Is the Writing on the Wall?
July 21st, 2007 by Grant in: EconomicsI’ve had this hunch for the last few months that we’re in for an economic shock that could ripple up one side of Wall Street and down the other.
There is just too much negative economic data weighing on the current bull market, and I think the Street is starting to get a whiff…
Yesterday, Google and Caterpillar released earnings that were less than stellar. On one hand, Google’s profit growth was 28%, and while that seems pretty good, it didn’t meet the Street’s expectations. So it’s easy to sweep that one under the rug.
On the other hand, Caterpillar posted a 21% decline in profits due to slowing engine sales due to a stagnant construction market.
On top of it all, Citi Bank warned of the possibility it could be stuck holding leveraged loans for corporate buyouts. The bank was unable to sell debt to investors on four deals in the second quarter, leaving it holding so-called bridge loans on its balance sheet and taking a hit on revenues.
Not good for the credit industry…
The Fed is starting to indicate things may not be so rosy, however they still claim that inflation is the number one concern. I have to wonder if this little phrase is in place to keep attention diverted from more weighty topics.
For instance, if you read carefully in the July 13th Fed report, you’ll see that all of a sudden there is a balance under “Securitized real estate loans”, that hadn’t been there before.
The balance, under the section called “Large Domestically Chartered Banks”, is blank in all prior weeks but this latest report reveals the ballance is $1.211 trillion. Yes, trillion, with a “T”.
I think it’s interesting they are calling these Securitized loans. Almost as if the Fed would be willing to do something about this trillion dollar balance if it felt it was weighing on the economy too heavily.
If that theory holds true, I can’t imagine what that will do to the value of the dollar. At an all time low as it is, I fear the paper I have in my wallet may not be worth the price of the paper it’s printed on in the near future…
Perhaps it’s time to buy gold again?
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July 26th, 2007 at 4:28 pm
Looks like today was yet another indication that the picture isn’t all that rosy right now.
July 26th, 2007 at 9:06 pm
Well Grant..
It sure looks like you called (and timed) things just right. I’ve always had the same feelings, but I guess a liitle early.
If the market tanks again tomorrow, IMO, that’s the writing on the wall.
Have you changed any of your asset allocations based upon your hunch?
July 26th, 2007 at 9:37 pm
Hey Mike…
I wouldn’t say I timed things just right. I’ve had this feeling we were heading down hill economically for about the last 4 months.
One thing I’ve learned is that quarterly earnings reports reveal all. A company can mask the fact that sales are slowing, housing is slowing, credit in itself is upside down for three months. Then they have to turn over their numbers to the Street and the transparency appears… The market is a beautiful thing.
As for me, I’m putting a lot of money into our Emigrant Direct account, earning 5.05% and a lot less into stocks. I’m not really selling stocks that I have, as I feel they are all leveraged towards the energy sector, which by and large I feel is very healthy.
The only stock outside the energy sector I own is my company stock, which is working to diversify in Europe and Asia where the pain of US sales may be hedged.
Grant
July 27th, 2007 at 12:37 pm
One thing that I like to use in my retirement portfolio to hedge against this kind of bloody action is the short-side ETF of the S&P 500 (ticker = SH). I established a position in it about 4 months ago and it was obviously a loser for quite a while, but I began adding to it late last week and it has kept my portfolio from getting hit too hard with red ink…
From a trading standpoint, expect this kind of volatility through the rest of the summer. We will obviously get a bounce from the recent action, which I’m not going to try and time, but will sell the broad market if/when it happens. The Russell Index (small caps) is on the verge of a 10% correction, but the S&P still has another 50 points to the downside for a traditional 10% correction, and given the recent swings, 50 points is a layup….
July 27th, 2007 at 3:17 pm
Whew.. everyone bailed at the end of the day today. This just may be the beginning of a bear market. Let’s see if a weekend of re-evaluation changes what people think. I can’t wait for Monday.
Sounds like you’re in good shape.
I was thinking (incorrectly) that maybe you held a lot in mutual funds when I asked that question. Good for you!
July 28th, 2007 at 9:13 am
Mike, I agree that Monday will be interesting indeed. The more down days in a row we have, the more it confirms the end of a bull market.
I do have a little wrapped up in mutual funds as it’s my only option in my companies 401(k) account. However, I’ve directed most of those funds into accounts with a strong international holding…
Might be a good topic for another time…
Grant
September 14th, 2007 at 7:31 pm
securitized has nothing to do with “security” dude.. it just means the debt (bond issue or loan liability) has been taken off balance sheet and reissued as a debt security
September 18th, 2007 at 7:46 pm
Stanley, yes, I understand that. However its the idea that this debt is in someway “secure” that I find interesting…