The Market Domino Effect: Staying Ahead of the Curve 39 comments
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The market domino effect has taken hold. As home prices continue to fall, there are several grave concerns facing the U.S. economy:
Domino One
One is a continued theme of the over-extended consumer. For years, the U.S. economy has considered consumer spending as the cornerstone for economic growth. At one point, consumer spending [1] was said to account for nearly two-thirds all economic growth. However, soon the consumer will be reigned in, and a price must be paid.
Most of the consumer debt is self-inflicted. As the old adage goes, people have spent money they didn't have, to buy things they didn't need, to impress people they didn't even like! Now it is time to pay the piper.
The rebate stimulus plan will not pull the U.S. consumer out of the tailspin. There is no quick fix.
- For years, consumers have treated their homes as nothing short of an ATM machine. Not only have they borrowed against the equity of their homes, but they have even borrowed against the anticipated rise in property value.
- As a new round of ARMs are set to expire, another segment of American consumers are sweating bullets. Trying either to unload a house that they shouldn't have bought in the first place or borrowing from a 401K plan to bail themselves out.
- As the U.S. economy continues to shrink still, a third portion of consumers are hitting the wall with job loss.
- Gas prices effect every aspect of the economy. Therefore, it is only logical to conclude that the consumer will have less disposable income.
- Last, as mentioned in earlier blogs, the easy credit in credit cards has given the consumer yet another avenue to over-spend.
Domino Two
Most lending institutions will continue to stay under pressure for the foreseeable future [2].
- Banks and other lending institutions have over-extended credit in the real estate market.
- Banks now need blood transfusions to stay afloat.
- Auto finance companies will be the next to feel the pressure.
- Eventually, credit card companies will realize that a credit risk needs more than a pulse for credit.
Domino Three
Deflation...and how it will impact EVERYONE
It is becoming increasingly apparent that U.S. financial markets are at a tremendous risk for deflation. Everyone knows that investments which move sideways - or move down - are already losing money. However, the reader's attention should not be focused on investments are earning anything less that 10-20 % a year. Bonds are bombs right now waiting to shatter any true gain.
According to the CPI calculator [3] (an extremely conservative gauge on inflation), $100,000.00 in 2006 is the equivalent of $105,916.67. Factor in oil, consumer prices including basic living expenses, health-care, a Fed that is over-printing [4], and a Congress that is satisfied being the largest debtor in world history [5], it is easy to see that these CPI numbers are a farce. The investor should not be lulled to sleep in this dangerous predicament. And this is the real story that is not reported on CNBC, MSNBC, or Fox Business.
Domino Four
A Crash-less Depression
The investment community has become keenly aware of the terms "crash" and "bust". It is the contention of this article that those things will not happen during the next depression. Many of the "lessons-learned" by the Fed, government and investment community have in-fact created shell games, Ponzi schemes, and other artificial stimulus plans which prop up the economy by creating liquidity. One need only view the policies of Greenspan [6] and Bernanke [7] to understand the real goal of the Fed [8] , which is to manipulate monetary policy to avoid the natural outcomes of the boom and bust cycles.
However, the manipulation comes at a price. Everyone who holds dollar-based assets will suffer the same fate. While is appears that the stock market increases - or at best stays the same - on paper, it appears that everything is o.k., when in fact, deflation has under-minded all investments.
This is not to say there will not be winners on Wall Street, but more importantly to underscore the fact that most investments will lose long term.
Mega Trend Losers
The U.S. Dollar, and those who have dollar based assets.
