(Courtesy excerpt of the www.ingerletter.com weekly analytical posting minus video. I invite you as this crucial stage commences to visit us and join our nightly analysis.)
Gene Inger's Daily Briefing . . . for Monday January 26, 2009:
Good weekend!
Tricky markets and economic policy mazes . . . proliferate. Our clear thoughts in terms of the technical condition and probable ways to perceive what happens next, are addressed via the two videos that as embedded in tonight’s Daily Briefing later.
“The good Lord put eyes in the front of
your head rather than the back so you
can see where you are going rather
than where you've been.”
-Lou Holtz, former football coach at Notre Dame
Indeed; this is why since early 2007, we have been more concerned about the ‘play’, as a forecast new era dawned, rather than trying tactics related to a previous bullish season which was increasingly worn-out; even before the revelations about financial insolvencies got to be fairly widely recognized. Even now, many analysts are focused on trailing rather than forward earnings, or base their offensive strategy upon prior experiences (ie: multiples that are not valid in this era), rather than realizing that this secular bear (or ‘epic debacle’ as we forecast it to be in early 2007) requires throwing away typical references to the last 10-20 years in respect to valuing securities.
This is something we have argued even before the ‘sucker rally top’ in 2007. Going forward, this ‘clean slate’ analytical approach increases success or odds of survival, with objectives of ultimate victory (down and eventually up). It’s sort of like the Miami Dolphins with their unique ‘wildcat’ offense; initially, as planned, it caught big teams entirely off-guard, until they figured-out what was going on; after they lost the game.
We believe that by no means are we through this epic struggle; though in ‘the race to zero’ as we called it well over a year ago, we already won for so many formerly large cap stocks, that became so small that the NYSE today reduced listing requirements. I emphasize the subterfuge of just superficially looking at the Dow Industrial Average. I doubt most average investors realize that if all the crippled stocks when to zero; what would happen to the Average would be minor. You’d have to crash the so-called non-crashed stocks that investors have sought hiding places in, presumed as ‘defensive’.
I look forward and see ‘Commercial Property’ defaults (whether or not Donald Trump is able to secure financing for delinquent payments; as he fights to prevent default, in a sense sufficiently revealing). As you know I anticipate waves of further foreclosures of ALT-A or Options ARMS loans as long forewarned, irrespective absurd arguments about housing or related stock patterns as being sufficiently stronger than the S&P to warrant buying (it is an easy chart to construct; because if stocks recover nominally while the market is softer; of course ‘relatively’ they look better, as it’s incredibly hard to go below zero). The same might be said about Financials; though generally we correctly felt they were mere ‘lottery ticket buys’ in November’s purge; looking to sell into January peaks right as the market (per forecast) ran-into ‘brick wall’ resistance at the year’s start as we forewarned for weeks. And in the past two weeks we warned of a miserable response to General Electric, irrespective of the numbers; or the dividend maintenance it should be added (continuity through the year will remain debatable).
Looking backward at the two years since our forward outlook turned bullish to bearish it is clear that the only investors who didn’t show substantial losses were suggested to be in cash (or equivalents); or short the market, if they were of a inclination to join us on that endeavor (which was and did sort of win a ‘bowl’ contest, rather than just protect from loss during the games). Though too many ‘chase yield’ and worry about the return on their money; we argued worry about the return of it. Realistically, buying power of ‘cash’ increased considerably over the past two years; just by virtue of not being impacted by the market’s decline (doubly so for those of us who exited heavy real estate holdings back in 2005-’06 recognizing that too was an unsustainable and ridiculous bubble, during a period when basically ‘anyone with a pulse’ got a loan; as you know this is not hindsight as I sold real estate, and warned everyone as to why).
Consequently, most investors, looking forward, continue sitting in cash or equivalent; while money managers preach defensive stocks (often the last to crack but they do), and of course the ‘agenda boys’ typically push ‘head for the hills’ investments at the same time. That crowd argues you should only be in cash if you ‘anticipate’ deflation ahead. Well; that’s silly. We already have deflation. That’s what lower real estate and prices for everything from stocks to TV sets is; and it’s true in commodity areas also.
