In case its not apparent in my writing, my outlook has been, and continues to be pretty bearish for the global economy, and especially earnings power for many of our US companies now that the consumer’s spending power is shot. Rallies like we are witnessing today should not be considered as relevant information when considering the trend of this market; the action is driven because hurricane Gustav turned out to be over hyped….but was this a miracle hurricane that erased the flaws in our financial system? No.
Jim Kunstler, whom I rarely take seriously because of the often unfounded cynicism of his content, actually offers an interesting thought:
While trumpeting the “dodged bullet” story-line, there have been absolutely no reports of what’s happened to the oil-and-gas platforms offshore, the Louisiana Offshore Oil Port (LOOP), or the tangle of pipelines running along the sea floor from these things to the onshore terminals and refineries. I’m quite sure we will not get any comprehensive news about these things for days, because it will require a huge effort of up-close inspection.
We’ll have to wait and see how the crude market reacts after today’s enormous sell off.
The bottom line is, I see very little conviction when considering the behavior of the market (huge gains one day, followed by losses which erase them the next), and it seems to be one which is reacting only to the headlines, since our fundamental standing is always being jumbled by news reports and speculation (like Lehman finally having a buyer). There is no sector which is attracting people’s money, and this could be a significant driver behind the confusion and volatility.
In terms of investment opportunities, many of the safer blue-chip, “cash cow” companies which pay large dividends, like Verizon (4.90% yield), Altria (6.10%), and even Pfizer (6.70%) have come off of their lows and sustained a rally. It makes sense when you think about it: people are flooding to investments where they feel the down side risk is limited due to secular earnings power, and they are further attracted by fixed income propositions, which yield more than any US Treasury bond…A flood to safety, if you will.
If that’s not interesting enough for you, there is always “PST” which effectively shorts the price of the 10 year note at 200% (you are betting that the yields will go up)…this would be the best bet for a Bernanke rate hike, *which is followed by a higher yield in the treasuries*, or a bet on our credit markets returning to normal, on a 10 year horizon.
Just in case you don’t believe me, the time in which the yield on the 10 year flew up 100bps (2004), as highlighted with the red trend lines, was when Greenspan began to incrementally raise interest rates (from 1% in June to 2.25% in December). We witnessed the inverse of this phenomenon this summer (2007), when Bernanke began to cut the federal funds target rate, as highlighted with the blue trend lines, and the yield on the 10 year plummeted 150bps.
Please don’t take my word for it though, its just a thought.
