Tuesday, August 28, 2007

Bulls Gone Wild


You can always tell when the beginning of the end is close at hand when stories come at you fast and furious. Such is the case as one shoe (broker-dealer downgrades) drops after another (asset-backed commercial paper conduits). Another day, another bad news story.


Added to this is what can only be described as “bulls gone wild”. Seemingly losing all sense of proportion, more than a handful of former economic and investment bulls have ramped up their angst and are now even invoking the R word, some with odds as high as 70%!

This switch from complacency and certainty that was so palpable at the beginning of the year to what now looks a lot like outright fear is remarkable. In fact, the exodus from the bull camp resembles the exodus from the Bush White House. Is the fear warranted? From an investment strategy perspective, I believe the answer is no.

Now, this may surprise some who know that I have been sounding the warning bell for two plus years re complacency and credit-related pressures. But it is one thing to acknowledge and accept a world in need of better structural balance, greater transparency, and sustainable monetary policies. It’s quite another matter to make the leap that we now stand at the edge of an economic and investment precipice. And as noted in yesterday’s weekly report, there are many reasons why a Fed Funds rate cut is not warranted. The same can be said for elevating a credit squeeze into a recession.

Investment Strategy Implications

There are lots of reasons to be very concerned, not the least of which is just how deep does the credit derivatives’ rabbit hole go? However, in all market corrections, opportunities emerge when fear is at its highest. Blood may be in the streets and the former bulls may have gone wild but a cool head, an opportunistic attitude, and some clear thinking will reward such inclined investors.

1 comment:

Dave Livingston said...

A good point, why the sudden turn-about ? Part of it might be by arguing the R-word they justify a rate cut which puts them back in business. Yet prior to Jul. it was nothing but a magnificent economic prospect with at worst a Goldilockian soft-landing combined with ever-rising profits and earnings (let's draw that major distinction) after maybe a little downblip. I'd argue that a good part of it is ignoring all the economic data that's shown a downturn slowly building for some time. This is NOT a black swan. Nor is the impact of non-diligent structured debt where many smart folks, aside from Fleckstein, have been analyzing the implosion risks for months. And some, like Wilbur Ross, even re-did their balance sheets months ago to re-position themselves. This is gonna separate the smart & strong from the delusional shortly. FWIW some of us have been flying the flag for a bit: Reality Checks: the Latest GDP Report and Outlack ? ( http://llinlithgow.com/bizzX/2007/07/reality_checks_the_latest_gdp.html )