We have been negative on the economy from the inception of this website, and for two months, we’ve been wondering how the Dow could be kept within 10% of it’s all-time high with the economic news out this bad. Now, one of the last big bulls, Jim Cramer, is throwing in the towel. Is that a sign of capitulation? Is there no place to hide, no money to be made in being long anywhere? Well.. 

According to Jim Cramer, whose hedgefund CramerBerkovitz managed to get a compounded return of 24% for 15 years, the answer to that question is no. That is surprising, as Cramer is a noted bull, and with his investment record, he has earned his right to sit at the table.

He’s not always right, of course, but this has a lot to do with the fact that his tv show and blogs expose his every move, while fellow hedgefund managers can often hide behind a veil of aggregates. So we do take him seriously when he speaks out.

He hasn’t seen things being this bad in 25 years. We agree, sort-off. The environment is somewhat similar to that in the 1970s. That was also a period of stagnating growth and high inflation, also led by commodities. And as we know, that’s a bad environment for stocks.

They only took off after Paul Volker (Greenspan’s predecessor at the helm of the Fed) drastically increased interest rates in response to the second oil crisis (and some complaints, notably by Germany, of a weak dollar) of late 1979 and squeezed out inflation for a couple of decades. There was some notable collateral damage to those actions though:

  • A fierce recession almost everywhere
  • The drastic interest rate hike produced a rapid rise in the dollar, these, together with the recession and the oil boom triggered massive third world debt problems that culminated in Mexico reneging on it’s debt in 1982.

We have given a few renditions of the bad economy of our own already (here for instance), so we will try to look for some positives:

  • The US economy is still not in a recession, technically. Booming exports due to a very cheap dollar and super expansionary policies have kept it afloat, but whether that continues to be the case, we doubt it very much. If anything, policies should begin to be more deflationary, for a start
  • Most of the rest of the world is still showing healthy economic progress, but economies are decelerating as inflation starts to bite
  • The epicenter of problems, the US, is a smaller part of the world economy compared to the 1970s
  • Many seem to rely on the hope that policy lessons have been made from the mistakes of the 1970s. The main mistake was embarking on reflationary policies when inflation was already accelerating, (now, does that ring a bell.. )

So many of those positives might very well turn. The credit and housing crisis are not over by any means, and they, together with a weak economy and rising unemployement, are spilling over into bad credit in other markets (credit cards, consumer credit).

Cramer doesn’t see anything he wants to buy at the moment, do we agree? The few stocks we discuss here have, one notable exception, escaped the carnage. In all these stocks, a main argument for buying was that they were very cheap, but we should have listened a little more to our own gloomy predictions of the general markets.

However cheap a particular stock is, it doesn’t mean it’s not possible that it won’t get any cheaper when the general market tanks. This has happened especially with TSL and EFUT. Both are very solid growth stories, both are very cheap, but they got cheaper still in the general sell-off. The extent of which has surprised us quite a bit.

DRYS moves to its own beat, as we’ve argued many times before here. SIGM has suffered from management credibility and its main markets taking off a little slower than expected (and they’re also on the receiving end of some very aggressive short-selling), and yes, also the bad general market (we feel happy that we advised a stop loss just above 20 though).

That leaves InterOil. We think that it in the right sector, and at the verge of proving a massive amount of reserves and a host of ensuing deals. It’s has already gone up a lot, but we are more confident than ever that it will continue to do so, come what may in the general market. Why are we so confident? We set out the reasons here.

It has traded downwards for a while, they seem to have some drilling mishaps. Nothing serious, but it is causing some delay and that gets people nervous. They are also seem to be moving extremely carefully as the well seems to be under enormous pressures.

As we set out in that article, we believe the flow rates so far from the first DST tests, although indicating very significant flow rates, are by no means representative of the gas pressures they encounter, as they are hampered by the small tube and DST equipment, and heavy skin damage limiting those flow rates.

Sooner or later, the true well potential will come out and reality will set in. We think it will be sooner rather than later.

3 thoughts on “Capitulation?”

  1. Cramer has a TV show to run and bats 50/50 these days. What he desnt say is his weightings which make all the differece in the world.
    Now IOC well COL on theYahoo board may be high with his $600 target but this is a corporate finance lawyer. Did M&A work for years and I have known him for years. What if he is even close to being right!!!!

  2. stp please look into tullow oil (tuwlf) the price has come down as the news gets better. check out ghana & uganda. Ghana is huge and easy to drill. the latest news was great, nateral gas plus oil.

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