market thoughts and other stuff

lots of commentary about a lost decade in the market -- already been there and done that in case most haven't noticed. a flat market for the last 8-9 years. But a very interesting one indeed. In the 2000-2002 time frame if you were diversified you did just fine -- techs and growth stocks (GE, AIG, MDT, etc) got crushed the most while value stocks, small cap and international stocks held up better.

During this last several months outside of financials and consumer stocks the market hasn't been as bad either. There are energy and material stocks that are higher now than they were several months ago. There are health care stocks like ILMN and LMNX that are near highs. LH is only 10% off its highs and probably would be doing even better if not for how bad DGX is doing.

This is not surprising in this bifurcated world -- half the world is seeing strong inflation (energy, materials, industrials, food related, etc.) while the other half is seeing strong deflation (housing, consumer related, financial related). I'm not nearly as worried about inflation as others are -- truth is asset deflation like we have in housing/financial assets combined with too much supply of labor (china, india) will keep inflation in check. The inflation we do have is driven by a supply situation -- slowing US economy, no supply issues with Nigeria, venezuela, iran, iraq, etc., heading into spring where weather related demand should be less, yet price of oil remains near a $100 or more. Everyone has been shocked by the inelasticity of demand for energy yet the truly shocking point is that after a few years of rising prices there has been no noticeable increase in energy supply -- inelastic supply. wow. Oil is as likely to hit $200 as to drop back towards $50.

Also food inflation is a government fabrication caused by farm subsidies and ethanol subsidies which drives up animal feed costs as well as making corn, wheat and other crops more expensive (add a huge chunk of demand for using food as energy and is it any surprise that the price of food is rising? isn't this basic econ 101?)

Back to the market -- it depends on selectivity. Certain areas will continue to suck -- I plan on trimming my MCO if I can get a rally out of it towards $40 -- securitizations are switching to FNM and FRE which I presume don't pay much for ratings. I expect 2008 estimates to drop towards $1.50ish. from closer to $2. I belive wholeheartedly in CME but I also know its likely to be under pressure as it has been when financials get hit. Wouldn't touch banks or brokers because more pain is coming.

Consumer stocks -- tough one. That's one issue with ECL that I have mentioned before -- large exposure to restaurants.

FLIR, ILMN, TECH, LH, FDS, etc -- will they continue to meet or beat estimates? I think so because they all have secular drivers behind them and are not dependent on sectors of the economy that are struggling for their customers. although FDS could be an issue eventually.

CREE is a less mature FLIR with more competition -- i.e. the price points haven't gotten to the attractive stage yet and CREE doesn't have 40% market share so the profitability won't be as good. but its one to watch.

LMNX -- just couldn't get comfortable with it to date but its on a roll.

I see the double bottom in the market and look at the Fed's actions and the bearishness that seems pervasive and think we may have seen the bottom. trucking prices (well brokers like LSTR and CHRW) have seen breakouts in their stocks which leads me to think the US has bottomed economically. Yet it appears housing still hasn't bottomed yet so hard to think the stock market has bottomed.

One thing is for sure -- financials won't be coming back any time soon -- the revenue sources have dried up --
a. securitization being a fnm fre thing means less opp for brokers -- volumes will drop a lot
b. fewer private equity deals means less issuance and advice etc.
c. less leverage or smaller balance sheets means less profits from trading.
d. credit cycle puts bank earnings at risk too.

My hope is that we may have started that flat period like from 92-94 where the market was flat as a pancake waiting for the S&L crisis to be resolved and absorbed by the economy. To deal with housing I figure we are about to have a few years of a flat market. always some opportunities but overall won't be that great. The question at this point is whether we need to have more downside first?

yen carry trade was done by japanese investors looking for higher potential returns than the meager amounts promised at home. Have you seen the Yen? its going up. The next big thing is the dollar carry trade -- expect more of our assets to go overseas.

by the way -- don't have selection ability with stocks? then you probably need to go overseas or find a manager that is as far from indexing as possible because the indexers and closet indexers likely to suck.

I agree with Dr John (see comment to my last note) that finding the right incremental place for money is tricky and fraught with risk. Cash would be nice but I don't know if that's the answer now -- as I said, there is a possibility the double bottom is in.

I posted comments on AMGN and GHDX on the TECH board Dr John if you get the chance.

I don't want to be too tied to health care -- and to diagnostics or life sciences either (which is almost all my HC exposure in my portfolio now).

I look at CREE due to growth opportunities for LED almost regardless of the economy. I like FLIR too for the slow march of technology favors them. Yet who knows about the stock prices -- given their valuation and positive investor sentiment.

I have gotten scared about energy thanks to some smart chartists but they are having a good rally in the mean time. long term still a big believer but near term is harder.

time to post this and start fresh if necessary -- thanks Dr John for posting.