Economic Slowdowns Create Opportunities

by: FinancePM10b

It definitely has been an interesting few weeks. The market went through a tremendous rally as traders and investors began to rethink the economic state, wondering, is the recession over? In my personal opinion, we are far from it.

The financial system is still a disaster. There are no jobs. Companies are growing but many are simply bouncing off extreme lows with immense cost cutting. The only thing that’s really keeping it all together is the presence of data to support inflation is still far away. Recent events including lack of stabilization in Europe, Goldman Sachs (NYSE:GS) investigations, and potential antitrust ramifications against Apple (NASDAQ:AAPL) are not good for the economy.

Yesterday, the markets were in terrible condition. All the major indices were down over 2%, led by tech heavy Nasdaq down nearly 3%. Was this downturn a fundamental correction or a technical panic? Well the economy is in disarray now – people are extremely uncertain as to what’s next for the big banks. Although the banks reported stellar quarter numbers, there will always be people out there ready to find a reason to attack JP Morgan (NYSE:JPM), BofA (NYSE:BAC), Citi (NYSE:C), Goldman (GS), Morgan Stanley (NYSE:MS) etc. If Goldman Sachs indeed does decide to settle with the SEC, my opinion is we are going to see the market rip higher temporarily. However, the SEC won’t let GS go away so fast – we may see some serious structural changes in the company, increased requirements for transparency, and more regulation over the deal process.

The recent controversy around Apple is a big negative for technology, a recommended sector during bullish times. Is Apple engaging in anticompetitive behavior? There’s another topic in itself. Recently, Adobe (NASDAQ:ADBE) and Apple have really been going at it. I would consider myself a supporter of Apple in general, but I have to say, Steve Jobs potentially destroyed his reputation on this one. I’m going to take Adobe’s side on this argument. It was very uncharacteristic of Apple’s CEO to publish a memo on the corporate website bashing Adobe and the Flash product. It’s unfair for him to say that Flash runs on a closed system. However, I do agree that Flash is becoming outdated and we are gradually seeing a transformation into HTML5.

Europe is killing the economy. The euro is at about 1.3002, tumbling on flight to safety. But this raises interesting topics for discussion.

1. If Europe is getting hammered so badly, wouldn’t this indirectly be good for the US economy? In other words, one could argue that people should take their money out of Europe and place bets on American equities. Perhaps this is just a product of behavioral finance.

2. Who’s next to downgrade Spain, Portugal etc? It’s inevitable that other rating agencies will come out and downgrade these countries. This of course will simply add to the panic and cause another tumble.

3. How much of a bailout are we talking about here? We’re not just trying to save a big bank, or a country, we are practically talking about a continent here. And who’s to say another country isn’t next? Spain, Ireland, Portugal, Italy, Greece have seen tremendous ticks in the price of credit default swaps.

The fact that there are so many differing opinions and no resolutions to these questions indicates that the global markets will continue to struggle. Is the recession over? I think not…

I would take this recent downfall and view it (and take action) as an immense opportunity. 2008 we saw stocks hit incredible lows, and watched them bounce back. Some of us sat in the sidelines, regretting not making a move at all. I believe there are many strong companies out there that are trading at very attractive valuations that are excellent investment targets. Stay tuned as I will model some of my investment ideas in upcoming posts.

By the way, Treasuries look interesting. The 10 year Treasuries hit a significant low yesterday, 3.69%. Remember we saw them hit the 4% benchmark level just a few weeks ago? I definitely think that shorting Treasuries is a great idea, especially since expected inflation has not been priced in yet, although everybody is waiting for it. An interest rate hike isn’t due yet, but traders are watching Fed policies closely as we could see a move shortly.