Wednesday, November 28, 2007

Blast off, then Back off

When I last wrote, November 21st, my last paragraph forecasted a rally possibly led by large foreign M & A activity before mid December. The Dubai investments in Citicorp and Sony has provided new hope to stock investors and we’re off to the races. I haven’t followed the Sony deal other than hearing that it is a minority stake, as is Citi’s. The Citi deal is being cheered and the common has rallied even though the Dubai deal is a preferred that pays 11%. If Citi craters in the next two years they have a preferential position and are being paid 11% in the interim. Our Arab brothers aren’t stupid. Given the terms, Citi was either in extremely bad shape or their managers were stupid.

Look upon this rally as an opportunity to re-balance your assets. The economy is getting worse, internationally as well, and credit markets haven’t reflected all the sins of the last 5 years. As I wrote in my missive about derivatives, they are terribly complex and the impact hasn’t been felt yet as we haven’t had counterparty defaults and the havoc that will ensue.

The follow through on this burst of enthusiasm may be strong and last for several weeks. The larger the move the more I will like it. But any move upward can’t be sustained. The economies of the world need a pause and they will take one. It may not last long with central banks pouring money into the fray, but the markets will anticipate, or follow, the economies downward and I intend to increase my negative bets.

Besides betting against bank ETFs and the construction materials, Deere, an admittedly good company, as is Martin Marietta Materials, is worthy of a close look over the next several days. It closed at an all time high today and now sells at a very high multiple of cashflow and other benchmarks. Can ethanol keep this rocket going? I’m starting to wonder as I remember the mid-to-late 1980s and the decline that Deere endured. I need to look closer, but I’m intrigued.
Crusty is generally a “long investor”, but as any reader can discern, I’ve become much more cynical and grown comfortable on the “dark side.”

By the way, crusty has lost at both poker and golf in the last two days so read my meanderings at your own peril.

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