The Road To Economic Recovery Has Potholes
Economics / Recession 2008 - 2010 Feb 14, 2009 - 07:17 AM GMTBy: Oxbury_Research
Let's take care of some old business first.
When I suggested a closer look at long positions in GE and BAC last week, I did not expect each of them to spike violently in two days. That was part luck.
The other half of what I explained ended with the following sentence, which is something I wish was not a repetitive reality: “All in all, if we don't see positive, convincing move in the next few trading days, we're looking at the very real possibility of the bottom falling out.”
Well, the bottom may not have fallen out, but it's certainly playing with fire. We seem to be holding our previous bottom level, but every time we do this, I feel like I'm bouncing a bowling ball on a glass table. With each bang, I am a little more convinced that I'll be picking glass out of the carpet.
Don't call it a comeback
The markets gave up ground most of the day on Thursday, with the Dow over 240 points in the red around three o'clock. Then, as it neared the questionably-constructed “bottom”, it catapulted over two hundred points in an hour to close practically even.
Great news? Slow down.
This thing has a long way to go. Like six or seven hundred straight up. Until that occurs, no one can convince me that we've started to break this downtrend in any measurable way.
Let me be clear: I want that to happen. True, I may be an active trader – and the thought of the volatility that would occur with a fallout gets me sexually excited – but I don't want our economy to deteriorate any more than it already has, and I certainly do not wish for anyone else to lose his or her job.
Of course, the simple facts are that we're in a trading range at best, and until we see some serious, sustained buying, my position hasn't changed.
Pothole number one: Americans are saving money
The average American, thinking that he is smarter than everyone else, has loudly proclaimed, “I'm going to start spending less and saving more. That's right, I'm a new person.” Sure you are. See you after the rally. I can't wait to sell these people some stock at the next near-term top.
In all seriousness, the fear that has pervaded our markets has caused seemingly intelligent habits to now become one of the largest obstacles to recovery. Let me explain:
As people start saving instead of spending, companies' earnings suffer as their products and services experience a drop in demand. At a time when they can least afford it.
To exacerbate the situation, as credit dries up, savings rates will increase further. Crumbling housing prices make home equity loans and lines of credit difficult to obtain. In a recent interview, Rich Yamarone (of Argus Research) made the excellent observation that, given our current state of affairs, banks more terrified than ever to use deposits as a source of funds for lending.
So, we have a situation where our new-found discipline is going to slow down the recovery in the markets. Unfortunately, with the amount of people who have been burned by their former habits (as well as possibly being restricted by the lower paycheck of a new job they were forced to accept), we cannot expect this to change very quickly.
Pothole number two: Dangerous oil ground
I will tell you right now, as I have for months, that I'm building a position in this stuff.
When this things turns, it's not going to go up $2. It's going to unleash a “Jesus, God, what were we thinking” epidemic when people feverishly put into perspective just how cheap oil became, and how no one is going to survive without it for many decades
Many experts are saying that a rise in oil prices may signal a turnaround in the economy. What I gather from this is that “many experts” can use powers of simple deduction that we learned and practiced in third grade.
What no one seems to be talking about is the fact that demand is not the only factor in the price of oil . There are countless things that must be investigated and analyzed in order to make any prediction about where oil prices are headed.
Iran is in trouble. They finally admitted in December that their economy is being affected by the dropping price in oil (flying in the face of their previous statement that they would be “fine” even if oil dropped to $5 per barrel, which no one believed anyway). I can't imagine the past two months, as oil has dropped another ten bucks, that the situation has gotten any better.
Are we forgetting that this country, among others that we depend on for oil, is clinically insane? If there's one thing we've learned over the past ten years, it's that there's quite often more bad news about oil than good. It won't take much of a disruption to launch prices back into reality.
If oil prices head north as a result of supply-side issues, and not as a result of a demand increase spurred by the beginning of an economic recovery, it will instead result in the strangling of already strained businesses and consumers.
Pothole three (and the heart of the problem): Uncertainty
Where's G.I. Joe when you need him? Knowing is half the battle, and we aren't winning half the battle.
No one is convinced of corporate transparency, more job cuts have followed the holiday season as the need for labor diminishes, and our government is throwing out numbers that are gradually turning the US Dollar into Monopoly money. Which, I might remind you, is the currency to which barrels of oil are tied. Another reason for my position…
Above all, uncertainty is adding fuel to the circular fire that is burning a hole in our economy. People need to buy for stocks to go up, but stocks need to go up before people are ready to buy. Something will give when people start taking risks.
I've already started, but unfortunately I'm three trillion dollars too poor to make a difference.
John K. Whitehall
Analyst, Oxbury Research
John has a solid decade of experience in the financial markets: from developing and implementing long-term investment strategies for high net worth clientele to intraday trading of equities, Exchange-Traded Funds, options and currencies.
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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