Wednesday, July 7, 2010

Markets Churn as Deflationists May Be Overstating Their Case

Even David Rosenberg is buying into the austerity meme. In today's note, he discusses response to bear markets and recessions and says:

So it’s an open question as to where the exogenous positive shock is going to come from this time around, especially with policy rates already at zero and fiscal policymakers more bent on austerity rather than stimulus.

Remember that he is talking about the U. S. But he has it wrong. All we have is some resistance against continuation of the massive deficits, by far the largest peacetime deficits the U. S. has ever run. Properly accounting for the costs of Fannie Mae and Freddie Mac, the deficit exceeds that of Greece, I believe. This ignores the politically contentious future liabilities of Social Security and Medicare/Medicaid/Obamacare. There is no consensus for austerity. In World War II, there was virtually no production of any consumer automobile for the duration of the war. Now that's austerity. The average American uses perhaps 25 times as much oil per capita as the average citizen of India. Austerity? With the obesity epidemic raging? Hardly!

Meanwhile, Barry Ritholtz reprinted an updated graph of ECRI's confidential Long Leading Indicator (click on graph to enlarge), which so far as have been released, has in the past few decades turned down significantly before a recession has come on. It has not done so in a pronounced or pervasive manner, and ECRI predicts no recession to begin in 2010 based on large part on this fact. The shorter index, the publicly released Weekly Leading Index, has in fact turned down sharply.
Since there is now so much concern about a new recession, it's a better time than a few months ago to think of a new up-cycle in the economy, or at least some stability. It would appear that a growth slowdown is baked in the cake, and that the powers that be will likely "stimulate" some more if a recession appeared again, which would then likely propel buying interest in gold and growth vehicles. So the game goes on . . .
So we have, as usual, cross-currents, which the powers-that-be have analyzed more thoroughly than you or I can. So how can one out-think the market? First, it helps to be able to look around you and ignore the hype and understand one's objectives and the goals of the powers that be.
The powers that be want you to trade a lot, so volatility is in their interest. They want price inflation for various reasons. One response is to own assets that defeat those purposes.
These include owning shares in financially strong companies at attractive prices, understanding that stocks as a whole are probably overvalued, but also paying heed to Jeremy Grantham, who agrees that both large-cap and small-cap U. S. stocks are about as poor investments as are U. S. long-term bonds, but that "high quality" U. S. stocks are about the best investments on a 7-year time frame amongst all his listed asset classes (GMO, free subscription).
Here are some dividend-payers that meet the DoctoRx criteria of being high quality, based on Value Line data, and that are doing well operationally. These are Tractor Supply (TSCO), Apple, TJX; and for gold-oriented investors, Newmont (NEM). Who knows, but perhaps all of these can be buy-and-hold investments that prospectively can beat buy and hold of similar quality bonds or cash.
Now that Treasury yields are at Japan level, cash is approaching trash. But anyone who shops knows that prices are rising, except for things that people own and for which buyers usually need large loans, namely houses.
Yours truly is not an investment advisor, and the above is not investment advice. For full disclosure, I bought TSCO today and after hours, it issued a major earnings and sales upside statement. So the stock is up a good deal after hours. If it is not up a great deal tomorrow, I may buy more. Based simply on the "value line" of Value Line, it is easy to see 50% price upside for TSCO within a year, similar to that which I can see as reasonable for AAPL.
Copyright (C) Long Lake LLC 2010

No comments:

Post a Comment