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Why You Should Be Worried!
While it is always darkest
before the dawn, and it is all too typical to throw in the towel at the bottom,
this market has a list of serious, seemingly unresolvable issues longer than the
Dead Sea Scrolls. Here is a partial list.
- Looming international debt crisis, with Brazil
mostly likely to default. The socialist candidate is creating the impression
that debt default and renunciation are possible options. The international
cost of capital just went up, calling into question the vitality of Latin
markets, and possibly Eastern Europe.
- A debt laden consumer that has spent unrealized
401(k) gains and his unrealized home appreciation and has nothing but
obligations to show for it. How long can the consumer spend without one-time
tax rebates, refi's, and absurd lenient credit to prime the pump? How long
can consumer confidence be sustained in the face of cascading stocks and
daily rumors of terrorist attacks. Is a double dip in the offing?
- Valuations are not cheap, by any measurement,
particularly if we get any negative answers to the questions herein. Tighter
accounting rules, particularly related to options, could make valuations
appear more stretched.
- We are out of fiscal and monetary rabbits to spur
economic activity. We are left with a corporate sector reluctant to spend,
and Main Street that may start noticing what's happening on Wall Street.
Defense spending is not enough to get the economy going.
- Our financial intermediaries face an imminent
legal assault that could damage their results, destroy their credibility and
make it difficult to do under-writings, raising equity risk premiums and
creating a capital crunch. Citigroup and JP Morgan Chase appear most
exposed.
- Deathly breadth on the markets, with only
defense, hmo's, hospitals, and some selected retail and restaurants left to
carry the markets. Finding upside momentum stocks is as difficult as a half
court shot, at best. Finding downside momentum is as easy as throwing a rock
in the ocean.
- Despite lower prices, insider selling is massive.
Insider buying is virtually absent.
- Dramatically expanded replacement cycles for tech
and telecom hardware, because of corporate anxiety and the inability of
applications/software to require latest hardware. This phenomena could cause
any tech snapback to be tepid, at best.
- A dead venture capital market, which will start
to stifle future innovation, and new job creation.
- Complete mistrust of corporate management,
accounting, boards of directors, and investment intermediaries. As a result,
risk premiums must rise.
- Hugely permissive capital markets created a
massive debt burden, at the same time, massive overcapacity eliminated
pricing power in industry after industry, with the exception of defense,
hmo's, hospitals, and selected retail and restaurants. Even with expanded
activity, we should not expect a highly leveraged bounce-back in
earnings.
- An international situation that is a constant
negative backdrop for investors, who remember well the plunge of the markets
after 9/11.
- Imminent offerings of CIT and Medco could suck $6
billion out of market already experiencing outflows.
While this market is currently oversold and could
get a countertrend summer rally, it will most likely fail until we get some
positive outcomes to the imponderables above. This is about return of capital,
not return on capital.
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