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There are still optimists

July 11th, 2008 · No Comments

If you read around a little on the net, you’ll come across some people who argue that things really aren’t as bad as they seem. After we reported here yesterday that arch bull Jim Cramer was trowing in the towel and didn’t even see anything he could be bullish on, it’s interesting to read these other stories. 

Here is one, we’ll give you a few quotes (the bullit points) and then discuss:

  • Some sort of political unrest premium is being worked into the price of oil, but has anyone realized that the political unrest even in times of relative calm rarely comes out of the price? It only adds upon the last scare. It’s really not a question of if, but when for all these cataclysmic events to occur.

We agree here, sort off. We’ve already argued that we think oil will top out pretty soon, if it hasn’t already happened. But for entirely different reason than the author of this article. We argued that the main reasons for oil to reach top is the slowing global economy and higher prices (oil) finally slowing demand.

  • As we enter this next round of earnings releases it will be interesting to see how the market reacts to those multinationals that continue to perform well. For instance, take the railroad industry; higher fuel costs and a slowing economy were expected to eat into volumes and pricing power, but that has not been the case. Exports have continued to drive the sector, with coal and grains leading the way.

Yes, we also argued exports are one last bright spot in the US economy, due to the falling dollar. But as we reported yesterday, in China they are already complaining about their expensive currency and what would happen to the dollar if oil starts rising and/or (probably or) US interest rates go up? What will happen to US exports now that the rest of the world is slowing down as well..

  • Yesterday morning, Wal-Mart (WMT) reported better than expected results for its sales during the month of June and raised its earnings estimates for the second quarter. Pundits will say it was a stimulus-check-induced bounce, but the strength at other retailers such as TJ Maxx (TJX) and Ross Stores (ROST) show that Americans, despite higher fuel and food costs, were still spending money, even before the checks arrived. Perhaps the biggest highlight from Wal-Mart’s June sales figures was the jump in the home category, which had been languishing for the better part of two years.

The Jury is still out on this one. For now, we side with those pundits. It’s hard to ignore the crash in the housing market (and now the equity market is down considerably as well, both destruct wealth), record low consumer confidence, rising inflation, tight supply of credit, rising unemployment, and a slowing world economy.

  • Call me a bull, call me optimistic, call me whatever you would like, but I don’t think the economy is as bad as the media is making it out to be. Yes, Americans are having to change their habits, yes there are rumors every day about another company on the edge of bankruptcy, but the fact remains that the unemployment rate is at 5.5%, and until a few years back, that was considered full employment.

For starters, unemployment is a lagging indicator. We had 4-5 months of negative job creation already. This is not going to away any time soon, we fear.

  • However, the real lynchpin for this market to turn around (and economy for that matter) is the financials. Rumors of additional write-offs and insolvency are the name of the game, and until the financials can shore up their balance sheets and right the ship, it won’t matter how well the other sectors do as the market will continue to have the weight of the financial world on its shoulders.

The author argues that the financials are key to it all. We think it’s more like housing, to be honest. The financials will suffer not only from further housing trouble, associated credit woes will spread into consumer credit, credit card debts, and the like.

We are very well aware of the saying that it’s always the darkest just before dawn, but we think it’s too soon to get optimistic. However, with the markets, we are getting a little bit less pessimistic. For a start, we are in oversold territory so a technical bounce at least is due.

And, financial markets look ahead like 6 months at least. That could be the time we start bottoming out. You will see the markets turn way before the economy does, usually.

Tags: The Markets