Rumor has it that the economy is slowing down. It must be just a rumor since the market went on a tear the week before last. In these very pages I wrote that a recovery is not possible without two things: a healthy job market and a healthy housing market. There is another leg – banks.
Last week Bernanke, the chief of the Federal Reserve hinted that the Fed would continue to embrace and “accommodative” monetary policy. Hell, if it’s not accommodative right now, what does he really mean? My friends, the Fed is stuck between a rock and a printing press. Stop printing money and the economy falters. Keep printing money, and the confidence in the US financial system and the US Dollar falters. To put it politely, Bernanke is screwed for now. What he needs is time and the market hates that.
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It may still end well if demand from consumers picks up. Right now consumers are dead scared about really spending money. For one, most just don’t have the money to spend on the new toys that businesses are selling. Apple aside, there are few consumer product companies that are bellowing about their growth. The solution falls back to the banks.
They are the third leg of the stool and they are not doing their part to keep the stool from falling. Banks need to lend. Not like they did before when all you needed was a pulse to get a loan. No, banks need to lend money to consumers and small businesses so that the money can multiply. They’re just in shock right now and they need to be snapped out of it. If the Fed really wants the economy to perk up, they need to light a fire under the bankers. Otherwise, the truth is that we are not going to see growth anytime soon and that will mean a stock market that is unlikely to produce the type of returns that you may be hoping for.
Chart
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As you can see from the chart above, loan growth is minimal at best. The reality is that growth in the style of economy we have comes from credit, and it just ain’t that easy to get anymore.
What’s a Bargain?
Well, you’ve heard me say over and over again that stocks might be cheap, BUT they could get cheaper. I advocate investing in long and short positions with a averaging down technique when it comes to going long.
In past recessionary times, and I am counting the current period as just that since most of the growth in GDP has been a result of government largesse and inventory rebuilding, stocks usually trade down to lower multiples.
I have seen arguments out there that the markets should be trading higher, as much as 20% higher on the S&P. The current price to earning ratio of the S&P is around 15. Most market pundits think that level should be higher, closer to 18, especially when rates are this low. Ok, I won’t argue their numbers. I will argue their assumptions however. Low rates should stimulate growth upon exiting a recession. This time though rates were ALREADY low going into this recession and went lower still not to stimulate growth, but to prevent a wholesale collapse of the US financial system. Money had to be printed to bailout out everyone who applied for it…except for those of us who still think that paying our due is the right thing to do.
So, looking at the numbers at hand, the fact that we are not out of the woods by any stretch, and the fact that we may be heading back into those woods, makes me want to pause and reflect. It also makes me want to share another chart with you, just to show you what could happen should we visit the past history of recessions in the United States.
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As you can clearly see, the trough price-earnings ratios in past recessions dating back to the 1950s has been lower than the current price to earnings ratio. As you can see, during boom times that p/e multiple has been stretched to more than 25. During busts they have fallen to as low as 7 or 8. You need to ask yourself this: Are we in a boom, a bust or somewhere in between. Therein lays the truth my friends. It doesn’t feel like a boom to me, and at 9% “official” unemployment (closer to 17% unofficially) and rates as close to zero as they can get, it feels more like a bust.
Position Yourself Accordingly
This is not the time to be a hero. Your broker/adviser might be encouraging you to take the jump. After-all isn’t the stock market where you make money? Well, it’s where he makes money for sure.
Don’t fall for it. Sure make good investments in solid dividend paying stocks. Rates are low, you need to generate income. Utilities, telecoms, energy and sin stocks are still paying healthy dividends north of 6%. Use a covered call strategy to boost your returns. It is still possible to “safely” make 8% or more on your money with an eye to capital preservation.
If the last six months is any guide, the money to be made may be in places besides the stock market. Yes, we have had a massive run-up from the lows in 2009, but we have not made any headway for quite some time. A quick look at the indices that measure the performance of most investors’ holdings paints a clear, but not pretty picture.
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As you can plainly see, the place where money has been made this year is actually in the bond and gold market. We have been gold bulls for many reasons. This is not to say that the next six months will be the same. Markets rarely are that simple to predict. Time will tell. My bet is that the market will not enter into some massive bull phase anytime soon. This earnings season has not been kind to the market by any means. On days when marquee companies have reported better than expected numbers, the market has fallen. That is not a sign of confidence my friends. It is the exact opposite.
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Best Regards,
Kevin Raymond
