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Place Your Bets On The Direction Of America

2 August 2009 2 Comments

Happy days are here again, or so it seems.  Economic metrics are improving, or maybe just getting less worse.  The hopeful and optimistic slant of the media continues to focus on “positive” indicators such as earnings beats (despite declining revenues).  Valuations don’t matter these days it seems because well who cares about the fundamentals of a business when we have a rising stock market!

The Consumer

Many stocks are currently priced expecting a full rebound in the consumer to levels of a few years ago.  Let’s take a look at a few stocks:

  • Harley Davidson (HOG) is currently trading at 38x 2009 earnings.  It’s also run up over 50% in less than a month.
  • Winnebago (WGO) has also had a huge run over 50% in a few weeks.
  • Brunswick Corporation (BC) which is a very large boat manufacturer has been slaughtered over the last couple years, had a huge pop a few days ago taking it from the mid $4’s to the mid $7’s (a pop of approx 75%).
  • Wynn Las Vegas (WYNN) is trading at over 100x 2010 earnings!  Do we really think Americans are going to be going to Vegas in droves any time soon?  They can’t even pay their bills!

Where will the large increase in business come for these companies to justify the valuations?  Even the most optimistic economists still say unemployment will like be at the 10% level into 2010.  That doesn’t bode well for consumer activity.  Consumers are shell shocked with job losses and drastically lower asset values.  The savings rate has jumped significantly (this is a good thing, despite what the government wants).

If only the “successful” Cash for Clunkers program incentivizing Americans to go into debt to buy a new car and destroy a fully paid-for car (what a country) included sales of motor cycles, RVs and boats!  Then, we’d really jump back towards prosperity!

Consumption is not the key to a healthy economy.  It is the key to re-inflated our impaired economy in the short run.  Since politicians run on short re-election cycles, they prefer to re-inflate our economy.  The problem is that this severely impairs us for long term growth.  By preventing Americans from saving (which the government is trying to do everything to do through programs like “First Time Home Buyers” and “Cash for Clunkers”), we are preventing the accumulation of capital to fund future economic growth.  This makes me lean more and more towards a Japan-like “Lost Decade(s)” as the future we face.

Where To Focus

  1. First, we are to be extremely cautious with the current rally.  Our economy is still very much in trouble.  Commercial real estate, employment and consumption are barely hanging on.  I’m skeptical on the “Green shoots” recovery.
  2. Second, any recovery whether this year or next or sometime thereafter cannot occur without inflation since it is our monetary policy that is responsible for driving the recovery not a restructuring of the economy.  Therefore, we are to be prepared for inflation.  For me, I’m going to more than prepared, I’m placing my bets in favor of it.  Gold, oil, commodities and even interest rates are going higher.
  3. Third, I don’t see how certain consumer stocks like the ones mentioned above are going to retain their valuations.  The current market rally has resulted in serious overbought conditions of these stocks.  Consider shorting these stocks but make sure you have the cash to back them up so you don’t get chased out of positions should they continue to rise in the short term.
  4. Lastly, I bought SSO (2x long S&P ETF) to take advantage of the crazy momentum we saw last week.  I anticipated breaking the 1000 mark on the S&P and going higher (at which time I would sell the position), but it didn’t happen.  This could just be a pause going forward or signaling a top and the end of the road of the momentum.  Watch this carefully.

There you have it… my investing strategy for the foreseeable future.  Until things change drastically, I’m likely to stick to it even through a rally as fierce as the one we’ve had.

Disclosure: Short M, BC, WSM, WYNN.  Looking to short HOG.