…Tuesday’s ‘reality check’ gives way to today’s ‘gut check’. In other words: do you believe all you hear about just how good this market is…and how cheap stock are? The most common observation one hears on CNBC is stocks have never been this cheap…that there are only two problem sectors: finance and the consumer. Last time TB checked those two sectors were joined at the hip and if what’s “good for GM”, as the old saw went until GM fell out of bed, “is good for the economy”, then pray tell, how can the economy do well without those two sectors? Look at Walmart you say, it is nearing its all time high of $61 set in March 2004, and yesterday and tied the high of Nov. 2004 of $57 (gas and food weren’t the big factors then…and still it has gone sideways (over past 12 mos. +19.1% w/dividends reinvested, since 4/23/04 it is -3.4% but +2.3% w/divs but annualized they fall to -0.9%/+0.6%), and still sells for 17x earnings…with 5 yr growth rate of 11.2%, the p/e to growth rate is 1.5x, fully priced).
Two “auld acquaintances” of TB’s Van Hoisington and Lacey Hunt wrote their quarterly investment letter and it is incredibly bearish. They give some horrible stats on why the economy will remain weak much longer than expected (not by TB). Mainly, we have been near recession levels for the past three years but just don’t know it…that is because ex-home equity withdrawals, 60% of GDP would not have been realized. They compare to the Depression and to prior economic periods and the problem is that housing prices rose for most of this period despite a sharp drop in the savings rate and no growth in wages. If interested TB will send you a link to the report which comes courtesy of John Mauldin.
Speaking of 60%, Mauldin stated in his April 18 commentary that 60% of the market for subprime products (CDO’s, CLO’s, SIV’s, etc.) evaporated along with subprime debt…in other words it decimated a market that took 15 years to create and those buyers are never coming back. TB can also forward that article or the link is www.frontline.com. Oddly, Mauldin, sees a shallow recession but bases this off his error on the impact of Y2k as did TB and cheerleader for the concept (Ed Yardeni), and that was a painful experience…but this time it is different…and without an incredible amount of resources pumped into correcting the computer problems of Y2k it would have been that bad!
There, in a mere two paragraphs TB, with the help of Van, Lacey, and John (could be a new song…has anybody heard from my old friends…), explained why both the consumer and credit markets will be detracting not additive to GDP growth for several years…at least.
Going to end now and let you reflect on these concise comments…see also headlines in the Overnight Markets section…not pretty.
Is it Friday yet? No?…going back to bed…have a good one!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 24, 2008
