Dose of Market Reality: Take Defensive Measures

Over the past several months, we have written about the state of the market, urging caution based on our view that the worst is yet to come, that the fat lady is not yet on stage, and the ping pong ball has not reached to bottom of the stairwell.  (see recent letters below)

With increasing confidence we continue to hold to this view.  And here is why:

1. There is little the Fed can do to alter the shrinking value of the U.S. dollar, other than to raise interest rates.  And in the face of our sinking economy, such an act would be tantamount to shooting holes in the lifeboat we presently occupy.  Smart investors abandoned ship several months ago, along with most of our trading partners who no longer want to hold our dollars.  They no longer see our U.S. currency as a stable, reliable store of value.

2. This is why it now takes 1.57 U.S. dollars to purchase 1 Euro, and why countries like the Ukraine are adjusting their currency pegs against the dollar (to keep from over-inflating their own economies).  Here in the U.S. we will continue to feel the pain of inflation coupled with a declining economy, otherwise known as stagflation.  We were reluctant to use this word some months ago, but it now appears as the most honest way to describe the coming months.

3. The U.S. consumer is under siege: the housing bubble has burst (worst drop in 17 years); lending ability of the banks is diminished; gasoline and heating fuel continue to rise in concert with oil prices (in spite of U.S. Senators berating oil industry executives in a blatant display of officious politicking); food prices continue to climb (with help from a non-partisan Congress that continues to buy itself campaign donations from long-entrenched and undeserving farm lobbies - - - see the latest subsidies granted to sugar, wheat, corn, that put domestic prices well above world price).

4. Uncertainties undermine markets, and our market has a plethora of them.  The earliest to be resolved is which party will occupy the White House in 2009.  Given pledges of the 2 Democratic candidates, there will be a multitude of federal dollars poured onto the populace, all to be paid for with higher taxes.  Astute investors recognize this for what it is: political posturing.  But should it come to pass, it is a recipe for further economic decline and higher inflation.

5. There are international issues which are not likely to soon be resolved: AlQaida, Iraq, Iran, Syria, Lebanon, Venezuela, N. Korea.  Any one of these heating up would add further instability to an already unstable world economy.

6. The PE ratio for the S&P 500 is at an historic level, with little of substance to retain it there.  Corporations are re-writing their quarterly and annual projections to reflect falling revenue and earnings.  There is nothing on the near horizon that would create positive revisions to boost market confidence.

7. The funny-money mortgage mess is not confined to the U.S. - - - it was spread world-wide - - - and it is far from being cleaned up.  Expect to see further asset write-downs and crowded exit doors as awareness grows.

8. Lastly, the U.S. Congress continues to manipulate facts and data in their effort to put a "best face" on the current situation.  How else would you explain the use of a "core inflation rate" that excludes the categories of food and energy?  That low number may look good in print, but it does nothing to put more discretionary dollars into consumer pockets.

Given the above, we urge you to take some defensive measures.  It is still not too late.

Comments

[User 161034:]

On target and succinct - - thank you.

2008 May 29 10:38 AM

[notsosmart:]

every day needs=15.68% inflation

2008 May 29 12:06 PM

[notsosmart:]

gasoline-36.6,util.16.... 2007-8 real inflation not the govt. phony #s.what a mess

2008 May 29 12:10 PM

[notsosmart:]

submit button not working well. food10.1, health-8.6, shelter-6.5.

2008 May 29 12:12 PM

[gordon:]

The investment banks, with their TAF unlimited checkbook, compliments of the Fed are able to push the market back up to $SPX 1400 , end of month windowdressing. With their stealth stash, this market isn't going to retest the lows.

2008 May 29 12:37 PM

[User 161034:]

Gordon, so you suppose those TAF's (Treasury Auction Facility) might also launch an opposite TAF action (Taxpayers Against Fraud) ?

In any event, the banks may use this Fed largesse to shore up their balance sheets, but that alone cannot sustain the economy - - - the consumer is hurting, and any market "windowdressing" will have very short life. (just MVHO)

2008 May 29 08:36 PM