concrete signs of slowdown are emerging
A few days ago, Rio Tinto, the giant Melbourne/London mining conglomerate, said some Western customers (European?) are asking the company to delay shipment of contracted amounts of industrial metals (how this works financially is an interesting, semi-complex topic, but irrelevant here) . FedEx announced this week that orders for airfreight shipment to the US, the EU and Japan are losing momentum as customers opt for slower and cheaper ways of getting their products into retail outlets.
In other words, for the first time in two years +, some firms are beginning to worry about having too much inventory and to work it down. In one sense, this isn’t good. But it had to happen eventually. And the equity markets have been discounting this development since July. After all, FDX has lost a third of its value in the past three months; RIO has been clipped by 37% over the same span.
So this is not really news. And as FDX said, customers’ hair isn’t on fire. They’re just being a little cautious.
the real problem is in the EU
There, a modern version of the Iliad, sans Helen, seems to be playing out, with France and Germany taking the role of Troy and, well …Greece in the role of Greece.
In a nutshell: the EU let Greece in about a decade ago, even though it didn’t really qualify, giving it unrestricted access to EU credit. Greece promptly borrowed (and spent) a gazillion times what it could ever repay, funded ultimately by the ever hapless financial institutions of Germany and France. Greece says it’s sorry and will change its ways–but is actually doing very little. It seems instead to be milking the situation for the best possible terms for default, or perhaps just for more time at the EU credit trough–which, I guess, is what almost anyone would do in their situation.
On the other hand, German politicians are on the horns of a dilemma. They either fund a Greek bailout, in which case they’re tossed out of office, or they let Greece default and destroy their banks. And they’ll be thrown out of office again. So they don’t want to act, either. Arguably, this is also their best strategy (short of actually doing their jobs and fixing things).
Having endured this stalemate for about a year, the nerve of European investors seems to me to have finally cracked. They’re selling anything not nailed down in a classic panic. The rest of the world is being dragged along for the ride.
If there’s silver lining to this, financial market panic may provide the political cover the EU needs to stop procrastinating and begin to act.
three stock market scenarios
I’ve sketched this out in a little more detail in Current Market Tactics this month and last.
I have three targets for the S&P over the coming year, depending on economic circumstances:
nothing wrong (hah!) 1350
muddling through 1170
recession ahead 1000.
I still think that muddling through is by far the most likely outcome. If so, 1170 would be the central tendency around which Wall Street will revolve. Panic aside, if an investor thought he would need a 7% return in order to be induced to take the risk of owning stocks, then he should be a buyer at an index level of 1090. That’s about 3.5% below yesterday’s close. Below that any selling, which I already regard as overdone, would enter into another, higher, level of craziness.
The main item on our wish list should be market stabilization.
what to do
My thoughts haven’t changed very much.
When we get to the other side of the current storm, I think the winners will be firms with Asian exposure, participants in technology-based change and companies that serve the affluent. At some point it will be right to trade your TIF in for WMT (I own the first but not the second), but not anytime soon.
If you can force yourself to get out from under your desk and witness the carnage, look for ways to upgrade your portfolio. When selling starts, it may be rational at first and the weakest stocks get sold off first. But then the selling often takes on a life of its own. When panic sets in and the bad-stock ammunition runs out, good stocks get thrown out the window at crazy prices as well. Why? That’s all that’s left to sell. No other reason.
My stocks got really whacked on Thursday, so I guess I’ve got to think that we’ve entered the latter phase.
Under the desk (or the bed) is sooo much more comfortable at a time like this, but my experience is that you’ve got to force yourself to at least analyze what’s going on.
If you can’t do this, or if you know you’d just do things you’d regret later–and you know your psychological makeup better than I do–find a good book.
By the way, in my view the current selling has nothing to do with year-end mutual fund housecleaning.
discounting
I want to add something about the discounting mechanism, but I’ll save that for Sunday.