What I know and what I wish I knew

A short while back I decided to return to writing on the blog as a way to encapsulate my thoughts and review tactics and strategies.   With the noise that exists within our culture and data driven industry we can lose ourselves to the impulses caused by the most recent data points.

The talking heads on TV uniformly speak with such clarity and conviction but are never held accountable to the results of their recommendations.  Do they eat their own cooking the way I do?  I doubt it very much.   So while you the reader may consider that this blog is for your benefit please consider its also for my benefit at well.

What do we know:

The political leadership existent within the US and Globally lacks the political will and savvy to solve the debt and currency crisis.   There is a continual sense that their intentions are to “kick the can down the road” for future leaders and tax payers.  The lack of cross the aisle cooperation between parties is pathetic.  The Republican’s lack of cooperation, even at the cost of benefit to the country in order to gain the White House appears to be the game plan.  Speaker Boehner is even disagreeing with the proposed short term tax credits proposed in the jobs bill.

If you’re a country that cannot print money then you are crashing.  Why this is lost upon the tea party, I have no idea.

There is a global race to devalue currencies.  PIMCO predicts the Euro will fall to 1.20 USD within three to six months.   When Janene and I were in Paris this May the Euro was 1.45 USD.

2012 estimated earnings for the SP 500 are coming down in deliberate fashion.   In August the estimate for 2012 was $112, now they are at $110 and falling.

Most European stock markets are down 15%-20% while the US is down 2% for the year.    Macroeconomic data continues to deteriorate.   Last night Goldman Sachs lowered their end of the year target for the SP500 to 1250 down from 1400.

Investors are extremely bearish.  AAII figures show 40% bears against 30% bulls.  This is an uncomfortable status in light of my hedged positions.   The issues of Greece, the Euro, our budget impasse, US debt, falling currencies and high odds of recession appear to be largely baked in the cake of many share prices.

Shares of dividend paying stocks look very attractive relative to bonds.

Contrary to Bernanke’s talk:  US money supply is rising.  Rising money supply frequently has a steroid effect in the short term for stock prices to move higher.

With Peyton Manning on the sidelines is there is no doubt that Tom Brady is simply the best at his position.

What I don’t know:

How low will SP 500 earnings estimates fall before they bottom?   The average recession cuts earnings by 25% from the previous peak or in our case $75 a share.

While a Greek default is inevitable, can Europe handle a Greek default in an orderly fashion, and then an Italy default, followed by a Portugal default……..rinse and repeat.

Will the Chinese support the Euro to allow multiple currency options for its growth.

Can the European banks reduce their systemic risks and raise gigantic amounts of capital they require?

One potential cure-all would be for the Chinese to let the Yuan trade freely on its own merits?  Is this just pie in the sky hopin and wishin?

Will investors finally purge Treasuries en masse and allow yields to rise?

Is our unemployment issue systemic (see Doug Kass) or cyclical (Paul Krugman)?

Can the opinions expressed by Tim Geithner in stating there will be no Euro Lehman’s be trusted?

How can Duane Allman and BB King be ranked higher than Eric Clapton in the Rolling Stone Top 100 guitarists of all time.  I’ve adored Live at the Fillmore East since I was a kid and Riding with the King is superb but shouldn’t the breadth of work by Clapton be considered?


Long Clapton


The S&P downgrade and other thoughts

In my opinion, the downgrade was both well deserved and telegraphed far enough in advance that the actual downgrade can hardly be a shock.   It took a great deal of cajones from S&P to pull the trigger on the rating but they had the courage where other ratings services were blind or cowards.

Is there a silver lining, that this could finally be the wake up call to Congress to disregard politics and do whats best for the country?  I would hope so but I’m not that optimistic.  In my opinion, for across the aisle cooperation to occur the Tea Party would have to dilute their flawed dogmatic view on tax income which would allow Boehner greater flexibility in negotiations.

In the meantime:  Equity markets are extremely stretched on the downside.  According to Sentiment Trader.com the only two similar examples are the market crash of 1987 and the German invasion of France in 1940.  30 days later the S&P 500 was up 8.4% and 9.1%.

Our Gold, Silver and Swiss Franc hedges:  They have worked remarkably well and while I still believe they’ll continue to work well longer term, the market for these commodities is too hot to handle right now.  But I’m not a seller.   The Swiss government has been stating their currency is wildly overvalued, but in turn it likely represents the most solid balance sheet currency.  Considering the plight of the Dollar and Euro I don’t see any reason to reduce our SF holding.

This morning JP Morgan estimated gold could reach $2500 by year end, we’re at roughly $1700.  This bulletin has the air of a buying panic which may indicate an intermediate term top.   Should the S&P rally as previously stretched markets are capable of, our hedges will be a source of funds and likely decline.  Keep in mind they have been in bull mode for several years and are likely to remain so, hence any pullback is an opportunity to add to holdings.

This is not the end of the world, this is not even 2008.   Very soon we will likely make a volatile market bottom that will market the low water mark for equities.  I don’t intend to increase equity exposure at this point, regardless of the selloff and the potential for a rebound.   I believe the low water market will represent a market bottom that will be retested at least one more time, possibly more.   Hence, the rebound which will likely be dramatic will be viewed as a chance to reposition our equity holdings into strong growth companies from cyclical stocks and add further hedges.

Brad Pappas