Wednesday, September 30, 2009

What is a successful career anyway?

Some interesting moves today after the close... moves that made me think about the difference between being famous or infamous.

First, Ken Lewis announced his retirement from Bank of America as of the end of this year. The stock immediately rose in after hours trading, even though Cuomo says he's still coming after BoA. How humilitating it must be to know that investors think your company will be better off without you. Ken Lewis had a huge part in building up the financial supermarket concept... and yet all he'll be remembered for is his flame out at the end.

At least that's better than John Thain's fate - he'll always be the guy with a penchant for decorating... and an exquisite commode. Oh yeah, and didn't he do something in the investment business too?

Michael Vick, on the other hand, was given yet another shot at redemption today. Nike has decided to take what I hope is an educated gamble on Vick... again. This could either be very very good for them... or end in a greater-than-Thainsian blaze of glory.

At least this business is never boring.

Thursday, September 17, 2009

What's driving this thing?

I've been doing a lot of research with my friend JT Smith (CIO of Aristar Funding), trying to figure out exactly what was driving this market.

The 'this market is cheap' argument hasn't made any sense to me for some time. Cheap does NOT refer to stock prices relative to where they've been, contrary to what is implied by a lot of folks. Historically, bear markets have bottomed at roughly 7-8x earnings. We only got to 10.2x forward earnings at the bottom in March - not low enough for my liking. Now we're trading at... sit down... 17.8x FORWARD earnings. Put another way, the S&P is more expensive than it has been in the past FIVE YEARS or more.

I might be 'of a certain age,' but my memory isn't so weak that I can't remember that the economy at least appeared to be much more robust at almost any time in 2004, 2005 or 2006 than it does now. And yet we're paying significantly more for a dollar of next year's S&P earnings now? Makes no sense. Unless...

What if this market isn't discounting future earnings right now? It's my belief that a lot of times the animal spirits of the market discount things without really knowing what it is they're discounting. So, what if... just what if... this market is actually discounting the inflation that almost certain to come? Gold over $1000 an ounce is telling us that either everyone is scared to death of this market (not confirmed by the VIX), or that inflation might be rearing it's ugly head. And yesterday's rumors that two Fed officials were ready to vote to tighten! Even today's Philly Fed numbers pointed out that the Prices Paid component is ticking up. Inflation.

Yeah, I know we've been seeing deflation in food and consumables. But that can turn quickly. And more importantly... how else are we going to dig ourselves out of this debt pit unless we pay it off with cheaper dollars?

If we're heading into inflation, folks, the game plan changes.

Tuesday, September 8, 2009

Bet you dollars to donuts

Actually, if the dollar keeps sliding, donuts might be the better investment soon. Yeah, the DXY Index was lower when Lehman collapsed last year, but beyond that, we're at pretty much the lowest levels we've seen in a long time.

What's it mean? Well, first of all it means that those commodities valued in dollars become more expensive for the American consumer. If you're a Middle Eastern country selling oil, you need the same buying power when you jaunt off to Paris regardless of what the dollar is doing vs the Euro... so the price of oil and gold go up. For that reason alone, I'm a little skeptical of the folks who are saying that the rise in the oil price is a reflection of stronger economic activity. But I'm a skeptic.

And let's look at the poor consumer again. So now energy prices are going up. And home prices still stink. And they have no credit available. And their retirement accounts are worth 40% less than at the top of the market. But those retail stocks are going to have earnings rebounds just like a coiled spring because of cost cutting. Whatever.

One more thought on the whole dollar/hard commodities thing - could people be piling into those commodities because of a fear of inflation? Yep. Does it make sense? In my mind, yes. How else are we going to pay off this amazing amount of federal debt that we have but to create inflation and pay it with cheaper dollars? And what holds value in inflationary times? Hard commodities.

Yeah, you can guess where I've got client money right now. Go ahead. If you get it right, I'll buy you a donut.

Tuesday, September 1, 2009

View from the Top

For those of you who haven't been to the Seattle area, that's Mount Rainier up there, taken from the SE side of the mountain. I took the picture a couple of weeks ago. Mountain tops are beautiful, aren't they? Problem is you can't stay at the top forever, you eventually have to go back down the other side.

In my opinion, today's sell off has been a long time coming. Of course, if you've read this blog at all, seen me on TV, heard me on radio, or seen me quoted in print... you already knew that.

What really killed me this morning was listening to some folks trying to hype the economic releases as positive. Look, we're in a pretty down time right now. If you don't think that the folks who put out those releases are trying to highlight the happiest stuff they can, you're naive. Let's take them one by one.

ISM Manfacturing: Headline number was better than expected, coming in at 52.9 vs expectations for 50.5. HOWEVER, you have to look behind the headline number. Looks like Cash for Clunkers is part of the pop – drew down inventories and there’s some restocking going on there. Is it sustainable? No, but the lower level wasn’t sustainable either. Employment is still declining – manufacturers aren’t confident about this or they’d be hiring. Prices paid is going up, which could mean that inflation is coming down the road, perhaps at a faster pace than most expect.

Yes, right now we're dealing more with deflation than inflation. But what if we can't sell bonds and need to increase interest rates? Yes, the dollar has been getting stronger. For me, that's a head scratcher. I certainly don't think the US is the safety currency or economy at this point. In fact, for our clients, I'm deliberately betting that the dollar gets weaker, strengthening commodities.

Pending Home Sales: Those are sales contracts... NOT completed sales. People still have to get loans, which are darn hard to get these days. Which leads to my next topic...

Construction Spending: This is the one that kills me... Year over year residential spending is down 26.4% (not-seasonally adjusted). But everything's okay folks. Really.

If you need a reason that the market tanked today, part of it was the stuff above. Part of it was what's coming down the pike at us. If you want more insight into what joy may be coming, follow jtsmith24 on Twitter - smart guy, good insights into the economy. You can follow me there too (PattyEdwards) for more timely, intraday, updates.

Take some profits folks. There's no reason to be a hero.