Fundamental Trading Diary

Fundamental analysis of the capital markets

Themes & Forces for 4Q

I’ve been pretty quiet for the past several months, taking advantage of the momentum of global reflation.  With newly minted Federal Reserve displacing risk capital in government bonds and mortgages, they have forced many savers to speculate in equities.  This, combined with weak stimulus and low multiplier government spending, has led to earnings and valuations which would indicate a fairly regular economy.  Google’s P/E is 33.9.  Exxon Mobile’s is 10.99.  If you didn’t think we had a global depression hanging over our heads, the markets look pretty fairly valued.

None of this have helped the common man — at best, for the moment, it may have made it hurt less.  The October BLS non-farm payroll report surprised observers to the downside to the tune of 216,000 jobs.  Equities don’t care about the plight of the common man.  Inflation is generally good for large corporations who can more easily ring profit out of it at the expense of consumers.  The resultant imbalance is expressed in consumer debt.  The link between inflation and earnings is so strong that CXO Advisory bases their Real Earnings Yield Model on it.

The Federal Reserve is clearly trying to revive this inflate and borrow model.  Chris Martenson has calculated that the Federal Reserve is more than 100% of the 2009 mortgage market.  Why, then, also despite the $8,000 home-buyer tax credit, is the Case-Shiller Composite-20 only 3.6% off its recession lows?

Let’s first start by axing more than 20% of people who have mortgages beecause they are under water.  Next, let’s make them anxious about the economy by killing their retirement investments.  Finally, let’s shed 4,127,000 jobs – and not even make an argument about the overstatement of employment in government reporting.

If housing doesn’t start to move really soon, government obligations on their backstopping agreements are going to be measured in annual GDPs.

So, why am I still bullish on equities?

Liquidity, momentum & inflation.

This deflation has led to an inflationary pop as governments have responded to the threat.  Economist Marc Faber contends that this is actually good for equities, gold and inflation sensitive assets because the Federal Reserve will print more money as things get worse.

Most global equity markets are still trending strongly, consistently setting new highs.  The disturbing laggard is China, but after an index doubles in under a year, it’s not that damaging to the trend for a 20% pullback.  However, they really cannot slip back too much farther without putting the rest of the world at risk of dropping in sympathy.

Commodities are just shy of their recession highs.  Treasuries yields are suffering, but without a $1.75T bond purchase programme — and everything else considered equal — yields would probably be leading upwards rather than lagging.

Global reflation chugs along.  It may have dangers, but how is that different from the past 8 months?  The framework and willingness to monetise debt is present like never before.  To conclude, I will leave you with some of my long ideas:

  • EEM – iShares MSCI Emerging Markets Index.  The US economy isn’t going to grow in real terms any time in the conceivable future, but the emerging market economies already are again.
  • AAPL – Apple.  The best run large company in the world.  AT&T made it worth while to get Apple to extend the exclusivity.  Great management, great technology, great consumers and great marketing.  Take whatever I say with a grain of salt, of course:  I dual-wield my iPhone 3GS and MacBook.
  • DV – DeVry.  Recessions push the unemployed and underemployed to pursue new careers.
  • COP – ConocoPhillips.  Big oils are very undervalued, and if you believe reflation will continue, you have got to believe that they will pick up.
  • AEA – Advance America.  Cash advance is very lucrative business these days, and along with being long equities, I’m long American poverty.
  • TTWO – Take-Two Interactive Software.  Among its properties are Rockstar Games (Grand Theft Auto), 2K Games and 2K Sports.  This should rock the 4Q.  Did I mention that Asians are huge gamers, too?  Slack in domestic demand will get replaced.

I am on this train while momentum carries it.  Then, I will jump off it.

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October 5, 2009 Posted by | Uncategorized | Leave a comment