Global: dead cat bounces
Summary
The herd is in disarray. Cookie cutters keep getting swapped, like blinking lights. Yesterday's bad news now is good news. The fact that Goldman does not feel the need to write down portions of its mortgage assets is neither here nor there: Goldman is in a league of its own. What about the other banks who have not divulged how much losses their avarice has goaded them into?
- Ah, you say, but Wal-Mart's (WM) profits are up. Sure, that is because WM had to cut prices earlier than last year, as well as having to discount more items in order to lure customers who are having to pay more for their gas and mortgages. This, along with a falling dollar, suggests that WM's profits rose because of rising turnover, courtesy of more discounts. However, the higher dollar surely must be hurting their margins. So just because WM beat analysts' predictions means little to those of us who are looking ahead. Besides we foresee stagflation invading America's shores next year....: this must kill profits!
How can US profits rise if The Economic Time™ in America keeps wilting? As we just suggested with WM: the key reason for better than expected profits is because they slashed prices so much that turnover got a boost - but, this implies that margins got a whack, does it not?
Topics Covered
1. Reasons for suspicion
2. How to make money off suspicion
Background
1. Reasons for suspicion
Readers know how deeply we have disliked The Economic Time™ in America for many moons. With bank lending standards getting tighter, mortgage lending virtually has stopped. At its more recent peak in 10/04, banks' real estate lending grew by an annual 45%; this October, that figure had wilted to an annual 2%! We have suggested before that one's home is a very basic need in Maslow's pyramid of needs. So if this need is threatened, consumption will get hit: normal folks are getting scared.
Also, The Economist of 10th November poses three trenchant questions regarding the state of the American banking system, to which we add a fourth at the end:
- Just how much do the banks stand to lose? We have suggested that the problem is a bottomless well. Others suggest something in the region of USD 700 billion;
- Do banks have enough capital to survive the crises? "At some institutions, mounting losses are making the cushions of capital held for times of crisis look increasingly threadbare. Wall Street firms and European banks use a special accounting provision for securities they consider hardest to value, which appears mainly to involve educated guesswork. Street the amount of securities in this category has ballooned and could easily wipe out the big firms' core capital if they are written down to zero - which is improbable but no longer thought impossible.
- How might the broader economy be hit? From the vantage of the Economic Clock™, watch an excess demand for money arise in a different guise: tighter lending standards mean that credit is tougher to get, so down goes lending.
- We add our own, final question: even if all the US banks come clean, what about their more opaque foreign colleagues whom they have lent money to/have correspondent banking relationships with? I could imagine, for instance, a large Japanese bank that has bought plenty of sub - prime junk, but is telling nobody. When it does blow up, that bank tanks - along with all of the loans it has from its US correspondent banks. So foreign banks' undisclosed sub - prime exposure very well can hurt US and other banks once it comes out...
Finally, in the same Economist, Buttonwood columnist, Philip Coggan, suggests that "Copper has spent much of the last two years in backwardation. But it recently moved to a state of contango, where futures prices are above spot prices."
OK, some explanations on this quotation are due:
- Backwardation happens when spot prices are higher than futures prices. "...that is normally a sign that users are desperate to get hold of a commodity and are willing to pay a premium for immediate delivery."
- Copper is perceived to be the most economically-sensitive metal: after all, its is used a great deal in construction, and thus is called "Dr. Copper" by economists. Its price is falling, meaning that its inventories are rising, because of a housing slowdown in America as well as in Japan.
- The result is that contango has been on the rise: spot prices are lower than futures prices, courtesy of higher inventories.
A falling dollar and rising commodity prices very well could morph into stagflation in America next year, a longer-held concern of ours.
All of which implies: how can profits rise if the growth outlook is getting dimmer - in the US, Japan and in the EU? Put differently, how can corporate profits rise if turnover and margins are getting hit?
2. How to make money off suspicion
- Always get your financial adviser's advice first!
- Short the US market. Buy the Proshares Ultrashort S&P500 (SDS:US), for instance.
- Buy commodities, perhaps via the following ETFs:
- Oil. Seems as if the Muddle East mess is going to worsen. That, along with winter approaching the Northern Hemisphere and energy demand rising in the likes of China and India, means that oil demand has to remain high. (ETFs Oil Securities are one vehicle: see OILB:LN)
- Gold. We all know that this is a "fear" investment. Besides, with non-dollar commodity currencies rising, along with the Euro, gold is cheaper for them than it is for a USD-based investor. So you might want to by Physical Gold ETFs such as PHAU:LN
- Platinum. Johnson Massey has just released its 2007 Platinum Review. Demand os outstripping supply, courtesy of booming car industries in the likes of China and India. Besides, labour unrest in South Africa is not boosting mining output, either. Have a look at a physical platinum ETF such as PHPT:LN