- Regional Financials which are largely over-exposed to an ailing economy i.e. Regional Bank HOLDR ETF (RKH)
- Housing sectors. i.e. SPDR S&P Homebuilders ETF (XHB)
- Real Estate i.e. SPDR DJ Wilshire REIT ETF (RWR)
- Entertainment and Recreation Vehicles i.e. Winnebago (WGO)
- Green Energy bubbles i.e.First Solar (FSLR)
- Banks with heavy domestic credit card exposure: Visa (V), MasterCard (MA) and Capital One (COF)
Mega Trend Winners
- Real Estate shorts i.e. UltraShort Real Estate ETF (SRS)
- Domestic Oil i.e. PetroQuest Energy (PQ)
- Oil Equipment i.e. Halliburton (HAL)
- International Oil i.e. BP (BP)
- Infrastructure i.e. ABB (ABB)
- Technology i.e. Microsoft (MFST)
- Foreign Specialty Chemical i.e. Reliance Petroleum [RPL.NS]
- Farm Equipment i.e. Deere (DE)
- International Tobacco i.e. Philip Morris (PM)
- Green Technologies i.e. Valence Technology (VLNC), Claymore/MAC Global Solar Index ETF (TAN)
- Retail i.e. Wal-Mart (WMT)
Inverse Play
Sources Cited:
1. MSN Money
2. MSN Money
3. US
4. A world of possible financial futures, "Federal Reserve forecasting and watching"
6. The Daily Reckoning, "Big Bang Theory: Housing Bubble meets pin "
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This article has 39 comments:
anyone interested in seeing a market mess,just look at the squeeze going on at Cal Maine...there's an investigation waiting for a place to happen!!
The age of paper assets (stocks, bonds, derivatives, fiat currencies) is in the process of making way for hard assets (commodities, precious & base metals, agriculture products, oil, energy, infrastructure, etc.)
When you see a market trading sideways, you should know that it's demise is close.
To each his/her own, in the end the REAL market will prevail.
Remember HOW MANY TIMES since "last summer" the financials had to take ADDITIONAL WRITE-DOWNS....
Do, you really think you can trust the "positive spin doctors" over the UNIVERSITY ECONOMISTS vs. the economists who are BEHOLDEN TO THE SYSTEM...(gov, big biz, etc.)
I trust the academics on THIS ONE...like the "marketeer spin-doctors" DIDN'T SEE THE "DOT-COM" debacle...then, they didn't see the "sub-prime" fiasco (and I don't think the financials HAVE "FULLY" COME CLEAN YET!). So, yeah I've been going "LONG" lately on these "phony polyanna bear rallies" - if the idiots want to "drive the mkt up" in denial...hey, "up is up," so I ONLY DAYTRADE THE SHORTERM AND "OUT BY END OF DAY!"
best, I can see...these days....
regards,
Flashrob
...but believe there ain't NO UP for the 2nd half of the year. That nonsense is what MANY OF THE HERD ARE BETTIN' ON!
When, your neighbors start losing their jobs and houses, then that "2nd half" recovery WILL BE MOVED "FORWARD," and probably indefinitely (the marketeers are probably working on the "spin" for that, right now and "frantically" ...LIKE KEEP THE LID ON TIL' THE ELECTION IS OVER...Bush can't "take any more!")
Like when the "financials" are laying off "thousands" of high-paying jobs (which ain't the same as "Walmart" jobs...ya know...the ones the gov all links together in the "labor statistics" ...like were supposed to believe there's not much difference). Not just the financials, but those "high-tech" jobs that were supposed to replace our "lost mfr" jobs, with Nafta and the WTO. Well, bottom line:
Whose going to RECOVER REAL-ESTATE for us...
maybe, "hi-techies" from India, China, etc. will MOVE HERE and buy up those empty houses...like they don't get paid as much by the "new MULTINATIONALS pay scales..." but heck, WITH THE DOLLAR dropping (like 50% against the Brazilian Real, no less in seven years or so) hey THEIR LOWER SALARIES (paid by the multinationals who, at least many of them, still keep their Headquarters here in the U.S.) WILL DO JUST FINE WITH THE "higher standard credit checks" of U.S.
lenders.
So, it ain't ALL BAD NOW...IS it....
regards,
flashrob
COF will take losses on its credit portfolio, and may likely be a distressed assets takeover candidate once investors panic about the losses they continue to incur as more homeowners lose their homes. FYI, it's estimated 1 in every 6 homes will go to foreclosure by the time this is done. That is a definitive negative wealth effect, and a 10% market correction doesn't fully price in what that really means.
It's cliche, although it really does appear like investors are riding on a slope of hope.
many of those promised "hi-tech" jobs that were supposed to replace the "mfr jobs" (so called lower level jobs) that were lost due to us jumping onboard the WTO/NAFTA express...
Well, many of those jobs are, SURPRISE, SURPRISE, finally, now, SURFACING...ONLY THEY ARE SURFACING IN "INDIA," for example.