I have never said there would not ultimately be ‘an inflation’ so as to repay our debts, as best able, with depreciated Greenbacks; in fact I specifically have said that’s there in the future. But the future is the point; to anticipate all that now remains premature it seems; since this is going to be a drawn-out process, not instant gratification for bear or bull on these various sectors; just as we have outlined even the distribution back in 2007 would be a time-consuming process. Just because the internet generation used to ‘we want it now’ on-demand fulfillment understands what may occur; they do not at times seem to realize that the process is ‘at least’ as time consuming as historically is or was the case even during pre-computerized times. It may not be exactly ‘glacial’ in time, but like we said two years ago; the shifts are like turning the Titanic. You won’t know whether the iceberg is hit for awhile; and then when it hits you’ll know it. So will a Nationalization of the banking system (quasi-already) be the proverbial iceberg that Gov’mint thinks will steers us clear, or will it float us into new unchartered ice floes?
(Certain forward comments, in fairness, reserved for ingerletter.com member; please visit our web site and join our nightly commentary.) That essentially in many iterations I proclaimed as we anticipated various phases of the ‘panic’ as unfolded; but we have unfinished business mostly with un-crashed portions of the market (of which there are comparatively few). Only after this process, can evaluations of the extent of ‘inflation’ commence. That’s why we called a couple good moves up (and down) in Gold, and suggested the current rally would be comparatively (reserved for members). In terms of the British Pound it obviously is stronger; but don’t forget we’re the guys that were not only bearish on the S&P, but ‘relatively’ bullish on the Dollar; something that the permabear gold-bugs have a great deal of difficulty computing or comprehending.
Further, many of them were right conceptually but lost money by playing commodities or foreign markets they thought would be stronger; as I warned they would submerge (and that was right in the process of highs being put in for China, India and others). I even did a courtesy video the Chinese could view so as to warn them how the ‘Bull in their China Shoppe’ was about to cause unprecedented carnage two years ago.
So my point is that besides being correct about economics; in a deflationary debacle as we are in; it was essential to maintain an across-the-board defensive status; and the best investment has indeed been cash. Aside nibbling as outlined (reserved) we believe this continues to be the best approach for now. Further; while conventional wisdom is strength on the backs of new Government proposals and risk later in the year; we see the inverse; a realization that Gov’mint can’t do it all; that as we quoted the WSJ the other day, even Feds realize much has to occur only later as recovery is underway; which we think means the borrowing won’t be there until or unless certain trade policies are clarified. That means contentious ‘funk’ (as outlined to members).
The Fed essentially has been in a liquidity trap. It aggressively has gotten the money supply to grow but has not rekindled inflation yet (which they need to spike so that at least a good portion of debt can be repaid with depreciated Dollars), but as it has not as of yet been able to get the economy to rally (it’s actually in accelerating decline we hasten to note), and the American people are finally in a ‘savings mentality modality’. We suspect more than a sophisticated or refined recovery plan will be needed to get things moving in terms of jobs, wages, and initiation of new engines of ‘actual’ growth rather than false growth (which was just the consumption binge).
Where that leaves us is a market horsing around these levels just above November’s lows; while the Transports already penetrated them as we’ve noted (and forecast); as well as a continuing sluggishness of the technology sectors, almost across the board. If the market ‘really’ ignores bad news that’s fine, and we’ll respond accordingly. But at this point such assumptions, including those who view the A/D Lines bullishly, are misinterpreting the forward implications. They’re looking at daily declining numbers in a favorable way after a simple and projected yearend upside grind that ran into a wall of resistance as projected. Actually what the A/D has done is simply resume declines.
Opportunities will not be so simple going forward, but they will occur as we outlined to our ingerletter.com members over time; and that partially relates to where companies made premature decisions (like the netbooks and cheap chips) to anticipate volume, where volume for profits they need do not yet exist, and thus decimate profitable for the traditional products (like laptops) in advanced markets, because price declines for a lot of users, create adequate computing power for routine tasks without expenditure in-size. That is precisely the kind of thing denying any ramping earnings until broader recovery sets-in, which can’t even yet be projected with anything other than ‘hope’, a justification for the lack of guidance from so many companies (if they had to provide it the odds are it would be negative, which is why they hold back). Eventually markets it seems will materialize in-size so as to allow decent margins. But for now these firms are set-up for higher unit costs and higher volumes than what they’re offering. If you doubt my thinking; then why are big firms like Sony, Samsung, Cisco and Intel doing exactly what they’re doing, and why are they shutting down lines and firing people as fast as feasible. Not because they see boatloads of goods or profits appearing soon.
