Fundamental Trading Diary

Fundamental analysis of the capital markets

Last Week’s Bloodbath

This month is not shaping up very well.  End-of-year selling is combining with deleveraging (Bill Cara points out that the short selling ban seems to have been timed in order to allow Goldman Sachs to deleverage to fit deposit bank regulations) with a healthy dose of sheer panic.  If it ended today, this October would be the 5th worst month on record for the Dow Jones Industrial Average since 1928.

The Bad & The Ugly

Let’s also face it:  large portions of this sector just simply aren’t ready to come up yet.  I reiterate that we’re fundamentally undervalued on a long term (6-18 months) period, but earnings are not going to support much higher valuations if they continue to come in like they have.  What to pay attention to:

Tuesday:  Pepsico, Intel, Johnson & Jonhson

Wednesday: Abbot Labs, AMR, Delta Air, JPMorgan, Coca-Cola, Wells Fargo

Thursday: AMD, BBT, Capital One, Continental Air, Google, Merrill Lynch, Nokia, United Tech

Friday: Honeywell

Additionally, there are a pile of smaller cap financial companies which could certainly set the table if they come in bad.

The Good

We’re so damned oversold, and there is so much damned money — most especially foreign — on the sidelines.  We’re due for a bounce.

Let’s not forget that the complexion of the market changes as the economy does.  Every 5-20 years, the market goes through a tectonic shift as the money invested in companies whose models are no longer as profitable shifts into companies who are.  Due to the fact that our business cycles are exaggerated by lending leverage and monetary supply inflation, they’ve both created new profit centres (from the risk arbitrage the investment banks make on mortgage debt out to the dozens of cottage industries created by the housing boom) and increased the speed at which our economy digests them.  The shift into technology was one such move which happened chiefly in the mid to late 90s.  The investment bank model rose out of the massive monetary supply inflation while the stock market was taking a beating in 01-02.  This same driving force turned the market into one dominated by raw material and energy costs in 2005 through 2007.

Now, we face a fundamentally different market – one that likely doesn’t reward leverage or debt risk.  The total market value of the stock market is likely to bounce around a lot from here without a whole lot of solid gains or losses.  New companies will replace their more poorly run counter-parts in indices.  Economic darwinism will cut the fat away, and allow capital to seek the best stewarts.  After this process is complete (which certainly takes time – months and maybe years), we can move on.

At the same time, there are many individual stocks which have had the snot beat out of them — and they are not going to stay at bargain values.  The Russell 2000 Value Index advancing by 4.67% while the rest of the market was mixed and down is an indication of where capital will find its best stewarts:   the companies whose earnings are the steadiest, come at the largest discount and with the lowest debt.

Note:  I am having some problems with WordPress’ post editor.


October 12, 2008 - Posted by | Uncategorized

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