StankyPigano

Asia: The Next Big Bubble

Ditto to Jeff Nielson's response.

Here's a little perspective: the U.S. consumes about 25 barrels of oil per capita annually. Japanese and European annual oil consumption per capta is in the mid teens. China's oil consumption in 2007 was just over 2 barrels per capita!

With real savings and real wealth creation, there is also considerable headroom for demand growth before it can even remotely be considered a bubble. It is a mistake which defies all Chinese history to assume they will continue to rely on exports as Japan has.

As an aside, I think the reason China is stockpiling copper and other resources is because they see the recent political changes in India. If India decides to build 50,000 miles of roads over the next 5 years like China just did, there won't be enough of ANYTHING in the commodities pits to meet the incremental demand...

Fundamental Valuation: How Low Could We Go?

Good article Brett.

The historical valuation data on earnings gives a similar prognosis for market valuations.
The way I see it, we are in a secular bear market for valuations, within which we can have oversold bounces and cyclical rallies. But the trend for valuations is probably lower.

Historically secular bear markets have lasted 12-15 years and have correlated with secular bull markets in commodities.
In the 70s, the market bottomed in late 1974; valuations did not bottom until summer of 1982. In the 30s, the market bottomed in '32; but valuations didn't bottom until '42. In between, the S&P rallied almost four-fold between 1932 and 1937 without coming anywhere close to the 1929 high. It sold off sharply from 37 to 42, but bottomed at a level almost twice the '32 low, even as valuations undercut.

If recent government initiatives are successful in stemming panic and preventing a deflationary spiral, then the indices can rally pretty sharply from these valuations. But once we anniversary the massive unwinding of financial company leverage, and once the consumer starts to comp positive, the hangover of a massive government debt burden will ultimately be inflationary...hence, another selloff and lower lows on valuations if not absolute stock prices.

Buy and Hold investors are likely to face a continuing valuation headwind for years to come.

Positive Divergences Continue to Stack Up

No question there are some short-term bullish divergences, but they must be viewed within the context of a broader, very powerful downtrend. Evidence of this view includes downtrending MAs on every index and stochastics which just can't muster a meaningful reversal from oversold levels.

The most bearish divergence is that between eqities and short-term credit markets. Historically such divergences have always resolved in favor of the credit markets.

Finally, does anyone really think the S&P should trade at 23X trailing 4Q earnings when the economic wheels are falling off in the free world? In previous such crises, that multiple has dropped to single digits. And that's probably where we are going before this is over...

Ambac Collapse: Anticlimax of the Week

Nice Post Tom.
Regarding the Rating Agencies, Paul Kedrosky wrote an excellent article Friday examining the role of the Credit Rating Agencies in the negative feedback loop which is perpetuating this crisis. In contrast to short sellers who sounded an early alarm and arguably kept valuations from going higher than they did, Moody's and S&P first perpetuated the explosion of debt and are now exacerbating the subsequent implosion.
These companies SHOULD be irrelevant, but their relevance is mandated under Federal Securities Law.
In fact if the markets are so precarious that we must ban short selling, then we should likewise suspend the Rating Agencies' ability to downgrade until they can be legislated out of existence.

GDP and the Decline of National Statistics

It appears to me that the people who develop the Government economic data may have gone to the same schools as the folks who determined that sub-prime CDOs deserved AAA credit ratings.

Pilgrim's Pride: The Weakest Link in the Food Chain

Gee whiz, I wondered why this stock was down 70% in 9 months! I couldn't figure out why it was down 50% since they priced a deal 2 months ago. Ya really think it's wholesale meat prices? This whole industry is dialing back production in light of higher input costs. PPC and TSN have both announced multiple production cuts, and even SAFM has postponed a major expansion. Cattle and hog producers, which have much longer production cycles, are also culling herds which is temporarily depressing prices for competing meats. By year-end pricing for all proteins will be rising sharply, and so will these stocks. PPC has the most leverage to that dynamic.
Also, while PPC has the most debt, they don't have much in the way of current maturities and the deal gave them plenty of cash...so liquidity is off the table.
You can short this stock if you want too, but we are 8 years into a commodity cycle which historically has run 12-15 years. When commodities go, they all go. The only two I know which haven't had big moves to the upside are electricity and meat....meat is probably next. Long SAFM, PPC, and wish I had some CALM.