High-yield/macroeconomics (fka YIELD)

[rfj1862]

What if We Aren't Going to Crash?
http://www.minyanville.com/articles/S-BBI-NFLX-VG-EBAY-COST-WMT-INTC-GE-AAPL-BBB-DV-MAN-ASF-C-GS/ind....

Rarely will you hear me discuss macroeconomics. I learned long ago that there are just way too many strong opinions floating around out there, and rather than subscribe to any one particular theme, what has made me money was sticking with the charts.

I am currently and will always be one who strongly believes the chart of a stock tells you all you need to know and on the rare occasion it does not, I accept it and move on. Rather than debate macroeconomics I much prefer to discuss the emotional struggles, strategical initiatives and stylistic evolution a trader goes through as he travels the path to success.

Lately, however, it seems we are being inundated with some very loud and prevalent arguments that give credence to the bearish camp and while at this very moment, I would label myself as market neutral, I thought it would be interesting to bat around some different ideas from a laymen’s point of view.


Inflation

Prevalent Opinion: Due to global growth, commodity prices have shot up, sending ripples through just about every industry as margins shrink and prices must be raised. Also due to this global growth and the fact that oil is a commodity quickly being used up, gas prices have jumped to extreme levels. Furthermore, due to the ethanol boom and rising cost of agriculture products, consumers are now paying more for everything from milk to eggs. The end result of this inflation is a strapped consumer, slowing consumption and a slowing economy.

Other thoughts: There is no question we are paying more for many things and areas of inflation are on the rise. However what about the areas where competition, innovation and globalization are resulting in a dramatic price drop? My first cell phone was several hundreds of dollars, while today Sprint (S) will give you one and it takes pictures to boot. I no longer spend $4.50 to rent a movie at Blockbuster (BBI) I have Netflix (NFLX) for $12.00 per month and am actually looking back into the Blockbuster product because I have heard it is cheaper.

My Internet and TV are bundled into one package, which is costing me less than ever before and I pay no long distance and ridiculously low rates with my Vonage (VG) phone line. Recently I started using Skype from eBay (EBAY) and am considering switching from Vonage. When I travel, I continue to book flights for under $200.00, something that ten years ago was unheard of, and finally, I am not too proud to hop over to Costco (COST) or Wal-Mart (WMT) in order to pick up all my groceries for far less than traditional grocery amounts. To top it all off, my broker continues to lower my trading commissions so I can save money and he can keep my business.

In my opinion, this is BS. Real inflation—the increase in prices of things that actually matter, like food, energy, housing, etc. Is high and has been high for the past 5 years. Decreases in the prices of trivia like cell phones and movie rentals can't make up for that.


Trade Deficit

Prevalent Opinion: The US imports far more than it exports, making it far too reliant on countries like China and their products.

Other thoughts: This is one of the most confusing arguments I have ever heard. Here’s why. When Intel (INTC) designs and creates a chip in the United States and then sends it to a plant in Asia for production, how does one value the exporting of the intellectual property or the designs to build the chip? The product is then manufactured overseas, shipped from overseas, and if it is sold in a computer that comes back into the US, it is counted as an import. At the end of the day, the money from the sale is eventually brought back into the US in the form of profits.

Doesn’t this take place with most technology companies? What about General Electric (GE) products or any other domestic company that has a plant overseas? Sure, at least until recently, the US may buy a heck of a lot of Asian toys, produced and manufactured there, but for the most part it is the major US corporations that possess the manufacturing plants overseas, and are sending over the designs to be constructed. It is a simple case of the US working smarter, not harder, and if it ever again becomes a country that exports more than it imports, based on the way the Trade Deficit is calculated, I will become quite concerned.

The bigger problem is the amount of US debt held by the Chinese. Better than a few bombs pointed at Los Angeles, if they should choose to get aggressive over, say, Taiwan.


Biggest Foreclosure Percentage Since The Depression

The Great Depression started in 1929 and while I don’t know exactly what the percentage was, I do know that home ownership before the end of World War II was extremely low. Not only that, but the US population was much lower.

Before we start comparing the current housing market with the housing market of 70 years ago, we should make some population and ownership percentage adjustments. The simple fact is over the last five years everyone who had a job and many that didn’t bought a house. Heck, many of them bought two. The point is, all moons aligned where so many people could buy homes and did.

Demand is now squelched and a cut in interest rates will not get us back to where we were. It will take much time for the supply to be absorbed and we can forget housing being a major economic driver for our country.


Mortgage Mess

As a result of this recent boom, the US now has to go through a period of cleansing. However, Americans also live in a country where political leaders will not allow masses to lose their homes. It just won’t happen.

Regardless of the opinion you hold on this intervention, it is what it is. While I don’t believe we can equate today’s housing slump to the Great Depression, "Hooverville" is not far from everyone’s mind and they will not allow the American public to lose everything they have because interest rates jump and over-extended borrowers cannot afford their mortgage. Furthermore, we are a prideful nation. The same reason everyone must have an Iphone or I-anything from Apple (APPL) is the same reason so many will fight to keep their home. If anything, this current situation has served to motivate many to do all they can to meet payments.


Unemployment

It seemed like everyone I met over the last five years was tied somehow to the mortgage or housing market. It is natural when you go through a major industry transition to also go through a big employment transition as well.

I suspect a migration will take place to the health care and medical sector in order to care for our aging baby boomer population: an employment sector, by the way, that is incredibly under-served and in dire need of help. While there will be a lull in employment, the beneficiaries of this transition will be public education or trade schools. Stocks like Blackboard (BBB), and Devry (DV) should benefit tremendously while intermediate solutions, i.e. temp work, soar and companies like Manpower (MAN) and Administaff (ASF) are inundated with new clients.

This has to be one of the dumber things I’ve heard. Well-paying jobs in the health care and medical sector are highly skilled require a huge investment in education and aren’t the kinds of jobs you can get with a 6-month online course from Devry. In other words, any migration to the health care sector will flesh out the ranks of people doing the laundry in the basement, not the jobs that actually pay a living wage (doctors, nurses, physician assistants, etc).


Credit Crunch

There is no question that the packaged product market is going through a cleansing as well. Banks all over the world got extremely greedy pushing the limits of a game that had worked so well for so long. Now, they are having a hard time gaining access to needed credit, simply because the collateral they posses is tainted.

At the end of the day, this too is a supply and demand market, and over time these banks will come to the realization that borrowing at such cheap rates, or not paying the appropriate market rate, for the given risk, is a thing of the past. This will serve to hit the top line of many major financial institutions and squeeze margins. We are already seeing this indicated in the charts of these financial stocks such as Citigroup (C) and Goldman Sachs (GS) and I suspect we will hear it directly from them in the coming quarters.

So what do you do with all this information or these other points of view? Not a thing. You continue to stick to the charts and allow them to be your guide. Either side could be right, and there are also time frames involved. The pessimistic camp could be correct for the next few months, or even years, or their arguments could fade quickly as the more optimistic views come into focus. We will only know when it is over, however I simply thought it was important to take a glimpse at some other ideas.