Wednesday, February 11, 2009

Not Lovin' It Cause They're Still Doin' It


The only Dow 30 stock to be up year on year is McDonald's. This blog has highlighted MCD several times this year as one to watch. Unfortunately, it has begun to break down on the charts. It declined a bit today as the Dow rallied a bit and has broken to a more than one-month price low despite a recent positive earnings surprise and rising earnings estimates for both 2009 and 2010. When the leader starts rolling over despite good news, beware. Perhaps the downmarket move from Starbucks discussed here yesterday, and related competition, is behind the growing weakness in the stock.

Meanwhile, the head of the International Monetary Fund has said that the U.S. and most of the rich countries are in a depression, not recession. What is the natural trend of stock prices in a depression? Down indeed. Trying to pick a bottom remains a job for gamblers.

For example, Procter & Gamble stock has fallen almost by 1/3 in 1/2 year, to about a 5-year low. Poof! Five years worth of stock gains vanished. And that's with earnings having exceeded expectations most of that time. Let's see what happens with continued earnings estimate reductions. If this stock continues falling, then at some point analysts will point out what this blog has already detailed, which is that P&G has a large negative tangible book value. So, what is the company worth on a fundamental basis? The answer is that no one has any idea. Your guess is probably better than that of an analyst, who talks to management and therefore is continuously spoon-fed garbage.


In other markets, this blogger put his money where his mouth was and indeed purchased 10-year Treasury bonds two days ago at what for now is the peak of the large correction/bear market in yields. The theory is that Treasuries are seriously hated and we may be at a peak in that hatred. Also, barring true Weimar Republic/Zimbabwean hyperinflation or out-and-out default, there is no such thing as a bubble in Treasuries the way there was a bubble in Internet stocks in 1999. Hold to maturity if you must and you will get the stated yield. In the meantime, I purchased a zero-coupon security, which both has a higher yield than a par bond and has greater price appreciation for every up-move in bond prices. We'll see. Not that that anyone has forgotten around these parts that going back to FDR, a Democratic President combined with a Democratic Congress have generally been bad news for bond prices. Yet the feeling remains that this is more like 1931, with more Great Recession/Minor Depression action yet to unfold, and that at some unpredictable point this year, investors and speculators will get scared again big-time and rush back to Treasuries, temporarily ignoring the tsunami of debt issuance. In that scenario, they will dump corporates and munis, just as they did last year. It should be interesting.


Gold has gone to a six-month high. For the first time in some time, the 12-month return on gold as judged by the GLD stock is positive. Despite the positive price action and all the reasons to fear inflation, the fact is that deflation is the order of the day. Furthermore, there is so much current slack in the U.S. and global economy that even if we are at the bottom of the economic cycle, historically inflation diminishes as recovery begins. Extra production can come on at very low marginal cost, so the per-unit cost of production drops as demand increases.
(That includes labor costs.) So re gold, there is little conviction here about its next major move, but the suspicion remains that deflationary fundamentals could push it a lot lower. That would surprise the greatest number of people, it would appear, and markets love to do that, don't they?


The Japanese stock market would look like a screaming buy if its chart were turned upside down and if the economic data had positive instead of negative signs. Japan's stocks are a disaster and represent a cautionary example for the U.S. The Japanese stock market is roughly 20 years from its peak. It is down about 80% nominally. Japanese Government bonds yield less than the dividend yield on stocks, but that was also the case months ago, when stocks were much higher. The Nikkei 225 has broken below its declining 50 day moving average and is down 2% in the morning session in Tokyo. There is no obvious bottom for the Japanese stock market.

The recent established order, the nouveau ancien regime, is crumbling. This order is/was based at its core on financialization of anything and everything that could be financialized. Enron did it. So did and do IBM, P&G, AT&T, and especially GE. Even hawkers of precious metals, God forbid, did it. Caveat emptor and caveat "holder".

For me, it's enough to recall Cole Porter: "Birds do it; bees do it; even educated fleas do it; let's do it, let's fall in love".

But don't fall in love with any financial product. For now, purchases should be with a renter's mindset.

Copyright (C) Long Lake LLC 2009

No comments:

Post a Comment