Hooray, Q2 is over! Boo, it's going to get worse before it gets better! / Earn "glowing" returns by investing here
July 01, 2008
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It’s not often that a line is funny enough to get me to nearly spit my morning coffee all over the computer screen, but the opening line from today’s post by gold bug / dollar hater Addison Wiggin’s “5 Min. Forecast” is a classic:
“Congratulations! If you can read our daily forecast today, we gather you have at least enough cash to pay your monthly utilities. Thus, you’ve survived the worst June for stocks since the Great Depression. Kudos.”
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Even though the second quarter has mercifully come to an end, I am afraid that the economy is going to get worse before it gets better. The unemployment rate has been rising over the past several months because businesses have been laying off their employees. Some analysts are looking for the unemployment situation to improve as we approach 2009, but I personally believe that it will continue to get worse. The other shoe, layoffs by state and local governments, has yet to drop…but it’s coming. BusinessWeek published a great article on this subject yesterday titled The Next Victim of the Real Estate Crisis.
The strong economy of the past several years has enabled states to rake in tons of money from sales and income tax, and especially from collecting property tax on skyrocketing home prices. Much like the domestic automakers who are starting to feel a ton of pain after squandering the last decade’s boom in auto sales, many states’ balance sheets are already in bad shape and they are just starting to see lower tax revenue. According to the Center on Budget & Policy Priorities, at least 30 states have reported budget shortfalls totaling approximately $48 billion as they finalized their 2009 fiscal budgets (most states’ fiscal years begin today).
State and local governments will likely begin to use up their reserves and then rack up huge debts rather than cutting spending in any meaningful way, hoping that the economy will turn around before they set their 2010 budgets next July. However, that trend is not sustainable and I believe that they will eventually have to cut their budgets. Reduced spending by the government and the layoffs that they may eventually have to make will prolong and possibly exacerbate the current economic slowdown.
This is one reason why I am so negative on the economy and I strongly believe that the Federal Reserve will have to keep interest rates at a much lower level than many analysts and economists believe, causing the dollar to fall even further and inflation to get even worse. Translating my last statement into a tangible investment strategy, I plan on staying underweight…if not short consumer discretionary stocks and long companies that will benefit from the high commodities prices that will likely result from a U.S. dollar that continues to fall like oil, metals, and even ag commodities.
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Going back to my earlier reference to my about keeping the lights on, the tide seems to be turning for nuclear power. After not building a single nuclear power plant in the U.S. since the end of the Civil War (I might be a little off on the exact timing, but you get the idea) more and more politicians and U.S. citizens seem receptive to building new plants. I have been building positions in two power companies that have nuclear plants over the past several months and I have added a number of power companies that have exposure to this sub-sector to my CAPS portfolio. As I mentioned in a previous blog post, the U.S. does not have enough power plants to meet its growing need for electricity (see post: Put a charge into your portfolio by playing this trend).
Add this insufficient power generating capacity to the ever increasing likelihood that a government which has all three branches controlled by Democrats will eventually pass some sort of cap and trade or carbon tax law and nuclear power becomes an extremely attractive long-term play.
Deej
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