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Wednesday, February 21, 2024

TGI 2009!

Happy 2009!

Not too many investors are going to be sorry to see 2008 go – it's been a disastrous year for the markets and, of course, the global economy as all our 2007 bubbles popped one by one: Housing, Construction, Mortgages, Investment Banking (including LBOs and IPOs), Retail Banking, BRIC and, finally Commodities all fell apart one by one.  These were all the "new paradigms" that would never end and would infinitely grow in the new global economy

Perhaps they would have kept growing if they did not, one by one, get caught up in the speculative bubble that began and ended with home speculation.  It can be argued that this was all just one big bubble, with housing carrying the others along, creating a mania of easy money and heavy leverage that overvalued commodities which, for quite some time, went into building more and more homes and buildings that, ultimately, no one actually wanted.  The same thing happened to the Auto industry as more people buying more homes and more families refinancing their own homes felt rich enough to go from 2 cars to 3 or 1 car to 2 but now that's a luxury that has also been scaled back and once again, as it was until only recently, when a teenager wants to go out they will need to borrow THE car.

The same goes for the BRIC countries, where kids were leaving the farms in record numbers to start a life in the big city.  This led to "demand" for new housing as YUM, MCD, WMT et al raced over to build stores to welcome the new consumers who were able to readily find jobs building new YUM, MCD and WMT stores and working for the banks that were financing the construction and the electrical companies putting in the wiring and the countless other TEMPORARY industries that spring up to support the construction of entire cities.  Those temporarily employed people needed housing and that led to another boom in home construction and the demand for the limited amount of current housing led to skyrocketing prices which made all the people who bought early feel rich and they traded up and fed the boom and PRESTO – another housing bubble!

'Reverse migration could shake China's stability'Think about how many people are employed and what type of jobs they have building a McDonalds in China for 6 months vs how many people and what type of jobs will be housed in that McDonalds once it's built.  The company may spend $1M putting up a store so figure 50 $20,000 short-term jobs are created but, once the store is open, only the Manager makes over $20,000 and the rest of 20 or so jobs pay closer to $10,000.  Multiply that by the astonishing rate of franchise growth in China and India and you can see how the economy can go from so good to so bad so quickly.

Even worse, since pretty much everyone overestimated the sustainability of the growth, we have what are effectively "ghost cities," where there are not enough permanent jobs available to support the population the city was built for and that leads to half-empty buildings that are not profitable for the owners that end up being poorly maintained and cannot pay their taxes which destroys the infrastructure causing more people to leave, etc…  This is the danger of central planning, which China used to map out the rapid urbanization of their population which led the compelling growth numbers that the US and Europe counted on to create a long-term demand for their goods.

Everything that is good about the global economy is also bad about the global economy as we are so inter-connected that we now take each other down.  There is no longer an isolated failure of the Ruble that we can shake off, it matters to us if China doesn't grow 8% this year, 45% of the S&Ps revenues come from overseas while 25% of the Russell revenues are of foreign origin (see chart below).  XOM, for example (who make up 3.3% of the S&P), derives 70% of its revenues from overseas while GE (1.2%) gets half their revenues from foreign lands and there are other names at the top of the list that may surprise you.


So let's keep in mind that we are all in this together from a global perspective and we are going to need global cooperation to be able to move through this.  I said last week that I expected we would begin to ride a wave of optimism into Obama's inauguration on the 20th but it is just another form of stimulus and we will continue to watch our roller-coaster model, not getting our hopes up too high until we see something like a global turn-around.  Yesterday I put up the big chart and predicted that the RUT and NYSE would hit their 50 dmas but the others would have trouble.  Well, they did until just after 3pm but during chat yesterday I had predicted that too.  It does not make me bullish to be right about such things, just suspicious as it's all wrapped up in just too neat of a technical package for my liking.

The Nikkei was closed today and the Hang Seng gained a point but the Shanghai gave one up, finishing the year down 65%.  Y.K. Chan, strategist at Phillip Capital Management in Hong Kong, said investors were surrounded by uncertainty, with the economic slowdown and declining corporate earnings growth on one hand, and an "abundance of liquidity" in the banking sector on the other. "Banks are afraid of lending the money," said Mr. Chan, adding the "determining factor" for markets will be whether the liquidity available in the system is put to use in 2009.

Europe closed early with the DAX up 2.25%, the CAC up 0.5% and the FTSE up 1% so generally in a good mood on New Year's eve.  Unfortunately, commodities were the top gainers, including oil stocks even though crude itself is back to $37.50 in overnight trading.  A rising tide of corporate bankruptcies towards the end of the year points to a difficult 2009 in Europe and, for the first time ever, the Euro is just about on par with the pound – not a good thing for England actually…

We should drift into the end of the year at about where we left off yesterday, perhaps a little follow-through to complete 2.5% moves from yesterday's open.  We will be heading into the holiday well covered as anything can happen on Friday's very low-volume session.  Hopefully, today will be nice and quiet.  Despite the "rally" less than 1Bn shares were traded yesterday and we won't touch that today.  There were "only" 492,000 jobs lost last week, quite a bit better than the 560,000 expected so there is no reason to give up yesterday's gains and we'll be concerned if we do.

Have a very happy new year!



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