economy (consumers, and especially corporations) and a worrisome buyer who can only purchase by devaluing the currency (government). Hmmmmm.
Ok, now let's integrate the impact of "cheap oil" into our market equation. As I noted many weeks ago, I expected that this concept would rouse the "animal spirits" and it did. But now, investors are starting to do the real numbers and they are starting to get a bit of a headache.
- the US must/will have to maintain a major presence in Irag you say? And what might this cost?
- to what level might the cost of oil actually drop before it starts to irritate or have negative economic impact on the suppliers of same (who, after all, are also consumers)? And what might they do under such circumstances?
- yes, "cheap oil" has the potential to positively impact the global economy, but what if we have already reached "critical mass" with respect to global deflation? If that proves to be the case (and the Fed's actions as well as recent words seem to suggest that this is what it thinks), then "cheap oil" will be irrelevent.
- if (as?) the global economy continues to slow, might the associated reduced demand for oil actually become the dominant force with respect to the price of oil? Is this already happening?
From my perspective, there is plenty of evidence to suggest that the "cheap oil" concept has been largely discounted by the stock markets.
Over the course of the Iraq war, and ever since, the stock markets have been on a bullish romp which has jammed stock prices to levels that can be sustained only if we experience powerful economic growth in the very near term. Is this likely?
For most sectors of the economy, the answer has to be a resounding "NOPE". Saturated markets, and a frightened consumer spell this out in neon for most market niches (and in particular for the tech sector).
If the above-noted observations prove accurate, then a stock market decline of considerable proportions is likely, and given the dollar's resounding thud, that decline is likely to be soon (remember those foreign investors).
Are there investment opportunities out there, even in such a harsh environment? Of course there are. At this end, I try to consider where economic activity is likely to increase as deflationary forces intensify and identify companies that are in these niches. As well, I also try to pinpoint companies that are both over-valued and that are currently being overwhelmed by their debt. For me, these companies are very low risk investment opportunities ("short" of course) and their numbers are increasing rather dramatically. Just to provide a single example, take a look at the airlines. Given the current conditions, their stock prices are insane. Given their debts, most will not survive without massive "restructuring", which usually means that their current common stock will sooner or later be wiped out by the bankruptcy judge or diluted to peanuts through the issuance of gigantic wads of new stock to the debt holders. So long as one carries plenty of dough to ward off the inevitable short squeezes, or better still, enters the trade as said short squeezes run out of cannon fodder, the risk/reward ratios associated with shorting this sector are excellent.
Finally, one has to consider the impact of "the unexpected" on the markets. At this end, I try to conjure up lists of things that might prove positive for the overall market as well as those that may prove negative. At the moment, my list of negative possibilities is much longer than is the my positive list, hence I am far more inclined to allocate resources to Vaderian activites (shorting/puts) than to satisfying my belief that we humans are likely to work our way out of the current quagmire without picking up some serious scars in so doing.
Best, Earlie |