I of course intend speculating ‘long’ in some of these before recovery; but (reserved). For sure; since we’ve been bearish from the highs (actually sold several virtually right at the proximate highs as members know) prices appear to look very attractive; but it seems to me they can look even more attractive as this year’s first half evolves more. In other words, I’ll be content buying in this ‘range’ (redacted for members only) if (as suspected) the old lows come out; probably as outlined between now and (as noted).
It’s a new era in a new Century; and as I (unfortunately) had to project; the first major economic contraction, bordering on a Depression, was the risk we faced not only as I outlined in early 2007, but as was outlined when we defined early 2000 (literally right at the Century’s start) as a ‘secular’ top; with the projected 2002-2006 (into early ’07) as a giant ‘reflation’ effort; sort of a super ‘Hail Mary’ pass attempt at revival. We did play it just right; didn’t like that it empowered consumption; not citizen wealth creation of a truly sustainable type (ie: was too concentrated in leveraged or low-interest rate speculation; with no correlation to increasing the industrial base of the United States). Some futurists like to contend the huge reflation is ahead; wrong they missed it; our perspective of it being from 2002-2006 was correct; accordingly it’s behind us now.
And as we welcome the new President and Vice President to their Offices; we’ll at least emphasize that having called 2000 as the ‘secular peak’; with 2007 ‘merely’ as the ensuing ‘cyclical rebound peak’; there is some hope we are at least well enough along in the overall evolution that a ‘time to bottom’ at least is (outlined to members).
Last weekend’s comments, while absolutely never ‘requiring’ a market to achieve any advance goal or measured potential target, gave some ideas of how vulnerable it may still be in the advanced phases of a financial catastrophe. When the S&P ran up above 920 towards 940; we called that a mini-bubble of nervousness concluding the rebound; right as typical pundits were championing ideas of buying or picking stocks.
We did chase that silliness; instead called for a break of 900; a shuffling around the Daily or short-term moving average; a move well into the 800’s, with a 700(s) handle on the S&P in the wings; and probably below that before this catharsis reaches nadir. This is pertinent as we did NOT embrace the idea at any time that we would just stay in rangebound situations (that was a glass half-full argument of some technicians we thought analytically illogical, both technically and fundamentally, but could just hang-tough into the early-2009 brick-wall of resistance, before breaking) just as occurred.
Summary:
Remember; there is nothing conventional about this bear; nor was there expected to be..regular members know we warned ‘longer & deeper’, and ‘epic’ in duration terms, almost two years ago; quite a heads-up on those doing it now; after the devastation has already occurred, and there’s little latecomers can do about it; but that’s typically the stock market, and that’s why being proactive was so important in this ‘new era’.
Conclusion: historic combined illiquidity was so gargantuan in the business world; or insolvency for much of the banking / institutional worlds; that for it not to triumph was delusional. Lest anyone misunderstand; we need smart 'velocity' of money to become energized more (since toxic housing debt is a microcosm of the overall debt picture); so anticipate 'velocity' created in ways that 'empower’ substantive American revivals.
Meanwhile, the Fed has not really addressed ‘mark-to-market’ nor Dollar-erosion that ensues. That leaves basically fiscal stimulus; or let the chips fall where they may. As this evolves; prices plummeting as the Deflation genie isn’t put back in the bottle yet.
We noted last week that Dow Transports were already at ‘lower lows’, and that there was no reason not to anticipate the Industrials following-suit, and taking out technical levels as projected anyway in time. IBM’s report (or insider bank buying) will likely be insufficient to sustain interim rises for now; and there are numerous ‘under estimates’ earnings reports ahead as noted. It is emphasized that this pattern includes tinges of post-hope-rally panic; but at the same time overall it precedes a ‘water torture’ sort of ongoing negative grind. If (as occurred) GE falters dramatically; it adds another level beyond bank insolvency. Let’s see the reaction to realistic Q4 further S&P earnings.
Bottom line: macro signs interpreted; including (slightly consolidated) the following bullet points:
· Regularly noted: credit markets still frozen, with banks generally unwilling to provide credit;
· Two-year macro overall forecast remains correct: not short and shallow; but long and deep.
Further points: nearer-term issues to contend with beyond above; some with macro aspects:
· Derivatives issues linked to municipalities or pensions barely grasped (extremely fluid still);
· Irrespective of rebounds within 2-year projected protracted ‘Bear’; investor caution still wise.
