With earnings season just about over, the numbers for the S&P should average about 12%. With consumers on the hook with their heavy debt loads, expect earnings estimates to be revised downward in the months ahead.
After President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, more than 600,000 cases were filed in the bankruptcy courts 16 days before the act became law.
As my friend Louis Navellier recently said, "if a consumer has a dollar in their pocket, they will spend it.' I can't necessarily disagree with him.
Today, as I was taking my son to school, I saw a guy who is a physician's assistant, driving a large Mercedes. His wife, who is a school teacher, drives a large Lexus. These people either hit the lottery, inherited a fortune, or are living way above their means. I must add that the husband is a little more uptight than he used to be. My mentor used to call this "form over substance".
Consumers who are now experiencing financial difficulties because of overspending, job loss, divorce, etc... are now facing two choices;
1) Chapter 7- A court supervised liquidation of person痴 assets to pay creditors as much as the assets will allow. These debts are primarily consumer debt.
2) Chapter 13- Which basically allows individuals with jobs to pay off their creditors with future income rather than a liquidation of their property.
Of course, if a person痴 job has been outsourced to a foreign country, and they have been unable to find a new a job, their assets will be liquidated under Chapter 7.
Now that the new bankruptcy laws make it more difficult for us to get an accurate read on the number of consumers in trouble, we may find out by owning stocks of financial lenders when their loan losses come in greater than anticipated.
Given my belief that the pullback in energy prices is temporary, I don't believe the recent rally in the consumer discretionary sector is sustainable. While impressive, the rally in the sector will probably go down as nothing more than a good trading opportunity.
Sooner or later, the wealth effect from the housing bubble will begin to die. When it does, retail sales will decline, and the consumer sentiment numbers that improved over the past few months will decline.
As business slows, we would expect companies to begin slowing their hiring, and the unemployment rate will rise.
One sector that we are becoming fond of (for investment, not reputation) is the insurance sector. Living along the Gulf Coast, we quickly found out that all of the "Good Neighbor" and "You池e in Good Hands" ads are a bunch of crap!
In any event, insurance companies have tripled and quadrupled premiums in the southeast, and they should report gangbuster earnings in the coming quarters. What a great business, they don稚 manufacture anything, they give you a piece of paper that you don稚 understand, and you pay them money. When it comes time for you to collect, they give you a hard time. What a great business!
As the economy continues to falter, Treasury yields will continue to decline. For many fixed income investors I have been laddering maturities on bonds and CDs out to three years. I like the idea of having something coming due every six months.
With a slowdown in the economy, oil prices will probably trade in a range of $50-$65. If President Bush decides to take military action against Iran, I would expect oil prices to shoot back up to $80/bbl, and then to $100/bbl.
Anyway, the elections are next Tuesday, so go out and vote for the person you think that will be not be influenced by special interest groups and corporations. Good luck in finding them. If the filing fee wasn't $10,000, I would put my Cocker spaniel on the ballot.
So, where do we go from here? Let's keep this simple. Buy pessimism , and sell euphoria.
