Monday, February 2, 2009

Winter of Discontent

Perhaps it's time for Monopoly sets to reappear both on kitchen tables and on expensive dining room tables for twenty in Greenwich mansions.

The classic Depression-era game may start making a comeback. The headlines are grim, as is the commentary from many of the top bloggers:

Mish has two posts today: "Railroad Traffic Plunges"; and, "Exports Plunge in China, Japan, South Korea".

Yves at Naked Capitalism posts, among others: "Veneroso: Japan on the Edge of the Abyss", and "Willem Buiter: Mismanagement by the Officialdom Can Produce a Depression".

Then there's the redoubtable CR at Calculated Risk. A representative post that sums up the recent economic news is January Economic Summary in Graphs. A lot of "cliff diving".

If you have time, you may want to read all the above. However, you get the picture. At a time of increasingly slack labor markets, now-abundant raw materials, and Asian exporters desperate to export at increasingly low prices, their customers have had to pay down debt.

In addition, has given up the happy talk at least for today. Perhaps the former Masters of the Universe meeting at Davos convinced them it was out of touch. The Econblog Review proprietary Vido Indicator shows bearishness, with talk about a new depression and musing about a further drop in the S&P 500 should it drop below 800.

Also, the Obama Administration is acting like a . . . new Administration. Gone is the hype about a stimulus package ready to be signed on or about Inauguration Day. Delay is the order of the day. Methinks that too many traders and investors were thinking that there would be so much enthusiasm for the new Administration that they could sell their stocks under cover of such enthusiasm. Since one of the functions of markets is to fool the greatest number of people, there are lots of bears who are angry that they either missed their chance to short-sell at Dow 8800 or whatever, or holders of economically sensitive stocks who missed their chance to lighten up. What do they do now at lower prices and worsening headlines?


From a markets perspective, here are some comments.


Marc Faber looks increasing right in his core assertion from last fall that the U.S. would have less economic stress than Asia, in that our manufacturing is already low as a % of GDP. But people still need services, and mostly can pay for them, for now. However, he looks optimistic, as he was calling for a stock rally into spring. Apparently the horrible headlines out of Asia are coming in worse than he, an Asia-based economics expert, expected.

The headlines will drive weakened holders out of positions they thought were strong ones.

FIXED INCOME: The deflationary implications of the headlines du jour, which assuredly will not end with today's, are too strong to ignore. One might want to take profits in TIPS and consider instituting positions in Treasuries for a trade, or depending on point of view, to add to them as a core holding. Lower quality debt is not worth holding unless you are John Paulson, with an extensive research organization to evaluate individual securities. But in that case, you are not interested in any thoughts expressed on this blog!

STOCKS: It is too soon for a contrarian purchase. The chance of a meltdown to new lows and far below is real, and unfortunately a bear raid makes sense while the new Administration and Congress decide what to do. In this sense, stocks could do the opposite of the 1999 blow-off top in stocks, when everyone experienced knew that 25X P/E on large-cap glamour stocks was a dangerous level and that the NASDAQ at 4000 was lunatic; yet P/E's on the large-caps went to 30 and the NASDAQ went over 5000. On the other hand, valuations on the stock market are not cheap on a variety of criteria, and earnings could be imploding. If Dow stalwarts such as Procter & Gamble, AT&T, IBM, Coca-Cola, and others get priced based on tangible book value, there is not much "there" there. (A Dow half the current level is easily justifiable on a number of metrics.)

When both the economic and market macro trends are both down, the wise trader and the prudent investor stand clear.

GOLD: Fundamentally increasingly overvalued, as the macro economic trends demonstrate that there is no bottom for cash commodities prices. However, the price of gold is driven by psychology. Traders who are long must remember that the major use of gold remains jewelry, not investment. (Offsetting this is that much jewelry use in India and perhaps China is quasi-bullion at minimal mark-up over bullion.) Technically, the trend lines are up over most time frames, though gold has churned to no net effect over the last 12 months. However, the sudden crash of the price of oil may provide grist for the mill of purchasers of (deep?) out of the money puts on GLD.

Returning to the Shakespearean theme of the title, the time is out of joint. Is Mr. Obama thinking the next part of the quote: "O cursed spite that ever I was born to set it right"?

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