Early 2009 bullet point macro thoughts (the above works in progress; some noted since ’07):
· Uptake of U.S. Treasuries by foreign entities may be choked-off, by necessity, as ‘09 evolves;
· Commercial debt default risks are wider and more significant than generally observed;
· Evolution of bottoming process (and trading moves) constantly evaluated as 2009 evolves.
To view the rest of these bullet points in all categories or videos; please join our ingerletter.com daily.
Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of technology issues (needed for assessment of general factors in tech overall, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection. (Individual stock comments generally are provided in the video overviews only; once in awhile I'll have some thoughts here, where something's particularly emphasized or of technical nature necessitating some discussion. Increasingly most all is via video.)
In the second video (as I was pressed by the ticking count-down clock); I said shares of Pure Bioscience (PURE) may be ready to pop ‘when they get another distribution deal’. Not how I meant to say it; as the CIBA deal is an ample distribution agreement for many name brands; as the CIBA deal is done entirely already. I meant to say as they start to see revenues accrue from distribution, or conversely, it becomes known certain well-known names are using it (balance of discussion reserved for members).
After hearing about the latest awful MRSA story, such as now the Arizona Cardinals suffered, as HBO did a piece on, we wish the company did better PR to make folks aware of the product’s existence. But I also realize they think it’s up to the distributor. Personally, even though I realize they have small budgets and sales mean more than PR, I tend to think there’s sufficient public interest in MRSA / Staph infections alone; that well-placed and documented articles in even medical or hospital journals would be helpful. Since we have heard from doctors about the potential, it seems a shame (not just for shareholders) public awareness isn’t more on the front burner at Pure. I have shared potential believing it exists, not just because I own shares. I told people about it who got a Staph infection; as to helping protect their personal ‘space’. They will never buy the stock, and I don’t care. I do care that awareness of prevention will be understood, for the sake of our society as these resistance bacteria proliferate.
We’re optimistic but would urge the company not to hide their presumed good works from the world; waiting for CIBA or distributors to do it alone. Something as simple as a ‘case’ of complimentary product (from any distributors) to the Cardinals, or to any of the sports teams that have complained about Staph / MRSA infection would be worth its weight. I would not think PR would be that expensive; might roll by itself if started.
In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples, by elements including organized terrorist forces in various countries. A world addressing terror threats continues, as domestic issues absorb us more while as we must focus on Middle East and World War III avoidance.
Our 2007 view: we were heading into a recession or potentially worse. Preventing it descending into something akin to post-railroad debacles way back in the 1880's; is precisely what the Feds combatted back in 2008. Actions affirm they remain engaged to stabilize monetary fluidity or functionality; as we argued for months; and has now gone into 'overdrive' so to speak (refer to prior comments for expanded discussions).
Issues continue including oil (as was too low vs. too high earlier in the year); terror; China; Pakistan; all the Middle East, Europe; dubious NY commercial property as well as lots of non-housing entities. Noted for a year: international dependencies, as outcroppings of extremist globalism; from which there is a veiled retrenching already. We must be 'Americans First'; or we can't ‘consume’ from the world, as they prefer it. As was consistently argued here for over a year; this clearly proved to be realistic.
Twenty-four months ago I commenced projecting an 'accident waiting to happen' as affirmed historically after long-duration periods of free money (Gilded Age mentality). Such doesn't create enduring liquidity; just gives that interim illusion; we postulated in 2007. Do not overly focus on particular price levels associated with big-cap lows.
Since early 2007 we noted economic conditions more similar to post the Gilded Age ending in 1929, the panic of 1907 (hence our call for the start to be the 'panic of 2007' last year at the end of that Gilded Age, and it's not coming back in the same style). It is not a structure entirely resolved by rate cuts, stimulus, 'miracles', arrogance of the few who think they can influence it. But it can be rescued by sound incentive policies.
Not only is governance from the center appropriate; but essential to sweep a higher tide enhancing meaningful efforts to restore primacy to regain financial sovereignty. It is underway; but is a long-haul kind of process. We pray that the new Administration is able to find the necessary traction to salvage the economy and increase optimism. In the meantime as the ‘new Age’ unfolds; we congratulate President Obama; Vice President Biden, and all the Cabinet members whose work is clearly cut-out ahead.
Enjoy the week!
Gene
Gene Inger,
Publisher
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