A Message from Dr. Doom
Marc Faber known by many as Dr. Doom believes 2009 could well mark a deepening of the world recession. While Faber admits that he miscalculated the positive impact of liquidity injections that the Fed has taken. However, the key story is the derivatives market. With a general over-extension in credit, and the complete depth of "bad debt" unknown, there could well be a scenario for further unraveling. "When credit growth began slowing in 2007 and when asset markets sold off, a huge de-leveraging process was triggered, which then brought about further price falls and caused further de-leveraging. In addition to the severity and speed at which asset markets collapsed globally, volatility also increased to record highs — not just for equities but also for commodities, currencies and bonds." Expect equity returns to remain weak as long as market volatility remains. Equity prices around the world are down nearly 50%. Home values and commodity prices are also down by half. Noticeably absent from Dr. Doom is the impact of lower oil prices which would be a net positive on world economies, and unemployment which trumps almost any other indicator! It doesn't matter how cheap gas is if the consumer does not have a job. With November unemployment at 535,000, December could well surpass that number... Last, Dr. Doom believes gold and gold miners are the winners.
Mortgage and Rates...
The good news is that rates have dropped to 5.65% for a 30 mortgage. This should be helpful to those who have the ability to service that debt. The fundamental problem of the credit crisis was never the fact that rates were low... The real problem was that credit was extended to people and businesses who did not deserve it. We are reminded that terms like sub-prime and Alt-A became common vocabulary among mortgage brokers and bankers. Seeing other untapped revenue streams, lenders were willing to extend home equity loans to people at 125% of their home value. According to Alphaville's Stace-Marie Ishmael "One tenth of all homeowners with a mortgage in the US were either behind on their payments or facing foreclosure in the third quarter of the year, according to data released on Friday by the Mortgage Bankers Association." The good news is the opportunity to re-finance three and five year ARMS. More importantly though, is the fact that borrowers may no longer qualify for loans due to property devaluation and tightened lending standards. If Fannie and Freddie back all of these loans, we are all is much more trouble than we realize.
Ask the Experts...
In June, I noted that Morgan Stanley's Thomas Lee made several recommendations about up and coming sectors. I equated these sectors with XLF, XLY, and XLE. I know Lee is an expert... and knows a heck of a lot more about the stock market than I do. So, I thought it would be a good ideas to check out these sectors. Here is what I found out:
XLF -45% from recommendation date.
XLY -35% from recommendation date.
XLE -48% from recommendation date.
Now Bob Froehlich vice-chairman and chief investments strategist believes 2009 will be a "very good year for the DOW!" Froelich believes that Dow will approach the 12,500 level next year with the greatest upside potential being the financial services sector. However, Froleich gave himself an out suggesting that three areas could have a negative impact on the financial markets: 1. cut in oil production
2. Rising Unemployment and 3. Political in-fighting on a Obama stimulus package.
So today 12/7/2008 we will assign Mr. Froelich three stocks that represent his expertise: DIA (Dow Jones Industrial Average Index), XLF (Financial services SPDR... sorry Mr. Lee he is recommending this one a little lower than you), and KEY because Forelich sees additional consolidation in the financial services sector.
My Stock Moves
I opened new positions in:
MLHR 5/12.5s
MDC 3/22.5s
MCRI 6/5s...
And still hold short positions here:
CNK 3/10s, FXI 5/16s, RYL 4/12.5s, WYNN 3/35s, BBW 1/10/5s
I still hold Calls on:
AU 1/30s, BAC 12/25s (which will more than likely expire worthless), GE 3/25s
1 comment:
TC, I think Lee is your Dick Bove! Should be another interesting week. Again, people don't seem to understand the spurious correlation between low mortgage rates and being able to afford a home. We have a savings problem, a credit problem, not a rate problem.
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