Global: Dead Cat Bounces
We hope that you have used the last two days to unload into strength. We have! We allude to the cookie-cutter approach to investing: people take any bit of news and make it either "good" or "bad", depending on the market's subconscious.
This is what is happening now: everything is "good", so "buy". The one statement that Goldman’s won't need to write down its mortgage book sent the stock up. The fact that Wal - Mart's profits were better than expected sent that stock up. But wait a minute: are not both of these occurrences - at Goldmans and at Wal - Mart - past events?
We hardly think that the future paints a rosy picture: America's profits outlook must worsen, and surely markets are in the business of discounting the future, and not in the business of banking on the past, no? See our Web Site for why - and how you can make money off our suspicions.
The herd is in disarray. Cookie cutters keep getting swapped, like blinking lights. Yesterday's bad news now is good news. The fact that Goldman does not feel the need to write down portions of its mortgage assets is neither here nor there: Goldman is in a league of its own. What about the other banks who have not divulged how much losses their avarice has goaded them into?
Ah, you say, but Wal-Mart's (WM) profits are up. Sure, that is because WM had to cut prices earlier than last year, as well as having to discount more items in order to lure customers who are having to pay more for their gas and mortgages. This, along with a falling dollar, suggests that WM's profits rose because of rising turnover, courtesy of more discounts. However, the higher dollar surely must be hurting their margins. So just because WM beat analysts' predictions means little to those of us who are looking ahead. Besides we foresee stagflation invading America's shores next year....: this must kill profits!
How can US profits rise if The Economic Time™ in America keeps wilting? As we just suggested with Wal-Mart: the key reason for better than expected profits is because they slashed prices so much that turnover got a boost - but, this implies that margins got a whack, does it not?
Finally our bleating of the past year is turning to reality. Watch for the usual over-reactions now. For the past weeks, every bit of news has been forced into the "good news" cookie cutter. Now, watch every bit being squeezed into the "bad news" cookie cutter.
Step in The Economic Clock™: it may not be a great day to day timing device, but it certainly helps you tell The Economic Time™ - and that is where the money is made: "the trend is my friend".
Thus, The Economic Time remains bad in America (and in Europe, and in Japan) - and finally, markets are moving out of denial. We have warned which sector to avoid in particular, and suggest that the "this time it's different" team is not winning the debate.