Tuesday, April 28, 2009

Nuts and Bolts

Should past performance be a reliable prediction of the future, then the stock market will rally tomorrow. That has been the case on each of my last three blog entries. The observations I make in this blog are not a condemnation of the market; nor are they a warped death wish to those who have benefited from manipulating they system for personal gain. The original intention of this blog then was to trace the historical trends that are becoming more and more significant, and draw conclusions to how those actions will impact us economically.

The Spanish Influenza of 1918 had a devastating impact on the United States in general, and an even further far-reaching impact on the rest of the world. It is estimated that the Spanish Flu killed anywhere between 20-100 million people world wide. For those of you who appreciate statistics, the Spanish Flu killed more people than WWI or even the Bubonic Plague. The Swine Flu (which will be renamed to a more politically correct title by authorities)should not be as devastating as the Spanish Flu. While there have been fatalities in Mexico, there have yet to be any reported deaths outside the United States. Chances are that health agencies are much more advanced today than they were 90 years ago. It is my sincere hope and prayer that few people die from this disease.

Fear plays a significant role in the psyche of financial markets. As a rule of thumb, I never believe things are as good or as bad as they seem. Most, if not all who have followed the financial markets over the past six weeks will note that there really was no "good" news even though the market rallied. Now, fear from the flu seems to have shifted momentum. Should the strain of flu that is killing people in Mexico prove to be a different strain than the one found in the United States, the, there will be a deeper an longer panic.

A squeamish consumer is exactly what the market does not want. With consumer confidence numbers coming in at a five month high, and a general slowing in price declines of homes, some analysts give pause for hope (1). While I will agree that President Obama brings a sense of optimism that was not seen in the Bush White House, a recession or depression cannot be ended by decree. That wishing a problem away rarely makes the problem disappear. Once banks start lifting the moratorium on foreclosures there will be another leg down... Maybe a better gauge is that baseball attendance is down nearly 7% from last year (2). I too believe that this is the kind of indicator that gives us a better pulse on the American consumer. Even plush organizations like the New York Yankees are reducing the price of tickets in their stadium. (3) Should you doubt these statistics, then I only ask you to watch some of the obnoxious car advertisements which practically beg someone to buy a car.

Nassim Taleb author of Ten Ways to Black Swan Proof the World begs governments and market makers alike to consider the most basic question as to why institutions were ever allowed to become too big to fail. More importantly, Taleb agrees with most people on Main Street as who begged the question as to why bank executives who helped destroy their banks, are still running those banks. It falls along the same guy who crashed a bus being given another bus to drive...with little to no consequences. Anywhere else, you get fired.


Oil appears to be heading toward $40.00 should it hit, I will consider long positions. I do believe oil explorers should be on almost everyone's short list.

After USX dismal numbers, and little hope of a quick recovery for automotives. TM, who has shown some upside to the impending doom of GM and Chrysler, deserves reconsideration as a put. OTM 40s in January may come back to life.

Whether it is travel related or simply another consumer discretionary decision, I believe the casino industry will take another hit. Consider WYNN when it crosses the $40.00 mark. It is destined to test the $20.00 mark.

1. http://bloomberg.com/apps/news?pid=20601068&sid=ajMQSmgKP7AY&refer=home
2. http://www.silive.com/sports/index.ssf/2009/04/baseball_attendance_down_nearl.html
3. http://www.nj.com/yankees/index.ssf/2009/04/new_york_yankees_reduce_ticket.html


AX said...

Going to be an interesting few days with GDP and stress test results, wild swings we can only hope and the containment or non-event of the flu hopefully.

Anonymous said...

Hear hear!!!! I agree with everything you wrote.

I had some extensive conversations around GM yesterday with some work colleagues. While most were still honking “Buy American”, some including me were still focused on a deeper problem – that excessive consumerism is the root of the issue. It drove the demand for and later the availability of cheap credit; cheap mortgages; cheaper products. Companies did not just force greedy ideas on “innocent” consumers just so their executives could get that much richer. No, they responded to market demands. The markets demanded, for instance, bigger vehicles at cheap prices. The U.S. auto makers responded by providing big vehicles, assembling them in cheap places like Mexico, and sourcing parts in cheap places like China and Taiwan. They willingly conceded the car market to the Japanese in order to focus on more profitable business – and satisfy the shareholders’ demands for ROI and dividends.

Can’t people see that? A market efficiency occurred! The market worked like it was supposed to!

Now, there’s a hypocrisy occurring in these bailouts. The bailouts are hypocrisy because they are interfering with what the free market wants to do. When the times were good, people said “Let the markets decide” and we all profited by cheap goods and great returns on stocks. Now when times are bad, people say “Look at all that greed!” and they want to have a bailout. People are bandwagoning against greedy companies and greedy executives, when a short time ago they hailed them for making money. Hypocrisy!

Let some of these companies fail; let the market make its adjustment and enact another efficiency. It will be painful, but its necessary! People should look in the mirror if they want to blame someone for the financial crisis. About 70% of our GDP was based on consumer spending – not manufacturing, not banking – not those things that create wealth, only distribute wealth. That MUST change. I agree with Peter Schiff and Ron Paul – our economy must shift to “Making” things, not “Buying” things.

More on this later – I have to go to work.

Tiger Coach said...

Speaking to your point... when the scales have tipped and the consumer in whacked out on credit... i.e. credit cards, auto loans, and mortgages (by the way all three of these are depreciating assets especially if you look at housing prices), the solution is not providing more credit. It is similar to giving the crack addict another hit... in the end, it only prolongs the pain of withdraw.

There will be another shoe that drops... it is not a matter of if, but more like a matter of when.