My point being, WHO AND WHAT are going to SHORE-UP and recover the U.S. Real Estate mkt - foreigners "on the cheap, YA THINK!"
Also, one LITTLE CAVEAT ON THE FINANCIALS...
who in their "right mind" thinks the financials are A BUY AT THESE LEVELS???
Did you SOMEHOW OVERLOOK the FACT that:
1. Future Earnings Prospects are bad FOR MANY!!!
a. Credit Qualifications HAVE TIGHTENED...no cyclical bounceback on "loose ARMs" ...gone, gone, never to be repeated...so less profitable loans made to fewer. How does that look for earnings, and beating comparable quarters last year...NOT FOR YEARS, IF EVER, I THINK!
b. FEWER LOANS, because the "pink slips" HAVEN'T BEEN DELIVERED YET...so the consumer is still BREATHIN' HIS LAST...until many get their pink slips, STARTING THIS SUMMER, I figure...
c. HIGHER ENERGY COSTS...FUNNY HOW OIL KEEPS ON GOING UP when reserves are in better and better shape each month...
Maybe that's because THE REST OF THE WORLD is not paying THAT MUCH MORE FOR OIL...IT'S ONLY US!
THE PRICE OF OIL (in U.S. dollars) IS ONLY GOING UP SKY HIGH IN THE U.S....this is due to the "dollar's" decline, because of Bush's War and the gov PRINTING MONEY like it's Monopoly were playing at.
(Oil is going up in other countries in Europe, Asia, etc. BUT MORE REASONABLY for them... because of China's increased growth, etc. BUT, IT IS FLYING UP IN THE U.S. ...not becuase of lower supplies and competition over it...BUT MOSTLY BECAUSE OF THE "ever weakening dollar," BECAUSE WE ARE PRINTING TOO MUCH MONEY!!!
and the MOST IMPORTANT POINT ABOUT THE "FINANCIALS!"
They HAVE REDUCED PROSPECTS, going forward for PROFITS...
a. lets not forget THAT THEY WOULD HAVE A TOUGH TIME going forward because of less customers (due layoffs of GOOD JOBS, etc...the kind of people who even get mortages, etc.)
b. tighter LENDING STANDARDS...
c. but, the BIGGEST REASON ...they won't be doing well for years LET ALONE surpassing LAST YEARS QTRS...IS:
they (MOST) are CARRYING (and paying premium interest on) BILLIONS OF DOLLARS OF DEBT...
do you think that MULTI-BILLION DOLLAR DEBT of MANY is going to quietly DISAPPEAR...well the
marketeer "spin doctors" ARE PROBABLY HOPING that YOU BEING THE "HERD," won't NOTICE A LITTLE THING LIKE THAT...
Afterall, we have REACHED BOTTOM, HAVEN'T WE (maybe), and the
FINANCIALS HAVE NO WAY TO GO...BUT UP...FROM HERE...(bout how the spin goes, doesn't it?)
Like the emphasis will be on NEW PROSPECTS AND REVS, etc...
BUT GUESS WHAT...there are still BILLIONS OF DOLLARS OF BAD DEBT (with interest)...
So, in REALITY, will someone tell me WHY FINANCIALS ARE CONSIDERED
positions TO START ACCUMULATING...
IS EVERYONE THAT DUMB???
Apple is bounding up, Nvda should pretty soon (two of my favorites)...AND I THINK THEY HAVE A TOUGH TIME GOING FORWARD IN THIS RECESSION...but the
main thing they have going for them...IS NOT HAVING BILLIONS OF DOLLARS OF SUB-PRIME LOSSES TO "PAY BACK," in ADDITION to a "weak economy" going forward...in order to make decent earnings.
I just can't believe the NETWORKS talking UP the FINANCIALS...
most are going to be WEAK for YEARS before they get out from under that bad debt, EVEN WHEN THE RECESSION IS OVER...(not anytime soon, I suspect....) they'll STILL BE PAYING OFF THAT BAD DEBT FOR YEARS....
i'd SHORT financials HEAVILY (most of those with lots of sub-prime, etc...especially AS HOUSING PRICES CONTINUE TO FALL, there will likely be MORE WRITEDOWNS....)...only reason I don't TOO MUCH is there ARE A LOT OF IDIOTS who "buy the spin" and drive them up...
eventually they'll tank, but I don't want to get "run down in the stampede" EVEN WHEN IT APPEARS the HERD is "heading for the cliff" and NOT THE RIVER.
