Great Expectations for Obama, But Not the Markets

Great Expectations is the title of a classic novel written by Charles Dickens in 1861. It is regarded as perhaps one of his greatest novels. The title “Great Expectations” can also be applied to President-Elect Barack Obama, our soon-to-be 44^th President.

President-Elect Obama will be expected to cure our country's economic ills and quickly. I believe that the nearly 1,000 point stock market sell-off this past Wednesday and Thursday was due to Wall Street 'disappointment'. The cry-babies on Wall Street were disappointed that President-Elect Obama did not hit the ground running and immediately appoint the future Treasury secretary.

Speaking of the future Treasury Secretary, I hope I am wrong but I expect that person to be New York Fed president, Tim Geithner. He will be portrayed as a fresh, young face. Some fresh face. As New York Fed president, wasn't he supposed to keep an eye on Wall Street? All he did was turn a blind eye to all the shenanigans on Wall Street. If Mr. Geithner is appointed Treasury secretary, Wall Street will be smiling like a butcher's dog. It will be business as usual for Wall Street.

The appointment of Mr. Geithner would be similar to what the Federal Reserve has already done. They have hired Michel Alix as senior advisor to William Rutledge, executive vice-president of the bank supervision group. Mr. Alix ran credit risk management for Bear Stearns from 1996 to 2006 and Bear Stearn's chief risk officer from 2006 to 2008. The Fed hires a guy to a key position that was in great part responsible for bringing down Bear Stearns. Incredible!

What else can we expect from an Obama administration? A friend of mine from Chicago was walking near the Obama residence in Kenwood, Illinois. He saw a large crowd of people gathered there. He asked a policeman, “Why are all these people here? Are they hoping to get a glimpse of the new President or an autograph?” The policeman answered, “Nope, these people are all corporate executives looking for a government bailout.”

We have already seen auto industry executives begging for a bailout like a dog begging for a treat. Look for many more industry executives to join the financial and auto industry executives in begging for government bailouts. I fully expect the airline and insurance industries to join them soon after the Obama administration takes office in January.

I only hope that then-President Obama will have the strength to say no to some of these executive beggars. If not, instead of American taxpayers footing a several trillion dollar bill, we will be footing a bill in the area of ten or twenty trillion dollars.

Not-So Great Expectations

On Wall Street itself, there are no great expectations for the stock market. October was a month for the record books. According to Standard & Poor's, October was the worst month for global stock markets in history.

Global stock markets lost $5.8 trillion in valuation during the month of October. For the year so far, global markets are down an average of 42%. This totals to over $16 trillion in lost valuation!

The carnage has sent the retail investor fleeing. October saw the biggest monthly outflow ever from US stock mutual funds. According to TrimTabs, $75 billion was pulled from mutual funds.

“Maximum Pessimism”

At times like these, the words of the international investing pioneer John Templeton always come to mind. He said to buy at the “point of maximum pessimism”. Are we at this point yet? The answer is yes and no. I believe we are there in some sectors but there is still way too much optimism in other sectors.

Let me start with where I see too much optimism. There is incredible bullish sentiment right now toward US Treasuries and the US dollar. Please do NOT invest in either the Treasury bond market or the US dollar at these bubble-like levels. If you have long positions in the US dollar or Treasuries, close them out. I would also avoid the sectors that CNBC loves – financial and tech stocks. There are too many people calling a bottom in those sectors to suit me.

I continue to see far too many so-called analysts and chartists telling people that the US dollar and Treasuries are the places to invest right now. As I've stated in prior articles, these people are mere trend followers. They just assume the current trend will continue forever. They are ALWAYS caught off guard when the trend changes. They NEVER think about the big picture or long-term investing. I've found in my 26 years total experience in the investment industry that the surest way to be separated from your wealth is to follow people with a short-term investing philosophy, a la Jim Cramer.

Where to Nibble?

