TheTrustedAdvisor.com

There’s plenty of blame to go around. I don’t see one convincing argument over another for the culprits: You could pick either 1)Bill Clinton 2) US Congress 3) Jimmy Carter 4) Alan Greenspan 5) Probably less convincing is the Bush Administration for lack of oversight, even though they were shouted down when they attempted to regulate this part of the market 5) Hank Paulson or Fed Chief Ben Barnanke.

It’s a comedy of errors that reads something like, well this happened, then congress did this, and Greenspan didn’t know what he was doing by putting rates so low even though we came out of the recession, and the Bush Administration didn’t regulate (hands off, you know), etc. Then pull it back to as far as Jimmy Carter and lesser so for the Clinton Administration.

It doesn’t matter what happened. I think we can stop that from continuing, so we must look forward.

I keep seeing talk of dow 5000 or dow 6000 or dow 7000. I’d be shocked to see any of them. Fundamentals say we should be a lot higher, but that’s not enough to take us back to the highs. We are now governed financially by emotions of very rich but hurting and bleeding equity management institutions. They know they shouldn’t be selling, but they have to meet their redemption orders and so must sell. It’s not their fault that their own finicky investor base is in a panic with the rest of the market.

I certainly think if we do hit either dow 7000 or dow 6000 that it will be but a fleeting moment in time before I see dow 30,000 by 2030. Don’t lose sight of the fact that we will come back from these. I don’t buy the argument that “this time it’s different.” That’s financial heresy, because something like this has always happened. I’ve heard it being compared to 1800 style recessions. I think out past 12 months from now, we’ll be at least to dow 11,000, maybe dow 12,500 to the old high of the dot com bubble.

The GDP data is being tainted with housing price depreciation, and we absolutely must be backing that out of the data, because it was a bubble, so it’s probably not a good predictor of future economic conditions. This goes along with the deleveraging argument that you hear thrown about on TV. I don’t buy that argument either, because we can’t really deleverage much more than this when there are a lot of financial institutions that have already gone under and don’t have much in the way of assets left to sell on their balance sheets.

I specifically see that the PE ratios are at about 10, when historically, they should be at 15 for reasonable growth rates. The argument goes, “but earnings will be lower”, sure, but if you take them lower when you’ve lowered earnings guidance by 50% or more already, what are we talking? Every company makes no profit? Not likely. New leaders that I expect to see re-emerge are Energy companies and basic materials. I happen to believe that the Chinese stimulus package will introduce a new wave of oil and commodities hoarding seen by the Chinese Communist Government prior to the Olympics. There is speculation that I deem to be accurate that the Chinese were buying Oil and other commodities to not have to pollute during their time as the Olympic epicenter. (I’m sure their gymnasts weren’t 16, but they put on a good show, anyway). This lead to that run-up, and I definitely believe this is on the horizon.

While it is true at this moment that Commodities are down, while they could stay down, the cyclical nature of these companies suggests they will be the trigger to take us higher.

We need to remember what indexes the DOW and the S&P are. Most of the S&P used to be financials at about 20%. That index has declined by about 70% so financials aren’t as big a part of the indexes as they used and single handedly account for about 14% of the market decline. The rest I stick to Commodities and Energy with Oil dropping by about 2/3’s from $147 to $60. That used to make up for 25% of the S&P 500, and has declined at least 50% from their highs, including international stocks, especially in Russia. There’s 12.5% of the market decline.

Where are the rest of the declines coming from? Wall Street’s “go-with-the-flow” pessimissim. They’ve assumed that because financial and energy companies will have declining earnings that it must be true that other consumer companies will have earnings declines. In this environment, I can see WMT gobbling up more market share from other higher cost producers such as Target or Costco. Costco will do all right because in some cases they are the lowest cost producer, but for everyday items with groceries I can see WMT gaining the lions share of the market share losses they put onto other retailers and grocery chains.

So, I guess I’m saying that I expect Oil and Energy companies to be first on the rally list. Financials will take so long to recover because of trust issues, that I can’t see them being a leader for at least 7 years. The consumer cyclicals and especially technology companies will continue to dominate in their respective fields. I don’t see CSCO losing customers, and I can’t imagine Apple will stop being the market leader in consumer electronics anytime soon. I kind of categorize retailers as different animals. I won’t touch companies closing stores, because it shows that they invested too much in capital expenditures, and got no return. This suggests their management is not only not conservative, but also has extremely imperfect information when it comes to selecting locations to sell products from. These aren’t good management tenets to look for in companies.

Once materials catch up with Energy, I think that’ll be a signal that the consumer is coming back. The political landscape I can’t see having an impact on anything but pharmaceutical and health care companies. I don’t think any problems will be seen for energy in this arena.

What’s the catalyst?

A very good question. The best analysts know their catalyst. I think I’ve picked mine as a re-emergence of commodities and oil prices from anticipated expenditures from China’s stimulus. When it is released, we should see a pickup in imports into China from China’s perspective of oil purchases.

How will International Stocks perform in this?

It all depends if they are domiciled in a free market, democratic, capitalist country. Everyone can see the writing on the wall in Russia, so I’m not even going to go into that. I think Pakistan is still ruled by a dictator, even though he is one friendly to the United States. I’d avoid any non-Western Country, because I prefer zero political risk. Though there is some, I prefer to think if it’s democratic and capitalist that it has no political risk of nationalization or royalty, rent-seeking governmental behavior. If those conditions are met, couple them with Buffet’s tenets that it be a company that has a net worth of at least $500 million and pretax earnings of $70 million. Anymore I’m beginning to wonder if Buffet has lost his touch, but probably not, and I’m certainly not a critic. So, to summarize, given the political climate is similar to the U.S. and barring a push to nationalize industries or other royalty, rent seeking behavior, I don’t mind investments in that kind of country, because it will be based more on company fundamentals allowing easier analysis.

I guess I made up for a lack of posting. But each post has a lot of information in it already, and this one is no exception, but most of the beginning I’ve already touched. The new catalyst may not only be China, but our own fiscal stimulus packages.