intelledgement (95.21)

4Q08 Intelledgement Macro Strategy Investment Portfolio Report - II

February 16, 2009 – Comments (0) | RELATED TICKERS: SCC , SLV , IFN

[continued from prior post]

Analysis: Too bad we don’t recommend individual stocks for most clients because if we did, a neck brace manufacturer would look good just about now. While 4Q08 at -22.6%s was not the worst ever for the S&P 500, it may well have been the most volatile quarter ever. Normally, the daily ebb and flow of prices amounts to less than ±1% for the S&P 500 index. If you round off the nearest whole number, the average daily change in the S&P 500 in all of 2006 was 0%…in 2007 it was 1%…and last year it was 2%. Here is a comparison of the fourth quarter for all three years:

Year

0% Days

1% Days

2% Days

3% Days

4% Days

5% Days

6% Days

7-9% Days

10%+ Days

4Q06

48

15

0

0

0

0

0

0

0

4Q07

23

27

8

6

0

0

0

0

0

4Q08

6

16

6

9

9

5

6

4

2

Six days in 4Q08—10% of the trading sessions—on which the market was up or down between 7% and 12%! About six year’s worth of value change in six days! Folks, this is a cry for help. The market is telling us that no one knows from day-to-day what the right value for stocks is. And the reason this uncertainty exists, in our opinion, is that almost all the “rescue” plans promulgated so far by the Paulson administration (W having apparently taken early retirement here) seem to be aimed at papering over our problems, rather than dealing with them forthrightly and genuinely moving forward.

As we have said before, we got into this mess by overspending, borrowing beyond our means, and speculating on bubble-valued assets. Any “solution” that involves lowering interest rates, increasing our debt levels, and easing credit/issuing more money is, essentially, attempting to put out a fire by dousing it with gasoline. The government does not have the resources to “rescue” all the zombie banks whose obligations exceed their assets, not to mention all the homeowners whose mortgage obligations now exceed the value of their properties, not to mention all the industrial companies whose profligate and short-sighted management have left them vulnerable to the economic tsunami we are experiencing…etcetera, etcetera. Aside from laudibly refusing to rescind the mark-to-market rule, the only honest move the administration made in this sorry mess was allowing Lehman Brothers to go bankrupt…and typically, that is now seen as a misstep.

The one facet of our desultory march into hades has surprised us is the strength of the dollar. We expected that the gobs of money the Fed has injected into the system in an effort to stimulate lending would be immediately inflationary; we failed to adequately reckon with two contrary effects. The first of these is the deflationary effects of demand destruction. When everyone has degraded retirement savings, a home that is worth 30% less, and—if still employed—job security issues, no one is out there buying new cars or even new clothes…or, at least, not with the same old reckless abandon. When demand fades, supply waxes…and prices fall. The second effect that surprised us was the flight-to-safety effect that—ironically—has money piling into treasuries. So desparately were money managers seeking a safe haven for funds that last month we had the spectacle of the USA borrowing money at 0% interest! Folks, when the safest place on the planet to put money is in bonds issued by a virtually insolvant government, we are in deep doo-doo.

Of course, Paulson is history and Obama is imminent. No matter what, 20 January will be a day of optimism and celebration for the USA. Perhaps the new man’s vaunted pragmatism will light the way towards smarter and less short-range responses. We hope so with our hearts, but our heads are saying, “don’t invest on it.”

Conclusion: Let’s hope for the best. The incumbant crew was most definitely leading us deeper into the morass; the new crew recognizes we are in a big hole…perhaps they will be smart and brave enough to stop digging. We subscribe to the injunction to make love, not war, but we still believe in being prepared for both. Accordingly, we retain three inverse ETFs in the portfolio…covering the consumer goods (SZK) and services (SCC) sectors as well as the S&P 500 overall (SDS). We still expect the cumulative effect of the liquidity injections and increased need for borrowing by the USA to eventually degrade the dollar’s value, and consequently remain long our commodity plays (GLD, SLV, and DBA). And finally as a hedge against a quicker-than-anticipated recovery, we still retain our China and India emerging market funds (FXI and IFN)—as we expect those economies to lead the recovery.