October 2nd, 2009
"When You Come to a
Fork in the Road, Take It!" - Yogi Berra
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We have seen a lot of roads, and
we have seen a lot of forks, but we’ve
never seen such a stupendous Fork as we
are seeing in today's markets.
There has been a lot of buying of
stocks by the ever present speculators, of
course, and there are also huge bets being
laid down in the form of stock purchases
and equivalents by investors who feel they
have "missed the boat." Many of those
are hedge fund managers and others
whose incomes are determined by the
annual/short-term performance of the
funds they manage.
All this is fine as these are the
types of decisions that cause markets to
go up and down. The buyers and sellers
are caught up in a constant struggle just
like the Bulls and the Bears. This reminds
us of the largest and most impressive
bronze we have ever seen of a giant Bull
and a giant Bear locked in a ferocious
struggle-to-the-death located at the
entrance to the New York Stock
Exchange Luncheon Club. We are sure
you have all seen pictures of this battle
which has gone on for centuries.
Yogi Berra's advice is worthy of
attention as the Fork in the markets has
one branch supported by the above-mentioned
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bulls while the other branch is
followed by investors who "cannot
connect the dots." They cannot reconcile
today's stock prices with the reality of the
economy and its outlook. They look for
the long-awaited economic recovery and
come to the conclusion that while there
are positives, there is still no clear-cut
direction.
This morning, October 2, 2009, the
Labor Apartment reported job losses
were accelerated to 263,000 in September
bringing the US unemployment rate to a
26-year high of 9.8%. This was the 21st
consecutive month of losses on the job
front. Some calculate that the "real"
unemployment rate approaches 15%.
Steven Stanley, chief economist for RBS Securities (sort of a bull) said: "We
are more inclined to view September as a
temporary setback than as a signal that
the decelerating trend in job losses has
stalled out. It is far too early to be pulling
the alarm on this nascent recovery."
On the other hand, Harm Bandholz of UniCredit Research (sort of a
bear) said: The weak employment report
lessens hope for a sustainable recovery.
Once the impact of the inventory cycle
and the fiscal stimulus has run its course,
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gross domestic product growth will slow
down eventually again."
Democrat Vice President, Joe
Biden, said "Job losses would have been
far worse without the stimulus."
Republican John Boehner who
leads the House said "We are headed for
what appears to be, at best, a jobless
recovery. That is not what the American
people were promised."
Once again it is obvious that every
coin has two sides and that when we come
to Yogi's Fork we should take it.
Housing sales have been
improving. That is a most welcome sign.
Two significant reasons are 1) that the
$8,000 tax credit given to new homebuyers
has been an important stimulus
and 2) the fact that the prices of homes
have fallen significantly. A possible small
problem: the stimulus tax credit will be
expiring shortly and many are trying to
get in under the wire. Will the market
stay strong after the stimulus is gone?
Of course we all remember the car
buying incentive of a month or so ago
known as "Cash-for-Clunkers." That
stimulus also seemed to work well albeit
at a tremendous expense for the
American taxpayer. Some of us even
wondered how car sales would fare not
too long after the program was
terminated. Now we have an idea.
The Financial Times reported this
morning, October 2nd: "US car sales
close to year low. Expiry of clunkers
scheme hits demand - GM and Chrysler
are heaviest casualties…. US car and
light truck sales came close to plumbing
new 2009 lows in September, with weak
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consumer demand
exacerbated by the
expiry of cash-for-clunkers scrappage
incentives and unusually low inventories
of some popular models. The heaviest
casualties were General Motors and
Chrysler, the Detroit car makers that
restructured under bankruptcy-court
supervision this year. GM's sales dived by
45% from September 2008, an unusually
strong month and by more than a third
from August. Chrysler was down 42%....
Total industry sales dipped to an annual
rate of about 9.2 million units last month,
from 14.1 million in August and 12.6
million in September 2008."
That's sort of bearish news especially when Ford Motor stock
rose
sharply in the last few days due to high
annual auto sales expectations. How solid
are those expectations?
We will not comment at this time
on the weakness of the US dollar and
many other issues that lead us to
continuing caution with a stock market
which we do not believe has the
fundamentals to support its recent levels.
We continue to have a conservative
intermediate-to-longer-term view of
investing and continue to believe that
"Water still runs downhill." For a
company to have its market valuation
double, for example, from $10 billion to
$20 billion, it seems that there has to be
relative improvement in the underlying
fundamental business and outlook for
that company. Many companies in recent
months have reported higher earnings on
lower revenues… not stronger
fundamental business. "Pie in the Sky"
stock prices, as a result of corporate cost
cutting, may work for a while but
generally end in tears. |
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We remember a few years ago
when there was a big push to buy stocks
because the pundits told the little people
that it would not be long before we would
run out of stocks. Better get them now
was the advice, and many stocks went up
sharply --- for a while anyhow. But then,
as nature would have it, water started
running downhill and the whole "buy
stocks because there's going to be a
shortage of them and we're going to run
out" theory collapsed and ended in tears
for many.
On September 11, 2009 the Wall
Street Journal had a front page article:
"Harvard, Yale Are Big Losers in ‘The
Game’ of Investing" authored by John
Hechinger.
Hechinger wrote: "It's a tie in the
Harvard-Yale investment game. Both
schools were thrown for colossal losses.
"The universities on Thursday
said their endowments, higher education's
two largest, each lost 30% of their value
in the year ended June 30 (2009).
Combined, the pair of investment pools
shrank by a staggering $17.8 billion.
"Declines in the endowments have
forced the two schools to cut budgets and
delay plans to expand facilities and hire
staff, as even the country’s top colleges
are being forced by the financial crisis to
retrench. The pain is being felt widely
across higher education."
(A copy of this most interesting and
relevant article will be supplied upon
request.)
Our advice is to take a step back
next time you are tempted to think that
the gurus/geniuses who run large pools of |
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money have all the
answers and are
exempt from the laws of Common Sense.
What happened with many of the
world's largest money managers in the
last year and a half is that they became
exempt in their own minds from having to
remember the basics and from having to
play by the rules. Their egotism and greed
trumped the simple reality of the Tortoise
and the Hare.
Question: Water will always run
downhill, but when it gets to the Fork
which path will it take? Answer: It will
follow both paths until one of them begins
to run uphill. We believe the same should
be true for investment decisions….
Particularly if one wants to avoid 30%
losses.
John W. Hamilton
October 2nd, 2009
John W. Hamilton
jwh@hamiltonadvisors.com
Deborah J. Hamilton
djh@hamiltonadvisors.com
J. Brock Hamilton
jbh@hamiltonadvisors.com
WEB SITE
www.hamiltonadvisors.com |
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PRIVATE WEALTH MANAGEMENT SINCE 1980 |
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This article contains the current opinions
of Hamilton Advisors and does not represent a recommendation of any
particular security, strategy or investment product. Such opinions are
subject to change without notice. Information contained herein has been
obtained from sources believed to be reliable, but is not guaranteed.
This article is distributed for educational purposes and should not be
considered as investment advice or an offer of any security for sale. ©
2009 Hamilton Advisors, Inc. All rights reserved. Tel: 203 629 1112.
Fax: 203 629 1469
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