REGARDS,
flashrob
check this out!
www.nytimes.com/2008/0...
regards,
flashrob
Financial lesson 101: The more nay sayers you see whining about how bad things are, the more likely we are very close to or already at the bottom.
Confession: I'm not that great a stock picker. But of all the advice handed out and the most simple and often the most ignored is buy low and sell high. While they don't admit it, most people most times do the opposite. I wonder... how many right now are chasing Vista, Apple and Google and avoiding banks like the plauge?
I've made a lot of my money getting into stocks when they were beat down and nobody would touch them with a ten foot pole. Sure, sometimes I got burned, other times I said whoopee!
Of course Visa & MC don't issue credit, they just let every shaky banking institution "have at it," & that makes them what?
Wake up stupid!
Knowing that "you can lead a horse to water, but you can't make him drink,"
doesn't absolve me from, at least in my estimation, from making sure that threre's water in the place I'm leading him to....
regards,
flashrob
The SUPREME COURT, IN THEIR INFINITE WISDOM, KILLED THE IDEA OF TERM LIMITS. I do not believe we can straighten out the cesspool in Washington until we can stop the lifetime careerists in Congress and elsewhere in government.
The Supreme Court didn't kill term limits. We just need a constitutional amendment. What are the chances of that?
That would apply to Flashrob too, right!
figure out that all they are doing is importing our debt. Then hold on to your pants! Uncle Sam is stuck playing in a bad game of Hearts, and the only card we have is the queen of spades.
Back in the day, I recall inflation being defined as to many people chasing too few goods. The BRICS countries (I count the Saudis as a world player due to wealth) can afford to do this for awhile by using the exponentially decreasing dollar. We are 5% of the world's population, and continue to use 25% of it's resources. If the goal of the BRICS countries is to live like us, the world will have to shed itself of approx. 3 billion people.
Thank you for the positive and negative feedback. This article intends to analyze the current trends, and how they will impact financials markets. While some would prefer to live a charade, and pretend that deflation is not an underlying factor to a weakening economy, it was appropriate to build a case as to the impact of the Fed and U.S. government policy.
Bonds may be viewed as a "safe haven" for investors. However, in this scenario, bonds are a trap. They simply lose value faster than it is accumulated.
Last, this article encouraged readers to be proactive toward investing decisions...thinking outside the box.
Respectfully,
Brian A. Davis
Anyone who "publishes" an article but presents no credentials and provide no disclosures should be completely ignored. Do your own research and come to your own conclusions. So much of what you see in print and hear on the business channels is unreliable/biased. It's written or stated by individuals who are virtual unknowns and who make no disclsoure about their own or their company's positions, that you simply cannot put yourself in the position of relying on their thoughts or recommendations.
Who cares what Brian Davis wrote in his market domino "article". As an investor, you need to do your own research and come to your own conclusions. If you cannot do that, then you should give your moeny to a professional and go spend your time doing things that you have expertise in and that you enjoy doing.
Continued growth of MA and V will be predicated on consumer demand.
MA and V, have excellent business models. Both companies have healthy stock prices as well. MA and V are based on consumer credit transactions (which should see weakness in coming months).
1. Over-spending
2. Inability to service debt
3. Default rates
4. Tighter underwriting standards
The ability for consumers to service debt will be tested. While this becomes more or less an issue for the underwriting banks, it will also effect the bottom line of MA and V. Furthermore, once a MA or V user defaults, then that customer is unable to continue transactions. Last, banks will continue to scrutinize customers with tighter underwriting standards. There will be come customers that banks will not want. These issues will effect the bottom line of MA and V.
Respectfully,
Brian A. Davis
P.S. I do not hold positions on MA and V at the time of this article.
reality...TRY SOME!
flashrob
On Apr 28 12:18 AM Manifestor wrote:
> Flashrob said: "it's very difficult to "change someone's mind" when
> they want to believe what they want to believe, despite all your
> best arguments."
>
> That would apply to Flashrob too, right!