Saturday, August 29, 2009

Irrational Exhuberance?

One of person I admire the most is Alan Greenspan and these days remind me a lot of him. Does the stock market frenzy is sustained by fundamentals? Are there any signs of recuperation? When someone is ill and shows signs of recuperation does not mean that the virus is away. I think the resilience of the American, German and French economies is quite astonishing but remind two things : first the stimulus package is not forever (remember the balance sheet problem described in the previous article) and second stock prices are based mainly by sentiment.

This sentiment has been nourished lately with some “positive news” but I think is too early to smile and to late to cry. In my belief the economy is on the verge of knowing( maybe one or two quarters away) if the stimulus is enough and the economy will get back on track (which I think it would take at least to the 3th quarter of 2010) or if the demand and supply were not able to change structurally and cyclically (increase and readapt).

The Dow has advanced from 6440 Units (this year low) to 9554.20 Units to date. Even a monkey could do a 50% profit just by doing nothing (if the monkey bought at year’s low, is quite difficult for a human but I think that the monkey has a better chance). I love the rapid rush that the stock market showed in the last three months. I picked some stocks that doubled, tripled, quadrupled or more, but still I’m seeing a lot of greed in the market and when I see ungrounded greed I start to be fearful (to see the perfect example of ungrounded greed , look at AIG’s stock price in the last 4 weeks).

I stay long long long (this means to hold them) on stocks, but I do remain concerned of real operative indicators (scrap metal prices ,FF indexes,inventory turnover, consumer confidence, among others). If indicators do not improve we will see a setback in earnings (increase in some earnings could be caused by a decrease in previous quarter inventories),thus in stock prices. Buying the Dow at 9500 is far better than being on fixed income, in the long run it will outperform.

Time will say if we have a Alice in WonderlandMarket , surrounded by irrational exhuberant sentiment or if we have an articulated, resilient, stable and back on track demand for goods and services aiming to 2007-mid 2008 levels.


Wednesday, August 19, 2009

Dumping Dollars?

In my point of view Dollar is not the right place to sit. Maybe its seems like the chair with more cushion but would you sit on a chair with great cushion and two broken legs? I wouldn’t . Would you invest in a company that spends 185% of what it receives from their customers? I wouldn’t. That its debt is growing 1% a month? I wouldn’t. This company is called United States of America and their shares are called Dollars. Pundits qualify the US as the safest country to park your savings, thus denominated in their currency. With all due respect that is only regarding the probability of default, but what about the purchasing power risk ?(dollars vs Euros, GBP, Remibis, Yens, Pesos,etc).

Being sympathetic with accountants I will explain how I see the US situation, looking it in a balance sheet wise , what happens when a company increases its liabilities and the proceeds go to spending (with no added income from this spending)? You reduce stockholders equity wright? And how do I name the shares of the company? Dollars, so basically they worth less as the company increase its leverage and increases spending.

This increase in borrowing from the US will erode the value of the US Dollar . The US is borrowing about 2 trillion dollars additionally each year, 400 billion financed by Chinese and 500 billion from domestic market and the rest from other places of the world. To revert this pattern the country has to deleverage itself, otherwise you will see a declining value of the dollar, inflation and real negative returns from holding dollars (cash and bonds). The only way to deleverage is to increase taxes (which due current conditions is not feasible at least until 2011) , thus having enough money to repay or at least not to incur in additional debt.

Don’t get me wrong I’m not saying do not invest in the US, go for stocks because they have an inflationary component , not a 1 by 1 but they will capture in value from inflationary times (depending on industry and company , but in average they will increase in nominal terms as inflation increases because their revenues will increase). Basically my point is you could do better holding cash or bonds in other currencies than holding just cash or bonds in Dollars.

Wealthy Mexicans base a huge amount of their savings in US Dollars relying on a basic tenet; to preserve their purchasing power. I wonder if this decision is based from a fundamental point of view or it is a mere tradition (maybe I’am not seeing something). Maybe they just like dollars but I encourage them to diversify and do not remain only parked in a currency with huge deficits.

Thanks for reading

P.S. For a country borrowing is not a bad, as long as the cost from doing it is below the benefit for the country as a whole.

Tuesday, August 18, 2009

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Ricardo Montes d....