augie.....
Thanks for the post. "Slider" and I seem to be much in agreement on where we are and where we might be headed. Last Fall, when everyone was saying crude was headed back to $10-12, I loaded my little boat with oil service and exploration stocks, and they were very good to me. Early this year, I was blessed by listening to my gut feeling and totally cleaned out the oils near the top of their run, moving the funds into gold stocks on pullbacks and those have been very good to me also (so far) - occasionally I get something right <g>.
My reasoning for getting so heavily into the oils (exploration and services) was initially as a hedge against the bear market. If everyone was correct and we did get an economic recovery, the energy shortage would quickly return, but if they were wrong, the middle-east turmoil and OPEC greed would hold the price of crude up, contrary to what everyone was expecting - either way, the sector should outperform the rest of the market. As it worked out, the price of crude recovered nicely.
My reasoning in bailing out of the oils was based on my belief that the economy was going to continue to decline after the inventory building spike ended, and if there were to be no economic recovery, the price of crude (then around $28) was as high as it was going to get, especially with the Russians now in the picture. So far that has been correct, and the stocks are now far below where I sold them. I think Slider is correct that if Iraq is resolved without major disruptions in oil supplies, the price of crude will rapidly fall below $15.
I also share his view on unemployment rising to 7% (or higher), but would add that the next round of cuts will involve more white collar and mid-to-upper management folks and the loss of those higher income jobs will hurt the economy much more than what we have been seeing - consumer demand will no longer be able to hold up as it has thus far.
Finally, he is absolutely correct about valuations - and that is a big part of what this bear is all about, and why the bounces are not longer lasting. When viewed on any historical, rational valuation metric, prices are still far too high. Reported earnings are mostly "pro-forma" fictions, that disguise how poorly companies are really doing. Balance sheets are not only loaded with debt, they are loaded with assets that are nothing but "air", worth nothing at all. The current valuations in the market, plus the willingness to buy all dips in the hope of catching "the bottom" tell me that the bear is not even close to being over.
The biggest thing that Slider did not touch on is the economy, which in my opinion is headed back into recession and dragging the rest of the world with it. Japan is headed back to financial crisis once again and there is no hope for a recovery there. Europe will be in full recession soon, with their strongest economy, Germany, being the first to get there. South America, like Japan, is a basket case and will continue to erupt in financial and monetary crises. I believe there is a chance that all of the above, along with derivative exposure, loan defaults, and enormous litigation losses could bring down a number of our money center and super-regional banks, and hurt such institutions as MER and GS. Auto sales have peaked, in my judgement, and housing could well be close to topping out also.
My natural state is to be bullish, and I am much more comfortable in bull markets, but having been through several bear markets starting with the '73-74 version, I have a healthier respect for what a bear market can do than most who are not as old and decrepit as I. I think the current bear will end up being much more like the 1929-1939 market, and will be secular, not cyclical, in nature - much worse than that of '73-'74.
Thanks for the cheery post from "Slider".
mlsoft
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