One thing that baffles me about the financial crisis and all of the analogies to the Great Depression is the repeal of the Short Sale Uptick Rule and Glass Steagall. If we are truly going to remember the lessons learned from the Great Depression we should quite obviously bring back the Uptick rule and also Glass Steagall which were the two most important pieces of legislation passed in the 1930's to prevent another Depression from hitting the economy.
Here are a few things that concern me about the current economic backdrop aside from the repeal of the Glass Steagall Act and the uptick rule:
1. Escalating Debt -- The fiscal deficits and long term debt issues are very real and just because we have a printing press does not mean we can export our inflation forever. Eventually, as we print more money to monetize the debt, inflation pressures will mount and standards of living will fall for the average American worker all in the name of Keynesian Economics. No one stops to think that maybe this time the problem is long term and structural and not simply cyclical.
2. Demographic trends have helped to keep bond yields low because of the net drain on labor participation rates helps curb inflation. Additionally, demographic trends of baby boomers heading towards retirement and a slowdown in population growth have helped prolong the housing downturn because in order for "hormones" to "take over" people have to want to get married and start a family. With the decline of the economy and the rise of the stock market bubble, many youths feel left out, abandoned, alone, sullen, depressed, etc. ... Clearly, the cult of equity folks are a lot better off with rampant money printing and inflation than are the day labor set that makes up much of our nation's 20 and 30 year olds.
3. The end of cheap oil may be upon us and high gas prices might become a permanent fixture in our economy. If so, expect to see even more of a transition into online/work at home type job growth as Americans are forced to adapt in a world where a commute becomes unaffordable for many workers.
4. While the stock market is up, for the average American the massive trickle down stimulus is not helping. Believe it or not, but the majority of young people are still struggling with low pay, jobs below their pay-grade, high unemployment, rising college tuition, rising student debt balances and interest rates, inflation, etc... Young people are especially affected if they have ever had a bankruptcy, have been arrested even for misdemeanors or DUI, have been unemployed for a long period of time, or who have mental disabilities. For the vast swath of the nation's middle class, the recovery is questionable at best.
5. Finally, the banks have definitely become too bigger to fail. If anything does go wrong in the financial sector things could unravel in the stock market. That being said, I am actually somewhat bullish on real estate and select financial stocks right now.
Here are ten stocks to consider shorting or selling if you own them to lock in gains. Remember PE ratios don't matter until they do matter! Better safe than sorry ...
|Stock or ETF||PE Ratio||Price to book||Price to Sales||Price/Cash Flow|
|Russell 2000 (IWM)||25X||3.3X||N/A||10X|
|Midcap S&P (MDY)||19X||2.2X||N/A||10.59X|
|Nasdaq 100 (QQQ)||24X||3X||1.9X||8X|
|S&P 500 (SPY)||14X||2X||1.3X||7X|
|Long Bond ETF (TLT)||N/A||N/A||N/A||N/A|
|QLIK Tech (QLIK)||272X||13.4X||8X||103X|
|Westport In. (WPRT)||N/A||13X||10X||N/A|
|Royale Energy (ROYL)||254X||5X||5X||26X|
First off, the CAPE PE or Adjusted PE for the S&P 500 is at 23X earnings. This is the method used in Robert Shiller's Irrational Exuberance.
The reason I included Ford here is that I believe higher gas prices will hurt the SUV and muscle car markets for the company. I also believe that the Chevy Volt will not gain traction due to the short distances the current battery technology allows an owner to travel before the car must be recharged.
Westport Innovations makes the list because even though I am bullish on Natural Gas Engines, WPRT is too expensive for me at current multiples. While some investors may want to speculate on a good company in a growth market, I would stay on the sidelines based on an already rosy valuation in the stock market.
As for ROYL, I think the run to the upside is over. Still, investors and traders should consider setting a stop loss at around $6 a share if they want to short this for a quick trade.
Groupon is a tough short because if they hit their numbers the stock doesn't look all that expensive. Let's see if analyst estimates are correct, but if they aren't GRPN could fall a long way due to the fact that it has lost money on a TTM basis. That said, with tech stocks anything can happen!