Archive for February, 2012

False Prophets/Profits

The stock markets are approaching new highs and once again exuberance reigns supreme! The stock prophets who promised big returns in the equity markets are encouraging investors to double down and enjoy the run on the markets. What could possibly go wrong? Business profits are sky high, employment is bouncing back, and commodity prices remain strong.

Most importantly, the problems of the Euro are behind us, the U.S. government is back to being functional, debt levels have dropped and……..what? The Euro problems are not solved? The U.S. government is not functional? Debt levels continue to rise and workers are losing the battle against price inflation and need two jobs to pay their debts?

In reality, the 1% are doing just fine and the 99% continue to tread water or lose ground each month. While the market gurus shout the smallest pieces of good news to the high heavens the reality is that this appears to be another non-sustainable rally. What the market prophets need now is for the mutual fund investors to once again plough back into the markets and buy the high priced shares before the next pull back begins. So before that happens, let’s get a more balanced look at the market realities.

1-      Greece has defaulted on its debt. You can called it an “orderly” restructuring but if you hold Greek bonds you just got destroyed. That of course includes a wide variety of Greek banks, Greek pension funds, and European banks. Few believe that the Greek people will accept the harsh credit terms forced upon the government and if they do a severe and long depression are all the Greeks can look forward to. This is the beginning of the end for Greece but the beginning of the problem for Italy, Spain and Portugal.

2-      The U.S. government just extended tax cuts that will add another $40 Billion to the deficit. This is what passes for “functional” in the U.S. these days. The day of reckoning may not have arrived yet but following the next election the government will need to slash spending, jobs, and start reducing government employees. The individual states are already slashing teachers, police and firefighters to balance budgets. You can expect a few States to flirt with bankruptcy before the end of 2012 and into 2013. I somehow doubt the current congress will assist with State bailouts.

3-      Moody’s just announced it is looking to downgrade the credit worthiness of the largest banks in the world. In short….”big is bad” in a world where “too big to fail” refers to countries now, not corporations. With trillions in credit default swaps still out there, even a single bank collapse could re-ignite another credit crisis. The fact that Moodies named RBC should not suggest every other Canadian bank would not be swept up in the storm.

4-      Meanwhile, I have been looking at house prices here in Palm Desert, California and it is hard to imagine the U.S. housing market is improving much. A 4 year old 2 bedroom home on a high end golf course in a gated community is listed at $119,000 and has been on the market six months. The real estate papers list hundreds of multi-million dollar properties that all state “reduced prices” and are not expected to sell off for months if not years. Statistics can lie if properly manipulated by experts.

5-      The best evidence of irrational exuberance is in this weeks’ story of the attempted sale of shares in Rubicon by TD Bank and GMP Brokerage. They overestimated the number of suckers who would pay $4.10 per share and ended up eating the shares and re-selling at $3.73 per share. Apparently the wise money stayed on the sidelines and refused to speculate on future market gains. The TD and GMP folks did not count on the usually gullible small investors staying away from the sales pitch.

So what is the message? Be cautious of what you read in the papers and what you hear from your salesperson/advisor. When business is slow the prophets will accent the slightest positives to push markets higher. We have seen small successes in U.S. jobs reports and some temporary band-aid solutions to avoid an unstructured collapse in Europe. What we have not seen are solutions or cures to our major economic problems. Do not trust salespeople to give you the full story, EVER!

My trusted stock analyst, Albert, put it best when he commented “never be totally in the market or totally out of the market and you will never be totally wrong”. Wise words in these interesting times!


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