Am I bearish, or just right? / Rates are up / These companies are on a roll / Get your own freaking phone
July 24, 2008
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RELATED TICKERS: MO
, NUE
, SYT
There has been a lot of talk about how negative the tone of a lot of the CAPS bloggers has been lately. While I think that we are likely to see a short-term rally in the major indices through Labor Day (or that they will at least remain flat through then), I remain EXTREMELY pessimistic on the current state of the U.S. economy, particularly the U.S. dollar.
Does that mean that one can't make any money by investing in the stock market (not short selling)? Absolutely not. I think that it is important for bloggers to bring what they believe are solid investment ideas to the table, rather than just crying about how bad everything is. In my opinion, tons of money can be made over the next several years by investing in the right places, which I still strongly believe are commodities (including oil, natural gas, ag), multinational U.S. companies with solid business outside of the United States or that are heavily involved in exporting, and foreign companies. Wait you say, this is the same stuff that you've been touting for months and that has been working for the past year? That's right. While it is very likely that these things will take a breather for the remainder of the summer, I am absolutely convinced that after that breather the sectors that have worked in not so distant past will rally again.
Why am I so pessimistic on the U.S. dollar? Jim Jubak, a well respected investor / journalist who is neither a gold bug nor a perma-bear sums up the problem with the dollar extremely well in his latest column: The huge threat to the US economy. Here are a few excellent quotes from it:
- "In the days since the crisis at Fannie and Freddie turned red-hot, the council that advises Saudi Arabia's king has recommended revaluing the Saudi currency, the riyal, which is pegged to the U.S. dollar, by up to 30%. That could be a first step toward switching the riyal from a price pegged to the dollar to one pegged to a basket of world currencies.
A similar advisory body in Abu Dhabi has suggested abandoning that country's dollar peg for its currency. A third oil-rich Middle Eastern country, Kuwait, ended its currency link to the dollar last year.
More ominously, because the threat is more immediate, some of the world's largest sovereign wealth funds, including that of China, are edging away from the U.S. dollar at an increasing speed. China's State Administration of Foreign Exchange, which holds the majority of China's $1.6 trillion in foreign currency reserves (mostly in dollars), has been holding talks with European private-equity companies about investing in their latest round of funds. That would shift dollars in to euros."
- "The U.S. government is caught in a terrible bind.
On the one hand, if the government doesn't stand behind Fannie Mae and Freddie Mac, many overseas investors will see it as equivalent to the U.S. government defaulting on its debt. If the U.S. government walks away from Fannie and Freddie, these overseas investors will worry that the U.S. government will walk away from the other U.S. debt they own and from the dollar itself. There's already a suspicion among overseas investors that the U.S. government will try to solve its dual problems of a massive government debt and a massive trade deficit by letting the dollar tank. On the other hand, if the U.S. government does back Fannie Mae and Freddie Mac, it runs the danger that overseas investors will simply add Fannie and Freddie's $5 trillion in mortgages and guarantees to the $9.5 trillion the U.S. government already owes. By that calculation, a bailout would increase the debt level of the U.S. by 53% overnight."
- "And if the U.S. doesn't come up with a credible plan? To protect their own interests, overseas investors will increase the rate at which they're moving away from the U.S. dollar.
In the short run, that means a cheaper dollar -- good for U.S. exports but bad for U.S. consumers who will have to pay more dollars for everything this country imports, including oil. In the longer run it means underperformance by U.S. stocks and bonds because overseas investors will want to hold fewer of them. It means higher interest rates because the U.S. government will have to pay more to get overseas investors to overcome their reluctance and buy our debt. And it means slower economic growth from higher interest rates and an increased cost of capital to U.S. companies that want to expand their businesses.
What's happening at Fannie Mae and Freddie Mac wouldn't matter so much, of course, if the U.S. didn't owe so much to the rest of the world. But it does. The sooner we realize that the two most important jobs a debtor has are successfully managing creditors and getting out of debt, the better off the U.S. will be."
This situation is no joke my friends. What the government has done in its handling of the economy, particularly with the national debt and with Fannie / Freddy is absolutely criminal. The same goes for Alan Greenspan's actions at the Federal Reserve.
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Here's another fun statistic. According to Bankrate.com, the 30-year average US fixed mortgage rate rose to 6.5% yesterday, its highest level since April 2002. This definitely is not going to help the housing market and it will prevent the Fed from raising interest rates any time soon.
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Quick Hits
- Smokers Fire Up Philip Morris' Profits: Despite reporting an amazing quarter, PM's stock fell by over 1% yesterday. To me this is an attractive entry point for the stock of a company that is performing exceptionally well, post-spin-off. As an added bonus it currently pays a dividend of 3.6% (I love dividends). This is just the sort of company that will flourish in a falling dollar environment.
- NUE Set Up Well for Coming Quarters: Zacks recently published a small piece on how Nucor's recent sell-off is a buying opportunity. Goldman Sachs published a similar note earlier this week, stating that it believes investors are over-reacting to a potential slowdown in the global economy and that continuing strong demand trends in emerging markets are putting a strain on the global steel supply. Goldman believes that any slowdown in the U.S. will more than be offset by growth abroad and that NUE will continue to report solid earnings for the foreseeable future.
- Syngenta Half Year Results 2008: Strong performance, positive outlook: SYT is up over 3% so far in a down market today after reporting tremendous quarterly results. If the ag boom continues, as I strongly believe it will, SYT will continue to thrive.
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Oops
Brett Favre might want to invest in his own cell phone
What an idiot.
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