No replies to this topic

[Islander]

Barrons Magazine July 18,2005 .
Fair use extract. Islander

"As a card-carrying Cassandra, we draw some comfort from being in good company. Like that of Stephanie Pomboy, proprietor of MacroMavens, whose unorthodox insights and saucy prose enliven our weekly reading. In her latest commentary, Stephanie takes a sweeping look at the investment landscape, finds it not a little bleak and offers some intriguing ways to profit from the dire happenings she (sometimes gleefully) envisions.

Her overarching view, as she rather grandly calls it, is that "one year and 225 basis points [that, in case you're blessedly ignorant of Street lingo, is 2.25%] into Fed tightening, the markets continue to be ruled by greed rather than fear." Thanks to the thoughtfulness of Greenspan & Co. in advertising ahead of time the timing and magnitude of rate hikes, your kindly speculators have more than compensated for any adverse effects by "indulging greater risk and/or employing greater leverage." Even in what she dubs the "market mainstream," this confidence in the good grace and empathy of the Fed has bred an enormous complacency in the face of the growing credit risk she discerns in the contrast between asset prices and economic fundamentals.

On the consumer front, Stephanie avers that the double whammy of rising interest rates and runaway energy prices, at a time when wages are stumbling along, are putting pressure on the weak links in the chain. The corporate credit picture, she sighs, isn't exactly pretty, either: "While high-quality borrowers sit on record cash hoards, their financially strapped siblings have exploited the market's appetite for yield, taking junk issuance to 62% of the total."

And she warns, "When the inexorable deterioration in credit quality comes, it will do so with lenders (both in the credit markets and the banks) completely unprepared," as witness spreads between high-risk and secure credits at near record-low levels and bank loan-loss reserves the slimmest in two decades. What will make it all the worse is that our speculative frenzy "has been underwritten by foreigners." And she predicts that, "freshly burned in the stretch for yield and recognizing that U.S. consumers are both spent-up and lent-up," said foreigners will pick up their yen, their yuan and their what-have-you and go home. Credit spreads will widen, the dollar will weaken and in the fullness of time and the plenitude of pain, the Fed will become "Buyer of Last Resort" for U.S. debt. At that point "the shift to hard assets will begin in earnest."

OK, OK, you say, but how do you cash in on calamity? As promised, Stephanie has some notions. The way, for example, to play the explosion of high-yield debt is, unexceptionally enough, to short junk bonds and go long Treasuries. An obvious approach to taking advantage of the coming decline in the dollar is to short the greenback versus the euro. The grim outlook for the financial sector indicates going long 10-year Treasuries while selling financial stocks short. Or you might go long gold stocks and short financial stocks or go long commodity-index futures (she foresees a secular bull market in commodities) or go long gold, especially in the dollar and the South African rand, where currency debasement is most likely."

How near? This fall and early 2006, fully evident to all my June 2006.