Quick Or Slow, Down We Go
Monday, July 28th, 2008
A market crash can be quick and sharp, like the one in October ‘87, or it can drag on for years, like Japan’s, in the doghouse since 18 years. The bear market we’re presently in looks like a slow mover. Yes, many markets are down 20%, but what’s 20% when they could drop by half?
Sounds far fetched? It is entirely possible that company profits collapse over the next 12 months. If that happens, prices and p/e ratios will not look cheap any more. Let’s look at some facts: In the USA, the chickens have come home to roost. The government is pumping hundreds of billions into failed banks and reckless borrowers - just to keep them afloat. But it’s not a liquidity problem we’re faced with, it’s bankruptcy. Many banks and semi-governmental institutions would be stranded without capital if they’d be realistic about their balance sheets. Consumers are already stranded and will have to cut back till it hurts.
Apart from the USA, we have disaster scenarios in various other countries who thought it clever to stop producing most anything in favor of property and finance games. Excesses as seen over the last few years are usually ending in recessions. There’s no reason to believe it will be different this time. The wall of money that has flooded the world will guarantee us more inflation. Traditionally gold and real estate have been good hedges against inflation. Despite the relatively high price of gold, we still think it’s one of the safest and best assets to buy and hold now. Distressed property can also be recommended, but there’s no need to hurry. Foreclosures and other opportunities will be with us for another year or two.
Stock markets, as mentioned above, will probably go down much further. But in between the slide there will always be short-term trading opportunities where one can pick up a fallen asset on its bounce back. Some banks and also oil companies are good candidates. Look for example at Citibank, UBS or Occidental Petroleum – who all live on roller coasters.
Not much is safe right now, but pharmaceuticals are likely to be a bit more quiet than others. Roche, Novartis, Schering Plough and Teva could be worth a second look. If oil prices go down further, airlines will be beneficiaries. Lufthansa is a good consolidator in Europe and due to an ongoing strike, the share price is reasonable. But such a bet should be rather limited. After all oil prices could well go up again in a few weeks time.
And lastly: whenever oil service companies like Schlumberger, Halliburton, Baker Hughes or National Oil Well Varco go down by 10-12 % from a recent high, they should be bought.