My Money Part II

As a follow-up on my earlier post I'd like to elaborate on these issues that give me a "gut" feeling bad things are coming. IMHO this will be true to the tune of apprx. 10%. Significantly:

"In Washington, Treasury Secretary Henry Paulson also spoke about the housing collapse but took a hard line against policy that could send the wrong message to risk-takers. Paulson said he had "no interest in bailing out lenders or property speculators."

It is a classic upside-downside analysis and, as we just discussed, the upside is non-existent. As for targeting the best possible sector for a short-sell opportunity we have identified two: Financials and Technology.

With regard to the financials sector I came across this interesting analysis of the $100 billion bailout Superfund:

"The subprime borrower who can't pay his mortgage today won't be any better equipped to do so after this bailout. All that may be accomplished here is for lenders to delay the recognition of these losses"

This is in line with my reasoning. Simply put, the buck will stop somewhere (consumers) and when it does, the rest of the economy will follow. After all, we're at three bailouts (Fed rates cut, Fed market infusion and the aforementioned Superfund) in the last two months. How may more do we need to signal the precarious nature of the latest market recovery?? Then there's still all those nasty little issues like oil, gold, inflation, real estate '08 election ect.

The technology play is more a step back from the obvious financials play. The thinking here is that the sector has been a haven from the pain of the financial/manufacturing market. As a result, the sector has enjoyed a nice run, right? Well, this doesn't bear out necessarily. Check out this chart I designed that contains a comparison between financials (XLF) Tech (QQQQ, XLK) and the S&P.



They appear strongly correlated. So is the technology safe haven a figmant of my imagination. Not sure, a quick search of the performance of leading ETF's in the respective sectors shows financial ETF's under water across the board in the last 1 and 3 months, versus tech ETF logging strong gains across the board. What gives? It may be something obvious but I don't see a good explanation just yet. Do you? Will tech be hit when: the consumer market shows its hand later this holiday season and, when companies, due to the credit tightening and economic uncertainty do not finance long term projects or make significant capital investments?



More to come.

Where to Put My Money?

This is a laundry list of pros/cons and analysis meant to help me make a decision on where/how to invest my money. It's a work in progress. As time permits, I will flush it out and update it. I encourage you to participate in a parallel analysis.

Pros: Interest rates, technology, global growth prospect

Interest rates have been sliced by 50 basis points in an aggressive move by the Fed to keep the economy strong. This, taken at face value, is a good thing for the investing climate. Over the long haul, though, I think this is a bad deal. The Fed, by cutting rates, has done several things: positioned itself as an corporate booster as opposed to an inflation fighter. This is opposite the position Greenspan took. He used words (irrational exuberance) to control hot markets and gentle innuendo (and measured cuts) to bolster bad ones (the Fed has its eye on growing weakness in the --- sector). I think the Fed buckled to private interests here and did not look out for the long-term. By dumping money into the system and bailing out investors who were irresponsible, and now, by stabilizing the investing environment with a rate cut in the face of growing inflation, the Fed as effectively subsidized bad investing decisions and therefore endangered our long-term economic future. In other words, this temporary salve treats the symptoms of the credit malady, not the source.

Technology is strong. Initially, it looked like investors making a flight to an area of the market where credit issues would not loom as large, now it seems a sustained run driven by restlessness elsewhere in the market, and genuine strength in the sector.

Global growth looks comfortable. I was interested to see that the US now accounts for roughly 40% of the world's market cap. This means, among other things, that some relief from domestic turmoil may be sought overseas - where quasi-independence from US markets is possible.

Cons: Inflation, housing, consumer debt, China, irresponsible federal monetary policy, time lag on the market

Several of these issues are addressed in the Interest rate discussion above. Suffice it to say that the credit/inflation/domestic growth/consumer debt beast is a tangle too complicated for one such as myself to unwind. I do believe though, that the ultimate conclusion of this mess is a bad winter. The catalyst for a market plunge could very well be poor holiday shopping returns. I think this is quite possible as consumer default rates work their way through the system and finally show up at the doorstep of companies (that are still rolling thanks to shortsighted Fed policy and last year's great profits). When the buck finally stops, it will be the consumers who find it on their desk. This is my great fear: inflation is real, debt is real, and the base that supports the corporate apparatus gets hit from both sides and, oh yeah, those interest rates are too low to stop it. We need interest rate stability. Greenspan (trough no fault of his own) cut rates for too long too consistently and now we've raised and lowered them too frequently.

China's rising core costs of food and energy should export itself along with all those toys to the US in the form of higher prices. How significant is this trend?

I have a whole take on the real estate market, which I happen to know something about, and plenty more to come. I would also like to do a comparison of some basic investment vehicles as compared to an index or two and adjust these for risk. This should give us an idea about how to invest my money.

The Credit Plague Spreads?

I'm still not sure what to think about this. I'm not alone, it seems, with bulls and bears both arguing their position well: Mild, yet delayed, recession? Downturn? Steady Growth? Credit crunch contained? This article in The Paper of Record does a nice job of summarizing the trends and events that may or may not be contributing to an "economic downturn."

As you know, I have a significant amount of cash sitting on the sidelines sucking up a not paltry 4.25% in a money market account. Do I get back in? If so, how? Contrarian strategy seems to be one play to make. I can't wait, for instance, to get into the housing market in a year or so. Will there be a "flight to quality" as fears of recession loom? Perhaps a utility run as people seek stability and consistent returns. Maybe, just maybe, this is a matter of waiting it out, as our true (and just) long-term inclination suggests. Your thoughts?