There is quite a bit we don’t know, and markets really do not like uncertainty..
- We don’t know whether the bail-out (TARP) is going to work
- We don’t know whether there will be a severe recession
- We don’t know to what extent the rest of the world is also going to be greatly affected
- We don’t know where the next biggest risks are located
- We don’t know how many hedge funds are in trouble
- We don’t know whether the housing market bottom is in sight
- We don’t know whether the great deleveraging game has run most of its course
- We don’t know whether the dollar and the US bond market are the last ones to tumble
I think you’ll get the picture. News from the G7 has not been terribly encouraging. More of the same, a vague communicé. That’s it.
That is not to say that we don’t know anything:
- If the bail out plan isn’t working, it is not unlikely that it will be modified into a form that has a better chance. In fact, that’s already happening.
- Whether we will enter a severe recession (there is even talk about 1930s style depression) is largely up to the politicians. Policy reaction does matter a whole lot here. We haven’t become much more optimistic this Saturday, because of the lack of new initiatives, but on the other hand, some countries do seem to get it right (most notably the UK)
- In this day of globalization, when overpriced condos in Florida can bring a whole country in another part of the world (Iceland) down, one should not wonder about widespread geographical ramifications. However, some parts, and parts that matter, seem only lightly touched by all this, most notably China, and to a certain degree also India. Whether that will continue is anybodies guess though, until a week or three, four ago, most people thought most of Europe would be spared the worst as well.
- Take your pick, US credit cards, US prime mortgages, US car manufacturers, putting out one fire does seem to lead to others.
- For sure there are numerous hedge funds in trouble. This is dangerous, as these institutions are usually greatly leveraged. We have seen earlier reports that many of them were sitting on records amount of cash, which is only mildly reassuring, as we have seen in 1998 with Long Term Capital Management that only one, over-leveraged hedge fund in trouble can create systemic problems
- This doesn’t seem likely. Recessions, and the US is for sure entering one, are not known to be conducive to the housing market. More financial stress will come from this corner, we’re afraid. We have seen reports that after sub-prime mortgages, now it is the much larger prime mortgage sector which is experiencing great stress. However, lower interest rates do help here.
- Here, at least we, are almost completely groping into the dark.
- There is a bubble forming in US Treasuries, which is sort of funny, because shortly, there will be a whole lot more of them. The dollar gains are partly related to this (and partly to rapidly deteriorating situation in Europe). This too, cannot last, but it may, for quite some time. But what if China starts to cash in on it’s billions of T-bills? We still think they have no incentive to do so, in the great Faustian bargain they have agreed upon with the US, but how much more can they tolerate?
What should you do with your stocks? Some suggestions
- Cramer was spot on with his suggestion to sell last Monday if you need the sources for some expenditures in the next five years.
- The few stocks we are endorsing here (IOC, EFUT, TSL) are quite ridiculously valued, but there is absolutely no guarantee that valuations cannot get any more ridiculous. For all three of them, we cannot see how their businesses will be materially impaired unless economically thing will get much worse, and it is quite an understatement that considerable slowdown in their businesses is already fully priced in.
- InterOil is on the cusp of a good news show and plans to build LNG for delivery in 2014, when all this will likely have passed. EFUT’s core market is retail sales in China, these are relied upon to substitute for the slow-down in exports. Trina has already sold 70% of it’s 2009 output.
- However, valuations hardly seem to matter in this market, it’s fear, forced selling, (in some cases) manipulation, liquidations, panick, all override cheap, even bargain basement valuation at the moment.
- Selling now runs the risk of missing any (at least temporary) relief, we think if you can sit it out for at least a year or so, you shouldn’t do that, unless you’re behind a monitor all day and fancy your chances.