Where do I see “maximum pessimism”? The sector that I see which is absolutely hated by everyone is the broad sector of real assets. In this broad sector I'm including industrial firms, timber, water, metals, agriculture, energy, alternative energy, and some sectors of real estate.

These are the sectors where investors should be sifting through the rubble right now for beaten-down quality companies. I believe that anyone buying in these sectors now will reap huge gains over the next five years.

Why do I say that? It's simple. The current recession or depression or whatever will not last forever. The global economy will eventually recover. And when it does, it will be the companies with real assets that will benefit the most. Why?

It's simple supply and demand. When the global economy recovers, demand for all sorts of “hard assets” will resume the climb that was interrupted by the credit crunch. China and the other emerging economies and their billions of people have not disappeared off the face of the Earth!

On the supply side, look at what is happening right now in the energy and metals industries. Every week there are numerous companies announcing major cutbacks in both exploration and current operations. Both current and future supplies of key commodities are being drastically reduced.

Even the International Energy Agency (IEA) said in its latest report that the production of oil from major areas such as Mexico, the North Sea, and Russia is dropping steeply. It stated that tens of billions of dollars of increased investments into energy would be needed annually to stop the overall global decline in oil production. Right now, investments are being drastically reduced, not increased.

Don't forget that even when the global economy does improve and investments are again flowing into oil fields and mines, there will be a long lag-time before results are seen. The dimwits on Wall Street think bringing a mine or an oil field on-line is like flipping a light switch. The truth is that it is a multi-year process.

The “real asset” companies who manage to still alive in this current environment will benefit and be the big winners as the assets they hold and they produce will greatly increase in value. I advise investors to start buying these type of companies NOW!

Disclosure: No positions.

Comments

[David Martin:]

Spot on analysis.
What is your take on the impact of the Chinese plans to spend another $300 billion a year themselves, leaving them with little budget surplus and presumably buying less US Treasury bonds?
I(t soundds bad for US funding and the dollar.

2008 Nov 11 08:36 AM

[madmilker:]

I don't advise anyone. I got my $1.97 cents in a fruit jar and if your smart...rats don't eat glass!

2008 Nov 11 10:01 AM

[Tony Daltorio:]

I agree with what you are saying. The people with money - China, MidEast, etc. will spend the money they have helping their own people, NOT bailing out the US. I think that when the massive Treasury refundings really begin in earnest next year, Wall Street will be shocked that most of the foreign investors who normally buy Treasuries won't show up.


On Nov 11 08:36 AM David Martin wrote:

> Spot on analysis.
> What is your take on the impact of the Chinese plans to spend another
> $300 billion a year themselves, leaving them with little budget surplus
> and presumably buying less US Treasury bonds?
> I(t soundds bad for US funding and the dollar.

2008 Nov 11 01:02 PM

[JasonC:]

Um, what do you think all the ridiculous bubbles that just went smash were? They were bubbles in the real assets, money will go to zero, inflationary brainstorm trade. Everyone on the planet bet the moon that dollars would be worthless and real anything worth infinity. Guess what? They are all hopelessly wrong. So now when their trades all fail and they blow out, do they admit they were wrong about a particle of it? Why no, of course not. They think the world is wrong, but not them. They aren't in the most crowded trade in living memory, no siree, they are resolute contrarians, because they believed in every single 4-fold bubble and expect each one of them to magically reinflate to twice its previous maximum size.

Buy a clue already. Dollars are valuable and will remain so, they are not confetti, it matters what you pay for real assets, not that they are real assets rather than money. The insane attempt to profit by simply being in the right something without any regard to its actual price, is the problem, from the get-go. And until you all give up your inflationary "money isn't worth anything" brainstorm, you will be ground to powder.

Afterword, to be sure, there may be opportunities among all the busted bubble ideas. But they won't be merely the idea that the bubbles were all correct all along, and shouldn't have burst, and instead money just should have appeared out of the heavens until they were all correct, and the banks should just print enough to pay everyone on every bet they ever made - even when no one pays back those banks.

