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A TOE IN THE TECH WATERS Market Pulse Last week I opined that “the real possibility of a panic-induced crash now enters the picture.” No truer words have ever been spoken. Considerable risk still remains to the downside. However, I do think it is time to begin to consider selectively going long this market. The trick will be to find the right sectors that will lead any rebound – and some undervalued stocks relatively immune to cyclical pressures. You can rule out anything to do with energy and commodities. A global recession is now guaranteed, and pressure will continue to weigh heavy on these key factor inputs. Ditto for banks, the financial sector, and homebuilders – at least til we see how the bailout takes hold and headline risk diminishes... Cutting the Gordian Knot Why has global stock markets plunged? Why has the global economy plunged into a recession? Why do governments around the world appear to be so powerless fighting this crisis? By answering these three questions, we may see a way out. Global stock exchanges have plunged because stock prices reflect expectations about a future stream of corporate earnings. When the economy softens, investors expect corporate earnings to be lower, and they started dumping shares. Once that bearish trend starts, it does not reverse until investors are confident that the economy is recovering. The global economy has plunged into recession because all four components of economic growth are in distress -- consumption, business investment, government spending, and net exports. Consumers now face a very significant “negative wealth effect” that is eroding their ability – and willingness – to spend. This negative wealth effect has come about from higher energy prices, the collapse of housing prices, and a collapsing stock market. Today, as consumers wake up to incredibly shrinking portfolios, they are fearfully pulling in their spending horns. On the business investment front, the onset of a recession has severely cut cash flow along with both the ability and willingness of executives to undertake new capital investment. With credit markets frozen, businesses cannot even properly finance ongoing operations or meet payrolls -- and layoffs mount . The bailout has not yet undone this damage. The picture for net exports is equally grim. Over the last year, a sharp rise in US exports helped stave off recession. This rise in US exports was driven by a dramatic decline in the value of the dollar, which improved US competitive advantage, and robust growth in both Europe and Asia, which fueled export demand. Today, however, virtually all the major economies of Asia and Europe are slipping into recession or slowing down dramatically. Meanwhile, the US dollar has regained some of its strength in the face of global weakening. Both of these forces are hitting US exports hard – even as both Asia and Europe find it increasingly harder to sell to the US. It is for all these reasons that the fourth component of the GDP equation -- government spending -- will be pivotal in any solution. During the Great Depression, the great British economist John Maynard Keynes figured out that when consumption, business investment, and exports all fall, the government can step in to fill the spending gap to jumpstart the economy. Today, however, ideological conservatism has not only perverted the use of a traditional Keynesian fiscal stimulus in the US. Government officials are also far more inclined to rely on monetary policy and the use of interest rate cuts to fight recession. The perversion of Keynesian fiscal stimulus has come in the form of a strong political preference in the US for tax cuts rather than increased government spending to jumpstart an economy -- just listen to both presidential candidates prattle on about this. The obvious problem with tax cuts is that there is no guarantee that consumers will spend them -- particularly if times are tough. A similar problem exists with monetary policy. It now seems that with every turn of the recessionary screw, the only thing the US government knows how to do is to cut interest rates. Monetary policy is, however, notoriously ineffective in a recession. The reason is that you "can't push on a string." No matter how low the U.S. Federal Reserve sets rates, business executives will not invest in new capital equipment and consumers will not buy big-ticket items like cars and houses if they believe the recession will continue. How can the U.S. see its way out of this mess – and resume its role as the locomotive for Asian and European prosperity? The first thing America needs is a political leader with credibility who can, like Franklin Delano Roosevelt did during the Great Depression, convince us that there is "nothing to fear but fear itself." This political leadership is essential to restoring the economic confidence of both business executives and consumers. Will Barack Obama or John McCain be up to that task? The second thing the U.S. needs is a traditional fiscal stimulus with a very 21st-century focus. A significant increase in government spending on programs aimed at energy independence, housing market stability, the rebuilding of America’s aging infrastructure, and the provision of affordable healthcare would truly be an appropriate fiscal policy. Only when the U.S. recovers, will Asia and Europe follow suit. Presidential Politics – PRESIDENTIAL DEBATE ANALYSIS The young, inexperienced guy looked very presidential. The old guy just seemed irascible and paced so much that Tom Brokaw's coffee got nervous. Meanwhile, the bottom has fallen out of the Sarah Palin market. Two thirds of the country are frightened to death that she is a heartbeat away from John McRascible. And by the way, I chose to watch the debate on CNN because they have this neat little gadget that records in real time how undecided voters are feeling about what each of the candidates may be saying at the time. Every time that McCain attacked Obama, the sentiment graph fell into the negative red zone. Memo to John: your job is not to attack Obama but to make a strong case that you're ready to be president. Let everybody else in your campaign and your party take their swipes at Obama. You must stay above the fray. Quick Takes
THE CHINA EFFECT Please see my latest You Tube report.
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2008
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INFORMATION DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance. |
