Thursday, August 17, 2006
Investing Advice for a Friend
Friend:
Eek! Don't like the sound of this. What do you think?
Mopey:
I've always felt that Liz Ann Sonders is dangerous.
She's right, we are possibly heading into a recession. But it's a maybe/maybe not situation, and it's also on the heels of a pretty big correction in a lot of stocks that tend to underperform badly leading up to and during a recession (cyclicals and cyclical/enterprise tech). If you look at the PG/MO/PFE complex of stocks (consumer products and pharma bellweathers) they've been outperforming pretty meaningfully for at least 6 weeks, if not more.
The whole point about the inverted yield curve is also coincident, if not lagging. The yield curve has been inverted for the last several months. Also everybody knows the Fed hiked rates too high and now the real question is how fast do we all go "flying through the windshield"--almost every recession in the last few decades has been caused by the Fed (this is not necessarily a bad thing by the way, but that sub-subject is fodder for another conversation).
The coming crash in housing has been predicted by almost EVERYBODY for a while now and my sense is that it's over-discounted in the market too. Punch up the key homebuilders (TOL, PHM, HOV) and you'll see what I mean... they are all down HUGE and have been down for a long time. Those might be potential buys in the next year or two, who knows.
There's one other REALLY key point that unfortunately she totally misses. The US is not the center of the universe anymore! There's a whole big world out there that is hungry for trucks, bulldozers, oil, cosmetics, cigarettes, banking, commodities, etc, etc. So maybe we shouldn't even get overly worked up over the US business cycle in the first place? Just a thought.
So my point is this: what she is saying is not insightful. It's factually accurate which is nice--but it's coincident information, not predictive. The market is already ahead of her! For another great example, take a look at Deere--construction equipment--it's already down 20 points from its local high set in early May.
This would have been a useful column three months ago. Now it's borderline dangerous.
What I'd be doing is try to look "through the valley"--meaning start thinking about the NEXT economic cycle. Look for some cyclical stocks that interest you or that you think are companies you'd like to own a piece of. DE might be a good one. Other possibilities could be UTX, GE, CAT (we've owned that one before and sold too early), HON (own it), etc. I'm working up a list of names to consider for myself.
Another idea is to buy more interest rate sensitive stocks, meaning banks (again maybe not right away but--again--let the price be your guide). The thinking here is everybody with money on the line already knows the economy is going to slow down, so let's start thinking about what happens AFTER that. Well, what happens is the Fed will cut rates. You know the list of names here...you already own some good ones. Keep them as possible ideas to add to if you can get your cost basis lower.
Keep in mind we don't know if there will be a recession for sure, or if there is one how long and deep it might be. So again, buy in bites and be patient.
Sorry for the longwinded response, but you really got me thinking over here! You should definitely keep reading this kind of stuff, but also be sure to think about where the "guru" might be wrong.
--Mopey
Eek! Don't like the sound of this. What do you think?
Mopey:
I've always felt that Liz Ann Sonders is dangerous.
She's right, we are possibly heading into a recession. But it's a maybe/maybe not situation, and it's also on the heels of a pretty big correction in a lot of stocks that tend to underperform badly leading up to and during a recession (cyclicals and cyclical/enterprise tech). If you look at the PG/MO/PFE complex of stocks (consumer products and pharma bellweathers) they've been outperforming pretty meaningfully for at least 6 weeks, if not more.
The whole point about the inverted yield curve is also coincident, if not lagging. The yield curve has been inverted for the last several months. Also everybody knows the Fed hiked rates too high and now the real question is how fast do we all go "flying through the windshield"--almost every recession in the last few decades has been caused by the Fed (this is not necessarily a bad thing by the way, but that sub-subject is fodder for another conversation).
The coming crash in housing has been predicted by almost EVERYBODY for a while now and my sense is that it's over-discounted in the market too. Punch up the key homebuilders (TOL, PHM, HOV) and you'll see what I mean... they are all down HUGE and have been down for a long time. Those might be potential buys in the next year or two, who knows.
There's one other REALLY key point that unfortunately she totally misses. The US is not the center of the universe anymore! There's a whole big world out there that is hungry for trucks, bulldozers, oil, cosmetics, cigarettes, banking, commodities, etc, etc. So maybe we shouldn't even get overly worked up over the US business cycle in the first place? Just a thought.
So my point is this: what she is saying is not insightful. It's factually accurate which is nice--but it's coincident information, not predictive. The market is already ahead of her! For another great example, take a look at Deere--construction equipment--it's already down 20 points from its local high set in early May.
This would have been a useful column three months ago. Now it's borderline dangerous.
What I'd be doing is try to look "through the valley"--meaning start thinking about the NEXT economic cycle. Look for some cyclical stocks that interest you or that you think are companies you'd like to own a piece of. DE might be a good one. Other possibilities could be UTX, GE, CAT (we've owned that one before and sold too early), HON (own it), etc. I'm working up a list of names to consider for myself.
Another idea is to buy more interest rate sensitive stocks, meaning banks (again maybe not right away but--again--let the price be your guide). The thinking here is everybody with money on the line already knows the economy is going to slow down, so let's start thinking about what happens AFTER that. Well, what happens is the Fed will cut rates. You know the list of names here...you already own some good ones. Keep them as possible ideas to add to if you can get your cost basis lower.
Keep in mind we don't know if there will be a recession for sure, or if there is one how long and deep it might be. So again, buy in bites and be patient.
Sorry for the longwinded response, but you really got me thinking over here! You should definitely keep reading this kind of stuff, but also be sure to think about where the "guru" might be wrong.
--Mopey
# posted by Moopy and Mopey @ 8:17 PM 