You will pay for capital or you won't have it. Banks will be profitable or you will get nothing and the price of everything will go down or sideways, never up. If a banker in New York can't get capital when he offers 10% for it, no one else on the planet will have any, either.

2008 Nov 11 02:37 PM

[gjg49:]

how difficult would it be to look up and spell Timothy Geithner's name correctly???

2008 Nov 11 02:51 PM

[Greg Pinelli:]

After reading JasonCs post I feel like I need a United Nations Translator...what can he possibly mean..if anything? The real price of something IS..what people pay for it in the market! Or is someone talking to him privately and only JasonC and a few select others know the REAL answer?
As for the article..there will always be optimism about something..what's the point? The flight to treasuries is defensive and fear driven..hardly the stuff of great investing or bubbles.....

2008 Nov 11 08:42 PM

[Tony Daltorio:]

I don't care if it's caused by greed (tech & real estate) or fear (Treasuries)--- a bubble is a bubble is a bubble. When this bubble bursts, there will be more huge losses for the Wall Street community.


On Nov 11 08:42 PM Georealist wrote:

> After reading JasonCs post I feel like I need a United Nations Translator...what
> can he possibly mean..if anything? The real price of something IS..what
> people pay for it in the market! Or is someone talking to him privately
> and only JasonC and a few select others know the REAL answer?
> As for the article..there will always be optimism about something..what's
> the point? The flight to treasuries is defensive and fear driven..hardly
> the stuff of great investing or bubbles.....
>

2008 Nov 12 04:09 PM

[Robert Nabloid:]

Society has went toward one that begs government to solve it's problems as if government has all the answers. So government politicians are pressured to "do something". With Obama entering the Whitehouse, it's no wonder corporations are lining up for cash... they can smell some free money - and if enough of them cry loud enough - they might just get some. I hope it doesn't happen - but Obama was in favour of the bail-out... so why wouldn't he be in favour of more? That's the answer government has - bailouts... so we just need more bailouts if they are correct, pepper in some stimulus packages and some tax increases to give the government more money to spread around to solve all these pesty economy problems. It's so wrong!! Bailouts don't solve the underlying problems.

Bail-outs, Stimulus packages, reduced interest rates, etc, etc... All of these proposals only deal with masking the symptom - that spending in the economy is declining - but fail to address the underlying problem that has created the symptom - The economy isn't competitive and is unsustainable. We've taken on too much debt! We hid our problems for decades by taking on debt and spending it, as if it was already earned - but consumers have realized they need to pay some of these debts off...

No politician that promotes bailouts or picking and choosing winners with unearned money, will solve the problem. The economy is not sustainable nor is it competitive. Unless these issues are addressed (and I don't expect them to be), I really can't see what it is people hope can be accomplished by "spreading the wealth" through more stimulus packages and increased taxes. Those only further mask the true problems. But I have no fear - in the fight of Government Vs. Economics - Economics will win in the end. We will, eventually (might take decades), realize that we need to be more competitive (and innovative/inventive) and less reliant on consumers spending debt dollars if we want to be sustainable.

2008 Nov 14 06:37 PM

[dr.doolittle:]

good bloggers here. Great Expectations of what exactly? Change? Or somthing new? Change is a literal canard, like same, oh, hey, look--the sun is rising in the east. Something new, on the other hand--something new is not just coming, it has arrived. Obviously its not the person of
Barak Obama. An even more hilarious idea is that Democrats represent something new as well! (Bailouts for Detroit? There's some original thinking.) Barak Obama the name, however, does represent something big--and to many more than just me, obviously. I've been a huge fan of George Bush and still am--still, a very interested fan of Obama as well. (Why all those rich white people voting for the guy, for example? What do they know that so many others don't?) As so many of the bloggers have pointed out, :"these people" are openly saying the government is going to do something. Surprised? Or are you just waking up to the fact that we've been at war now for over 7 years?

2008 Nov 17 03:01 PM