I have been gathering as much data as a human possibly can, and if I am not fairly certain of an outcome, I do not like to babble on just to have something to say. I realize I am speaking to intelligent people; I want to make sure I have my facts together before I render an opinion.
This being said, we as investors are bombarded with a huge number of opinions. The only problem of course is everyone has an opinion right, or wrong.
I will be the first to admit that I am never always right. I will also say that some of my economic and market opinions take time to pan out.
Right now, and for several reasons, I am rather puzzled about the direction of the economy and the stock market. Let me tell you why.
Like you, I take in as much information as I possibly can, then render an opinion. Sounds pretty simple doesn't it? Since this is what I do, most of the time it is. This time however, I hesitate to use some the conclusions I am considering because most people will blow them off as being alarmist, or prophesying doom. I never have been one to do such a thing, I always call them as I see them and let the chips fall where they may.
In 2004, I spoke at the World Money Show in Orlando. I was an Investment Advisor with Phillips Publishing, and it was a wonderful experience. The "Investor Alert" blog you are now reading use to be a paid newsletter service. On the first day of the show I appeared on the Phillips All-Star Roundtable discussion with about 8 high profile investment advisors. About a thousand investors attended the Roundtable discussion.
When it was my turn to speak, I calmly said that the US was about to enter into an energy crisis that would drive the price of gasoline to $2.00/ gallon and eventually $3.00 and higher. Just before I appeared on the panel, I drove by a gas station where the price for unleaded was $1.53. Mt reasoning for this energy call seemed pretty simple at the time. I had looked at what was happening in China, India and the rest of the world and quickly concluded that energy demand was rising and supplies were depleting. This was a simple call.
At the time I did not think anyone would look at my prediction as being alarmist. Well, I was wrong. A 20 year veteran in the financial publishing business, and a frequent guest on Wall Street Week with Louis Rukeyser spoke immediately after me. He took my prediction for higher oil prices to task, and nicely said I was wrong. Mind you, this was 2004, and making a prediction for $3.00/ gallon gasoline when prices were $1.53 sound like an alarmist.
I didn't, and stuck to my guns.
Reason Why I am Puzzled
To be frank, I really do not like what I am seeing with the current situation in Real Estate, Consumer Debt, Inflation, the Savings Rate, and the potential for a large number of bankruptcies in the months ahead.
I realize if the country got into deep trouble the Fed could wave its magic wand and lower rates, but our currency would plunge to new lows. To add insult to injury, if inflationary pressures persist, the Fed may not be able to rescue the economy for fear of driving inflation even higher.
Another reason I feel we have some significant problems ahead are corporate insiders. If we are just going to have a "quick correction" or even a mild downturn in the economy, why are insiders selling their shares at such an alarming rate?
Make no mistake, the Real Estate bubble that we have witnessed is one for the record books. While higher home prices and interest rates may have caused the recent slowdown, a huge build of oversupply will keep the market oversaturated for several years. It makes me wonder what all of these "soft landing" proponents are looking at. Everyone knows that speculative demand created by easy credit has fueled the real estate hurricane.
As I watched the homebuilding stocks today I was trying to figure out how much of the accumulation was from short covering, and how much was from bargain hunting. My best guess is we have entered the beginning stages of the earnings warnings, and the next several quarters will bring more of the same.
Granted, many of the homebuilding stocks are at levels not seen since 2001. But, I think we will see another 10-20% on the downside over the next 6 months.
The housing sector has been the saving grace to the employment numbers, and as the sector continues to struggle these workers will begin to lose their jobs, and the carpenters, plumbers and electricians who have made a killing the past 5 years will struggle to find work.
This morning we woke up to news that Intel is firing 10,500 employees, Ford 30,000, 5,000 of which will be white collar jobs. GM announced it would eliminate 30,000 manufacturing jobs, and on top of all of this, 469,996 IT jobs have been outsourced from January 1, 2000 to September 6, 2006 (Source techsunited.org).
According to Paul Craig Roberts, former Assistant Secretary of the Treasury for Economic Policy under Ronald Reagan, "US manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job."
Conclusion
Now you can see why I am puzzled. I don't want to be an alarmist, but I do not think this is going to end nicely. I am not smart enough to be able to tell you exactly when the fallout will occur. Frankly, it痴 hard to believe the stock market has held up as nicely as it has.
Maybe the housing debacle will be the straw that broke the camels back. Based on the evidence that I am receiving, I think it would be a miracle if the market only went down 10-15%. I just don't know when this will happen. Maybe the Fed can prevent this from happening by buying S&P futures contracts.
Since corporate profits are driven by consumer spending, and based on what we are witnessing, how in the world can corporate profits continue to climb? I don't see any way they can.
