Random Musings: Lowering Forecasts & BofA & Big 3 CEOs are Idiots
Here are a few random thoughts that popped into my head this morning:
- I have a new personal forecast for the U.S. housing market. I now strongly believe that home prices will continue to fall, by possibly as much as another 15%, throughout 2009 before reaching an eventual bottom in early 2010 and sitting there for a long time.
- I've said it before and I'll say it again...stay FAR away from any consumer discretionary stocks. I expect the savings rate of U.S. households to rise from its current level of zero to a more historically normal level of at least 5% and possibly as much as 10%. This increased savings rate combined with a massive negative wealth effect and rising unemployment will cause a lot of pain for in the U.S. where consumer spending accounts for 70% of GDP.
- Both of the above points lead me to believe that the U.S. will experience a worse recession than I had expected earlier this year HOWEVER while what we go through today will certainly be unpleasant a lot of it is priced into the market at these levels and it will be no where near as bad as the Great Depression. Investors who slowly average in to the right stocks today... well run companies in the right industries that pay solid dividends will be very glad that they did so several years from now.
- Oil is in a never-ending downward spiral. I would not be surprised in the least if we saw it hit $30-something per barrel. The precipitous fall in the price of oil, combined with the still tight credit market will cause major problems long-term as new projects come to a grinding halt and non-conventional sources like oil sands and deepwater drilling experience major pain.
When the global economy eventual stabilizes, and make no mistake about it...it eventually will, the price of oil will soar as existing fields get sucked dry and no new supply comes on-line. For now, I would stay very, very far away from any oil sands companies. Even the best companies that have benefited from the boom in oil exploration, like my beloved Transocean (RIG), will probably have problems in this environment if oil doesn't rebound before its contracts begin to expire.
- In one of the dumbest statements that I have heard in years, Bank of America CEO Ken Clueless er um Lewis hammered on a potential bailout of the Big 3 automakers at a speech at the Detroit Economic Club yesterday. Specifically he said "I think there's one too many" automakers and "I think the American people are suspect of just giving more money and buying more time..."
Are you kidding me?!?!?! I know that the automakers are poorly run, but the actions of companies that BofA now owns, like Countrywide and Merrill Lynch, and probably its own actions significantly contributed to the tight credit markets and economic slowdown that were the final straw that broke the automakers' backs.
Not only that but, Lewis was recently given a huge chunk of the $125 billion that Paulson and friends handed over to banks. You know what they used the money for? Not lending to consumers and U.S. businesses like it was intended for, instead it used the money to increase its stake in a Chinese bank!!!!!! Lewis needs to shut the heck up. He's so annoying that if I wasn't so lazy I'd switch my bank account from BofA to another bank like Chase.
- While I'm on the subject of the automakers, what the he-two-sticks is wrong with the CEOs of the Big 3? How on Earth could they fly to their testimony on private jets and go before Congress so unprepared? They should have had all sorts of presentations that provided specific plans on what they would do with any money that the government loaned them. Instead they shuffled in there like a college kid who was unprepared for a test and failed miserably. Wagoner has to be fired.
- Deflation is rearing its ugly head in the auto industry. I just heard this morning that used vehicle prices are falling so rapidly that a decent-sized private auto group in my neck of the woods has instructed all of its stores to no longer accept trade-ins. Yikes. That's not going to make it easier to sell new vehicles.
- In other auto news, a local, family owned Pontiac / GMC store in my area recently closed shop. During the prime of the auto sector a few short years ago, this small store retailed around 150 units per month. Guess how many it sold at this point in October? 4. Ouch.
- Is anyone really that surprised that Citigroup imploded yesterday. Sure it has some valuable assets, but here's a company that was executing terribly before the financial crisis that is now being run by the former head of a hedge fund that it overpaid for (it collapsed a less than year later) as its new CEO.
I realize that there's lots of pessimism in my above statements, but remember that this is not the end of civilization as we know it. I don't necessarily think that stocks have bottomed out. Today's positive move at the open is probably nothing mroe than a dead cat bounce.
However, I need to reiterate my earlier statement that the economy will eventually stabilize. The time to buy stocks is when they are low. The 40% plus drop in stocks that we have seen this year may not be the end of the decline, but investors are being given a once in a lifetime opportunity to buy stocks at lower levels than we have seen in decades. Keep averaging in a little at a time to companies that pay solid dividends and you will be fine. I'd much rather collect solid divies than wait for Mr. Market to award me an earnings multiples that we may never see again if we enter an extended period of multiple compression.