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Citi-Morgan talk may spark fresh wave of deals | 2.16.09
Citi-Morgan talk may spark fresh wave of deals | 2.16.09
Posted At : February 16, 2009 10:45 AM
Critical Economic and Market Update:
* The US economy – FUBAR
* Market and Investment strategy
* TDT™ (Top Down Tactical) – Our (newly trademarked) actively managed hands-on portfolio management system designed for today’s dangerous market
* Recently quoted AP story
The mess of our economy is truly beyond recognition. The question really is when, not if, it will be fixed and what you do in the meantime. Some feel as early as this summer while others say it will take a generation. What I do know is that this recession is going to be the longest in anyone’s memory. It is going to seem like it is never going to end, but it will, I promise you!
Retail Sales came in much below expectations, -2.7 vs. an expected -1.2%. Considering that consumer spending makes up about 70% of GDP, this is serious stuff. This statistic seems to have surprised investors and pundits alike, as stocks have taken it on the chin on the news. However, the fact that they are “surprised” just blows me away once again, as I have been pounding the table for months saying that consumer spending will be in decline, and which will be the fundamental reason for the decline. As you have been reading in my weekly Critical Updates, and in my Economic Tsunami Special Report, the demographics’ of our country’s aging population having passed their peak spending years will certainly bring a reduction in consumer spending and severely damage our economy. The nation is basically changing from net spenders to savers! Add this to a generation of irresponsible over-leverage and you have a “Perfect Storm”.
The key is to be positioned right.
Housing. New home sales fell 2.9% in November, while the median price declined 11.5% while unsold inventories are at a rate of 11.5-month supply. Housing starts fell nearly 19% in November, while the number of building permits was down 15.6%. Sales of existing homes in November fell more than 8%. The S&P/Case-Shiller 20-city housing index showed an 18% drop in prices in October from a year earlier, while the 10-city index declined 19.1%. Prices in the 20-city index have fallen more than 23% since their July 2006 peak, while the 10-city index is down 25% since its top in June 2006. Of course, it’s been much worse in Sacramento. The economy is going to have a hard time rebounding with the housing market still in decline. It will be 2011 before we work through the excess supply of homes, especially as we are seeing more and more come onto the market because of foreclosures. Demographics point to an even longer rebound as “echo Boomers” won’t come into the market as first time buyers until 2012-2015. Therefore we should expect more downside with increased wealth destruction and more pressure on consumers.
The reality is that the US and much of the world are going to see their economies continue to shrink. Only then will the economy slowly start to grow again. Throughout the globe, capacity utilization is falling rapidly. That means that industries have no pricing power, as they can produce more than they can sell. And when demand drops, prices fall as producers try to stay in business. Just as there seem to be too much automobile production and thus too many auto dealers, there are too many stores for a country whose consumers are in retreat. Estimates are that consumer spending could easily drop 7% as the saving rate heads back up to 5% (or even more). It is estimated that over 70,000 retail stores will go out of business in the next six months. That would be in line with the 140,000 that closed doors last year. The economy and its businesses have to adjust to a new level of spending that will be the first serious consumer recession in 40 years…a generation. (Now do you see the generational link to the demographic trend?) The good news is that that means that those left standing will get more business and will be able to expand and grow and hire people. That is how recessions work. Excess capacity is worked through. Businesses cut back until they can get positive cash flow.
Deflation continues to be enemy #1. Overcapacity, rising unemployment, imploding leverage, lack of borrowing and/or lending, a serious retreat by consumers, and increased savings are all the conditions that generate deflation. If left unchecked, we could see something like what Japan experienced, or even worse, as they started with a savings rate of 13%. But deflation is not going to be left unchecked. It will be fought by central banks everywhere with low rates and the printing press, as well as government spending. However, as we are learning, lowering rates isn’t enough to get consumers to spend when they have seen their wealth erode from losses in the value of their houses and investment portfolios and retirement accounts. The stimulus last summer was largely saved or used to pay down debt. What was an annualized stimulus of 3% of GDP in the second quarter, which is pretty big, only kept GDP growth positive for one quarter. Now with…what is it now, a $700b stimulus, a Trillion, a gazillion…more? Whatever it is the boys at the helm are going to fight this recession and deflation with everything they’ve got, but primarily with old-fashioned stimulus. As they print money to tackle deflation, with a complete disregard for inflation I might add, they had better be ready for a serious decline in the dollar. If they don’t stop in time, they risk a run on the dollar. If they are forced to stop due to that or sooner than it takes hold, the economy will decline again bringing back deflation. What that means to you and me is that we had better adjust our portfolios and businesses for that reality, and we will.
Market and Investment strategy:
One of the great sucker plays since the bear began in 2000 has been the “buy and hold for the long term” mantra that has been chanted by the sages of Wall Street. Simply look at the returns: from 12/31/99 to 12/31/08, if you invested in an S&P 500 index and held for “the long term,” then your total return during this time would have been -28.13%, or an annualized rate of -3.6% per year. In inflation-adjusted terms, the stock market is about where it was in 1973! If you reinvested dividends, that gets you to 1991 (inflation-adjusted). Clearly we have to be nimble and willing to desert old fashion buy and hold asset allocation models to be successful.
What looks attractive at the moment?
1. Quality bonds, both corporate and municipal – There are some attractive issues here, 7-8% yields
2. Look for dividends – There are many high yielding stocks and preferreds
3. If you have CD’s or back cash, let me know. There are some great deals out there
I would avoid:
1. I would not be a buyer of US government debt. Treasuries, if not in a bubble, have little upside potential and just don’t yield enough.
2. Chasing CD rates at banks – Those banks that are offering high CD rates may be chasing deposit money and in trouble.
TDT™ (Top Down Tactical) – Actively managed hands-on portfolio management for today’s dangerous market
TDT™, a hybrid investment management style which combines the practical application of Top-down analysis with the hands-on actively managed approach of Tactical asset allocation.
Top-down analysis begins by scrutinizing the broad global economic picture. By looking at the big picture, you decide if and when it is safe to be invested and what specific sectors to be invested in depending on the economic cycle. The opposing style is bottom-up investing, which starts with specific businesses, regardless of the industry or the economic environment. With this approach, even if you make a good choice, it may still decline due to a declining stock market, a bad economy or by being in a sector that is out of favor.
Tactical Asset Allocation takes a hands-on actively managed approach to investing, by adjusting the portfolio to market conditions. Allocations are made between industry sectors depending on which is in favor and between asset classes of bonds and stocks, and even going to cash when necessary to preserve principle. The contrasting approach is the typical “buy and hold” asset allocation which invests across the broad range of industry sectors, regardless of current market conditions or which sector is in or out of favor.
TDT™ is the powerful investment management style built for today’s dangerous and volatile markets that will help provide you peace of mind.
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