The Recovery is in Need of Rescue
Wednesday, May 13, 2009 | Teeka TiwariRating:
The market certainly "feels" like it wants to catch its breath here. What’s particularly worrying, though, is the recent strength in gold and crude oil prices. Oil's move to $60 a barrel yesterday stirred up the inflation talk once again.If you look at gold prices, you can see that these inflation worries are more than just talk. Gold looks like it's setting up for a move above $1,000 per troy ounce.
But, can the U.S. economy recover if we have rampant commodity price inflation?
The answer, clearly, is no ... and maybe that’s why the market has been stalling here. A ratcheting up of commodity prices could not happen at a worse time. As bad as corporate earnings have been, imagine how bad they could have been if oil were still trading at $140 a barrel.
The rally so far has been sentiment-driven, and who knows how long that sentiment will drive the markets higher. However, the thing to remember about sentiment is that it can change in a heartbeat. If an oil rally really takes hold here, you’ll see this rosy sentiment turn into blind panic very quickly.
Sloppy 'Secondaries'
Another warning sign is the rash of secondary offerings coming to market. You really get the feeling that the pigs are shoving each other to get their turn gorging at the trough.
You’ve got billions of dollars being raised right now by the banks, autos and finance companies through stock offerings. These guys have made an art form out of selling stock to the public when their stock is expensive. So, be careful about getting involved in these offerings because, most of the time, you can buy the stock cheaper in the open market at some point after the secondary.
But, my big concern is with the bank secondary offerings. Many of the banks are attempting to raise cash to pay off their TARP loans. But is this really in the shareholders' best interest? I don’t think it is; you see, the terms on the TARP loan money are incredibly generous.
The banks can’t get cheaper money anywhere else -- at least, not in the debt markets. So, the decision to dilute existing shareholders via a secondary stock offering to pay off low-interest-rate loans must be considered suspect. The only reason to do it is to get out from under the government-imposed executive compensation rules. For my money, that’s a breach of fiduciary responsibility on behalf of management.
Additionally, consumer and business lending is going to be subdued for some time to come. Even when it picks up, strengthened banking rules will not allow the banks to leverage as much as they did before so it's difficult to see where the earnings growth is going to come from to take these stocks significantly higher.
Looking for Stocks to 'Bank' on?
If I were looking at bank stocks to buy for the long term, I’d be considering banks in Singapore and China -- specifically Singapore. It’s a good bet that China will bounce out of its recession harder and faster than the United States will. The entire Asia sector is ridiculously overbought right now but, on the next correction in the sector, you are probably going to want to go long some large Asian financial institutions.
Not only do the Asian banks look like good long-term buys, but you might also want to look at some of the top construction companies that serve the Asian market. The Asian boom may have taken a break, but it’ll be back and the second leg could will be bigger than the first.
If you are hunting for solid long-term high growth, it’s likely the Asian market that will supply it -- not the U.S. market. That is, not unless we have some major breakthrough that's on par with the Internet or integrated circuit.
The American consumer loves to spend but, in the past, that spending was fueled by access to easy credit. Its true, credit is beginning to trickle again … for the rich but not for the average American. The average American will not have access to easy credit again for a long, long time. Without access to credit, consumers cannot spend in the way that we’ve all grown accustomed to. It means that the recovery will not be a robust one.
That’s why you must ask yourself what type of recovery is being priced into this market. If the market is looking for a return of the late-'90s hyper-growth, that’s just not going to happen.
In the 1990s, we had a declining-interest-rate environment, rising housing prices, massive technological innovation and access to easy credit. This time around we already have low rates, housing's still going down and consumer credit is nonexistent. We don’t even have visibility on when those conditions will change.
What this tells us is that we continue to be in a trader’s market and, with a recovery in need of rescue itself, we are far from being out of the woods yet.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
