Tuesday, November 6, 2007

The Media never gets it

I’ve been on the road for the past four days heading to Mount Dora. Along our route, we take a different route to and from Omaha each Fall and Spring, we visited several wonderful small, historic communities. Hermann and Ste. Genevieve in Missouri were great river towns with structures dating from the 1830s.We found Mobile, Alabama to have a downtown that was a vibrant, smaller version of Savannah. Apalachicola and Cedar key in Florida were once the biggest ports in the state and Civil War era economic powers. Both are now reborn with artists and interesting restaurants.
Each evening I’d catch some news and start giggling to myself as the current news was usually the opposite of the prior day’s concern. One day we were going to hell in a handbasket because Citicorp was rumored to need a larger loan write-off, the next was filled with euphoria as the employment report showed more jobs were created than had been expected. Recession one day, continued global expansion the next. A rate cut is good for stocks one day and indicative of a slowing economy the next. What is one to believe? The talking heads and cub reporters won’t help you understand because they don’t understand.
Crusty says we’re going to have a recession and a fairly severe one.The seeds have already been sown and the Fed’s rate cuts aren’t going to be the panacea, by the way we also drove through Panacea, FL on the way down. Cheap money in the U.S. and around the world encouraged easy credit and speculative behavior. Credit fueled the economy. But it wasn’t productive credit and it’s asset pricing was based upon the greater fool theory.
The air needs to come out of this credit induced asset bubble and it is in process now. Everyone has read of the subprime mortgage debacle. But easy credit didn’t stop with mortgages for the uncreditworthy, it flowed to home equity lines on over-inflated homes, condo developers whose market was mostly flippers, credit card companies that have continued to finance consumers now that they can’t refinance their homes, land developers and home builders, private equity to take companies private at ridiculous valuations, and finally the funding of the huge leverage of the hedge funds that has been used to create another bubble in commodities. The commodities run up began as an emerging markets growth story, but it evolved into a place to park cheap money.
How can an economy not suffer when it’s banks are no longer interested in lending, it’s consumers feel poorer as the value of their real estate decreases and real inflation makes day-to-day living more difficult? Gasoline will soon follow oil up and the transition to $4 gas won’t be as “easy” as our acceptance of the move to $3. The prospect of the Democrats winning in November and raising taxes will encourage selling of stocks as investors capture today’s lower capital gains taxes.
The economy’s direction is down, but that doesn’t mean that stocks will immediately decline. It is likely that there is another move upward before yearend. After the new year starts I think the direction is down and for quite awhile.If you are young I wouldn’t do anything as 2-3 years from now the market will have recovered. If you’re crusty like me, take some money off the table. You maybe save yourself some heartburn if the rest of your portfolio declines and you will save yourself some tax by selling at the pre-Hillary capital gains level.
Crusty has moved about half of his portfolio out of equities and into short term treasuries and short-like positions. The remainder is in large cap, multinationals and international stocks. As the yearend nears, and I worry less about an irrational rally, I may increase my bets against the market.
Conservative stock pickers like to say that they wait for a “fat pitch”, well, I think the economy is setting up to be a fat pitch on the downside.
Time to meet my daughter and granddog for dinner.

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