Maybe give it some more choke Vlad..?
Obviously the dominant financial news is the keeling over of the markets. The mainstream media seem utterly confused and baffled by the sell off, searching high and low for justifications and explanations. In our view there is a disappointingly simple answer: 1) stocks were too expensive; 2) people panic. Stocks were pricing in a utopia of growth and low interest rates with controlled inflation and Bernanke ready at the pumps whenever called on. This was clearly delusional. It was an attitude reminiscent of discussing the upcoming Premier League season with a Liverpool fan: at worst -at worst- they expect to finish the season second! The fundamentals do not apply: in the markets the Bulls ignored the unemployment issue, they ignored the fifty million Americans on food stamps, they ignored the battered balance sheets of Main Street; in Anfield they ignore the players and their lack of depth and talent. Needless to say both subjects must reset their expectations and, for the markets at least, that process is now under way. Recessions are normal occurrences, they are important and unavoidable parts of the economic cycle, and we expect America to enter recession by early next year; but that is not to say that the world will implode around us. It is important for market participants to realise that this is not 2008. In 2008 there was no question that complete collapse of normal society was a possible outcome, it might have been a 10/1 shot, maybe longer, but it was certainly an event that the world skirted around and avoided. This is not the same scenario and the panic of the media, and some traders, suggests to us the psychological phenomenon of "recency bias" - that is the tendency to place heavier weight on more recent events and lighter weight on less recent events; so, in effect, people scared out of their wits in 2008 (us included by the way) tend to expect a similar brouhaha from a 2011 recession when, in fact, there were 11 recessions in the last fifty years that did not cause complete carnage (just one that did). Companies are entering the next recession with healthier balance sheets with significantly lower levels of debt; the opposite is true of Countries entering the next recession, most are in a bit of a mess, but most can print currency so should, eventually, muddle through intact.
As we mentioned in our last post, the stock strategies which usually perform well in recessionary periods are likely to repeat that feat - i.e. being long solid dividend payers with good pricing power and good balance sheets while being short more speculative small caps. We touted Eli Lilly last week and it's interesting to note that Lilly remains just around positive since then despite the fresh sell off. Statoil is a similar proposition, a company paying about a 5% dividend, trading at six times earnings with about $15bln in cash; Statoil is now back around the levels it traded at at the worst of 2008; they announced one of their largest ever finds just last week (a size not found off Norway since the eighties); and, finally, being a Norwegian company, purchasing stock in Krone keeps one's precious readies out of Dollars or Euros if one is so inclined. Similarly we expect the agriculture arena to outperform equities, and movement since the July stock sell off would support that view; the following chart shows the S&P500 in orange and the DBA Agriculture Fund (which tracks a composite of commodities including corn, wheat, soy-beans and sugar) in blue, evidently the Ags still have buyers:
Nevertheless, it's critical to remember that the Bears are in charge of this market now, so guile and pace will ultimately be required to flourish. . . coincidentally, exactly what Liverpool have none of.
Stay lucky,
