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Good Morgan report. I liked the earnings graph (hint - it's too high)
Latest Letter to me Investment Peeps
I've been continuing my economics hobby.
Frankly, I don't know why I do it, but it keeps me entertained.
I went back and looked at my last letter to you and not much has changed. Things are still sideways, with the exception of happy stock markets.
The US and the equity market is on a terrific tear, but I cannot find more than a couple of positive data points in the sea of information. I know, there has been some positive movement in unemployment, but I find that to be a trailing indicator and still very high. I've also seen some of the manufacturing indexes looking positive, but it's far from a trend and they're still at depressed levels. More worrisome is the belief that the US is somehow decoupled from the global economy and that's just not the case. Europe remains a mess with much of the Eurozone in a recession and with high unemployment everywhere but Germany. What little information that comes out of the second largest economy, China, doesn't seem positive at all. Across the board, the Chinese economy looks stalled and artificial - with numbers posted mainly on gimmicks and not on a durable, sustainable future. I believe we're in for one of two paths. The first path is that indicators will sour and unemployment will drift up to double-digits by the end of the year - I'd expect this to be apparent in 1Q numbers starting mid-April with warnings from big players expected next week. The second path is that every possible switch and lever that can be pulled will be pulled to push off as much as possible until the top of 2013 -- to work around election season. I'm unsure if the second path will have much effect and if the start of a broader decline might start mid-year regardless of policy.
I'd like to believe that the run on equities is a sustainable, but I think it's actually just massive liquidity from the last several years of loose policy and a global flight to value looking for any returns. Much larger markets like bonds and real estate are choppy at best - disconnected at worst.
What does this mean - worst case there is probably a sub 11,000 level in DJIA; double-digit unemployment; civil unrest in China, Spain, Italy, Greece, and possibly the middle-east, and big turnover in congress and the whitehouse. In reality, I think that having some vehicle to take advantage of negative sentiment might be a helpful hedge in the short-term. At least locking in some gains and being positioned to buy on a downswing would be good.
Talk to you soon,
Dave
Letter to my investment peeps...
There appears, to me, to be excess risk in the market that isn't well understood or priced in. Besides the regular issues with an election year, I think that Europe continues to not have a workable outcome in their overall debt management and they certainly are not seeing any growth from the austerity movements. Besides the regular players that are in the news, France and UK appear ripe for continued sliding. I think that this makes for a perplexing situation in for investors as that there is not really any viable place for cash. But I think that's irrelevant as Europe tackles the real issue of liquidity versus insolvency and what to do with that. I believe that most of the nation states are simply insolvent and need to have a restructuring of obligations thought a default process like Argentina. Emergenging markets like China, Brazil, and India appear to be slowing, with the most turbulence economically in China, but I think that there will be general political unrest both in Europe and emerging markets as the middle class figures out that they're not in any power position. In the US, I'm concerned about three things 1) the popular political belief that austerity leads to prosperity 2) MFGlobal rehypothication and the theft of (perhaps) billions from tens-of-thousands of accounts to make JPM whole and 3) continue softness in housing and employment. Upside seems scant. Generally, employment seems to be heading in the right direction and if states and localities get the ball rolling on running out the property shadow inventory and pushing foreclosures than a real price point for housing can happen and there can be some good news in that sector. I think this coming year will see continue preasure on local economies, particularly in CA, AZ, NY and NJ. However, there might be some solace in that the rest of the world seems to be in worse shape than the US so there could be a flight to the dollar and to equities as well as US hard assets like property (which we saw with the Japanese in the 80s). That might put some inflation preassure in the US and make things like imports more expensive, but we'll see. If the administration continues to push on cutting spending with the right-wing politicians and refuse to grow the economy through smart spending and taxation then we're just on our way to a Japanese sideways economy for the foreseeable future. I think the Fed is out of growth options and can only buy Treasuries at this point. The middle east continues to be wacky, but the world survived the most political crazy times in some of the most oil rich places without much issue. If Iran and Syria continue to be risky it shouldn't matter too much unless there is a larger event with Israel or larger civil unrest in the Arab peninsula. I think to make money in this market you have to be active traders and to seek value with dividends in equities perhaps hedge the account with funds that appreciate when the market corrects. I'm not optimistic, but I don't have a lot of other ideas or options.
