A Financial Market Overview

In Greek mythology, Sisyphus was a king punished by the gods. In the Greek equivalent of the underworld, named Tartarus, Sisyphus was cursed to roll a huge boulder up a hill – only to watch it roll down the hill again. Sisyphus’ punishment was to repeat this task throughout eternity.

In the midst of this punishing bear market, I think that many investors are probably feeling like Sisyphus right now. They have seen their accounts, such as their 401k, back down to levels last seen a decade ago. Like Sisyphus, they have had their investment accounts “roll back down the hill”.

However, unlike Sisyphus, investors’ “punishment” will not last forever. This bear market will end and a new bull market will be born. I know what you’re thinking – when will it end? Unlike the so-called experts on CNBC, I am honest enough to tell you that I don’t know. All I can do is hazard a guess based on my more than 25 years experience in the investment business.

As regular readers of my Bourbon & Bayonets columns may know, I approach investing from a long-term fundamental perspective. I find investments which will bear fruit in one year, three years, five years or longer. I could care less about short-term performance.

I also am not a technical analyst. Don’t get me wrong, I do look at charts as one tool in my toolbox. However, I am not a technical analyst who makes short-term trades based solely on what the charts “say”. To me, that is merely extrapolating past and current trades into the future. Look at how well that worked in 2008…

When Will It End?

What has been happening in the financial markets for the past year and a half is the liquidation of bad investments that were made in the biggest credit bubble in history. The Fed and other central banks are calling this liquidation process “deflation”. However, this is not deflation in the classic sense where a contraction in the monetary base has led to to a fall in the general price level.

I do not care to be opposed to what central banks are trying to do. The central banks are trying to unleash inflation and are expanding the monetary base rapidly. St. Louis Fed president James Bullard was pretty explicit this past week, “We can be fairly certain that rapid expansion of the monetary base will be sufficient to head off any incipient deflationary threat. Rapid monetary base growth has been associated with inflation in a wide variety of times and places in economic history”.

I think that the timing of the end of the current bear market is highly reliant on actions that global governments have and will take, along with how much more of the liquidation process we have to go through. This process will take a while – my best guess is 2-3 years. But with central banks going full tilt at creating money, I wouldn’t be shocked if it were only 1 year.

My tendency would be to like an individual company’s stock or bond if the company either has no debt or does not need to re-finance their debt in the next 2-3 years. However, I would be willing to begin to establish a position in a company in piecemeal fashion, even if they had some short-term debts, if I really loved the industry they were in and the company’s business model.

So what areas do I like and dislike for the long-term? I will give readers my 2 cents worth and look at many areas and give them a rating from 5-star (Great) to 1-star (Terrible).

Star Ratings

United States – 3-star. And I think 3-star is a stretch. The US was once the greatest nation in the history of the world. But from the Greatest Generation and prior generations, we have gone on to the Baby Boom Generation and to the current Generation DUH? It seems to be getting worse with each generation. I am not optimistic on the future.

US Treasuries – 1-star. Treasuries have never been a great long-term investment. This is especially so now, with the “fear” trade pushing Treasuries to bubble-levels.

TIPs – 3-Star. This is the one exception to what I said above. The overblown deflationary fears have given investors the opportunity to purchase TIPs at reasonable prices.

US Dollar – 1-star. Personally, I’m not a fan of fiat currency, period. I would say that the US Dollar is the worst of a bad bunch and the Chinese Yuan the best of a bad bunch.

Corporate Bonds – 3-Star. Overblown fears about defaults being greater than the Great Depression have pushed most corporate bonds to fantastic buying prices. Investors do need to do their homework if they are buying individual bonds.

Real Estate – 2-Star. This sector is really beaten down. However, there is still way too much debt in this entire sector.

Stock Sectors:

1-Star sectors would include: financial and technology. I have never owned these types of stocks and never will.

2-Star sectors would include: retail, media and consumer discretionary.

3-Star sectors would include: industrial, utilities, medical and health care.

4-Star sectors would include: consumer staples, large energy companies.

5-Star sectors would include: natural resource stocks – mining, agricultural, water, energy and alternative energy. The cash flows with many of these companies,such as BHP, is healthy which means they won’t have to tap the debt markets over the next several years. I like to invest long-term in sectors that are involved with scarce resources and that have a positive supply-demand outlook in the future.

Commodities:

Gold – 5-star. I believe every investor should own some gold as an insurance policy against financial market catastrophes. Think of gold in the same way you think of insurance on your life or home or car.

Base Metals and other Precious Metals – 3-star. A bit too reliant on industrial activity. However, the long-term trends in the emerging markets are positive.

Energy – 4-star. The long-term supply-demand outlook is extremely positive – the world is running short of cheap, easily accessible energy.

Agricultural & Softs – 5-Star. This area offers huge potential. The supply-demand balance is positive in most of these commodities. Water and arable soil globally are become more and more precious. People will always need to eat.

International Markets:

Europe – 3-Star. I’m biased since I am descended from European heritage. Europe definitely has problems, but I believe the current fears over Eastern Europe are vastly overblown.

Mid-East & Africa – 3-Star. I believe this area offers incredible potential. The big question is whether this region will ever get its political act together.

Latin America – 3-Star. This area is a real mixed bag. I would rate Brazil and Chile as 5-star. Other countries I would rate lower, such as Mexico which is a 1-star. Mexico is far too dependent on the future of the US.

Canada & Australia – 4-Star. These countries are sitting on a wealth of natural resources. This wealth will help them overcome the effects of the financial crisis over the long-term.

Southeast Asia – 3-Star. These countries need to make some economic changes, as they are too dependent on exports.

Japan & Korea – 2-Star. Too dependent on exports. I don’t think they will ever recover from the current economic crisis.

Russia & India – 1-star. I would never invest in either country because of their governments.

China – 5-Star. The Chinese Communist Party is the most liquid financial institution on the planet. They also seem to be the best capitalists on the planet.

Bourbon & Bayonet readers, I look forward to any and all comments.

Respectfully,

Tony D’Altorio
Analyst, Bourbon & Bayonets