After taking some time off to enjoy time with friends and family, I’m back at the desk combing through opportunities for 2010. ZachStocks market and stock articles will be back up and running shortly, but in the meantime I wanted to post a sample of the free ZachStocks Newsletter. The newlsetter is sent out twice a week with market commentary early in the week, and some insightful links heading into the weekend. Sign up to receive your free subscription and I look forward to hearing your thoughts.
Below is a sample of the ZachStocks Newsletter which was sent on December 18th…
Dear Subscribers,
Strength in the US dollar has begun what could be a major market shift. Up to this point, international stocks and domestic companies with significant international revenue have been the beneficiary of a weak dollar. But as the economic picture turns “less bad” traders are beginning to price in the probability of a rate hike and the long-term consequences of inflation. This could cause a major shift away from international exposure at a time when the domestic risks aren’t much better. It’s unclear exactly where investors will be able to put their capital that offers attractive returns and acceptable risk. So continue to keep the defense on the field and consider lining up some short ideas for when markets begin to crack.
Below are some of the articles I found most interesting this week:
Zero Hedge: Prepare for the Hyperinflationary Great Depression
While the debate between deflationists and (hyper)inflationists has been a long and painful one, numerous events set off in motion by the Bernanke Fed (as a direct legacy of the Greenspan multi-decade period of cheap and boundless credit) may have well cast America as the unwilling protagonist in the sequel of the failed monetary policy economic experiment better known as Zimbabwe.
Some of the charts showing currency expansion and government debt can be very concerning. I’m not sure why the US would be any different than numerous other historical cases where printing of fiat currency caused devastation. While it’s not fun to think about the long-term ramifications of our current policy decisions, I fear that if we can’t learn from history we will be doomed to repeat it.
Sitka Pacific: November Letter to Clients
The US economy has indeed pulled back from the brink this year, as the positive Gross Domestic Product for the third quarter attests. However, the question now is whether we have truly turned the corner, or whether this rebound has been just a lull in the storm… Unfortunately, the drop-off in mortgage resets seen in 2009 is only a temporary respite… The dollar amount of mortgages scheduled to reset in 2010 and 2011 is going right back up again, until finally dropping off in 2012. Seen from this perspective, the conditions in 2009 appear to be more like the eye of the hurricane, not the end of it.
As more banks repay the TARP funds, the potential for further mortgage losses looms as an even larger threat. If these banks which were bailed out by the government and then repaid the loans are forced to once again ask for assistance, you can bet that the public outcry will be fierce. Many off-balance sheet assets (of the toxic sort) will be required to be put back on balance sheets in 2010 which could cause a weakening of capital ratios and lead to significant weakness. I hope that these problems will remain contained, but for now I wouldn’t touch most major financial institutions.
Financial Times: Distressed Debt on the wane in US markets
Bonds trading at less than 50 cents on the dollar now account for only 1.1 per cent of the high-yield market, or $8.9bn in securities, down from 27.5 per cent, or $202bn in bonds, a year ago, according to JPMorgan data. The intense demand for once-distressed bonds is stirring the debate about whether investors are acting wisely or piling into junk bonds because of a lack of opportunities elsewhere in the fixed-income markets.
Investment managers have become so intent on generating returns, that they are once again turning a blind eye to risk. The quote above may appear to be a positive – after all, more bonds are trading close to their par value – but if the underlying fundamentals continue to be weak, and investors are just paying more for the debt, then we could be grossly mispricing risk. A positive side to this coin is that small businesses are finding it somewhat easier to issue bonds and raise capital. But is that really helpful if these bonds go into default in a few years?
WSJ: Spendthrift to Penny Pincher – A Vision of the New Consumer
Their (the consumer) value system is shifting from aspiring to material wealth to aspiring to a life better lived. Businesses ranging from shoemakers to financial services to luxury hotels don’t expect American consumers to return to their spendthrift ways anytime soon. They see consumers emerging from the punishing downturn with a new mind-set: careful, practical, more socially conscious and embarrassed by flashy shows of wealth.
You can’t live through a decade like we are currently completing without having it affect you in some way. A return to a grass-roots lifestyle is intuitively refreshing as there is nothing more obnoxious than a wealthy person trying to make sure that everyone knows he is doing well. But a shift away from luxury goods also has a downside too. Employees at retailing locations, manufacturing plants, and many other service industries will likely see hours cut and jobs eliminated. Ultimately, a return to the basics will be good for the country, but in the meantime the pain can be quite difficult.
Sorry to be a Grinch this holiday season. I truly am not a pessimist and despite the danger I see in the markets, I believe 2010 can be an incredibly profitable period. We simply need to keep our eyes open and take advantage of the opportunities that present themselves. This coming year, investors who embrace a conservative approach or who are willing to profit from declining profits will likely see their wealth increase. But the simple buy and hold crowd will find it difficult to make money, much less outpace inflation.
Wishing you every success,
Zachary Scheidt
Chief Investment Strategist
Sound Counsel Investment Advisers
678-467-7064
