Florida Agenda

By GENE INGER

Though I was among the very few who predicted the liquidity and credit crisis, as well as it morphing into an “epic debacle” in 2007 just before the highs; the rebound of the past year has been so persistently controlled that valuations are extended once again. That might mean that those feeling overly comfortable about the rally, and just taking-off for the gay cruises or other venues, might feel the expense more than they think if equity valuations behave in the weeks ahead as we are projected fairly likely.

If one had to define the greatest risk, it’s probably not the fed’s “thread the needle” or impossible resistance against budget cutting by Congress that shapes this New Year. Rather, it’s the overall debts, deficits, toxic assets that aren’t yet unwound, and what, for sure, is a looming crisis involving two things: the states and localities that have no means of funding their shortfalls; and evidence that what has been a (Goldman Sachs) follow the leader spin about absurd earnings levels and multiples in the next year, means that a “reversion to the mean” is going to take place.

Even if conventional wisdom is right about the third year of a presidential cycle being in the upward direction, that doesn’t mean volatility fails periodically appearing prior to a further upward effort. If during such volatility geopolitical events (terror, nuclear war in the case of North Korea or Iranian-sparked surrogate attacks) or anything else, then of course the nascent recovery will capitulate with the stock market. Gold won’t drop terribly far after the hype phase ended as expected.

All of this brings up another issue that is tantamount to 2011: if China and others are busy accumulating gold on concessions, and China and Russia are trading now with their own currencies instead of the dollar, what happens if they are not participants in size at our refunding treasury Auctions? Much of our debt was foolishly rolled-over in the past year with short-to-intermediate duration paper. As the Fed only controls the “funds” rate, they can do little to prevent higher rates. Thus, that alone exponentially will increase US debt/deficit levels, because of the higher interest to be paid on the nation’s debt. It will do so regardless of Congressional Budget trimming or new citizen demands.

What we enter isn’t the inflation people talk of, nor the deflation we rightly forecast in 2007; but it can become sort of a “hyperstagflation,” where prices for necessities in life rise persistently over time (gasoline, food, utility rates, taxes where they can get them, while pretending not to be making it tougher for citizens).

It also means concurrent low-to-moderate wages against a background of higher daily-living expenditures. It is a toxic combination that is very hard for a government that hates cutting government, to address. As government workers on a federal, state or local basis are laid-off, the unemployment rate worsens. This, along with continued malaise in housing in most areas, and lack of trade policies that make sense, leave a treacherous investment climate.

What to invest in for this intractable “new normal” situation that polarizes our Nation? We hate picking single stocks, not because it’s silly, but because it’s not diversified. You can take an ETF and look at the best stocks in that ETF and cull them out for an individual investment. We did that by emphasizing Chevron (NYSE: CVX) last year on the pullback, and a small stock that doubled since mentioning: Western Refining (NYSE: WNR).

We speculated in Pure Bioscience (NASDAQ: PURE); a tiny but potentially disruptive antibacterial play, that has just gotten clearance from the EPA for “food processing contact use” as well as a unique marketing deal with a Dallas firm that formerly did the largest LBO ever (Mary Kaye cosmetics) and with a head of that operation who was Avon’s largest shareholder at one time. So after the two years of frustration, we suspect an inflection point is finally coming in 2011-’12.

Then there’s another still depressed stock that merits a look; one that earned me the nickname of “Mr. Micron” back in the ’90s. Since Micron has about $3 billion cash, and is in overall stable condition, I think it’s relatively undervalued in the 7- 8 range.

So if we have to pick a stock to add to the ones we’ve mentioned earlier in this yearly review, let’s make it Micron Technology (Nasdaq: MU).

This is not a year to be delusional, pretentious or over-the-top superficially fabulous.

If that can be done affordably it’s fine; but nobody should be using credit for anything, and debt should be eliminated.

By Gene Inger

With demand for money very low, it’s no surprise that Americans have a case of Elvis Presley’s “suspicious minds” when talking of a recovery in the economy. And, most of the buying that is currently going on originates in professional circles and exits quickly if need arises. The simple explanation as to why the market’s rally should advance is the Federal Reserve’s action. But, it should be noted that just the ability to push prices unrealistically higher doesn’t mean that growth automatically follows. For three years we warned to “corral the wagons” and be defensive with respect to excess risk, as the ‘epic debacle’ called for in May of 2007 would be a very long-term process. As we contended that for the last several months, not as an explanation for cynicism about the purported economic improvements, it is at least gratifying to hear the Fed seemingly admitting in plain English that we were right. The “fix” was in and they did do this.

While many Americans are benefiting by improved prices in their mutual fund and all sorts of retirement plans, there is a looming downside to be pondered: a bond bubble will eventually be pricked, and someone will say ‘ouch’. Higher rates will be equated with a realization that economic recovery is taking hold, as will potentially surprise investors, with mostly selling of stocks, almost ironically because the economy is recovering. It’s almost like getting a lap-dance; if a stripper is showing full frontal nudity, there’s not much left to the imagination once you enter the supposedly privileged environment of a private performance. This market has been foreplay in a sense, and once we spike into a “top,” we should see a buying “climax.”

The American dream has become a “rental;” home ownership is like wandering into a dark room where you don’t know what will be lurking around the corner. That’s been a nightmare for those who didn’t listen to our warnings back in the bubble’s froth during 2005- 2006. The housing market is now more attractive, but getting a deal closed isn’t easy, and there is a probability of housing prices generally continuing to decline for at least a year or two, not only because of inventory, but because of what’s in the shadows yet to hit.

 A true “deal” is a deal in any economic environment, but that often means paying cash or obtaining seller financing. Furthermore, nobody in their right mind should even consider measuring prices of condos or houses in terms of declines from the peak as that peak bubble was an anomaly likely never to be seen in our lifetimes again. There are few closings in some portions of the market because most sellers are still unrealistic. With the economic collapse and job insecurity and now the “mortgage- gate” crisis, which has by no means peaked, you might need pricing to drop another minimum of 10 to 20 percent.

As we look to 2011, it seems that the emerging American trend of saving, of avoiding tendencies to be attracted to glitz or conspicuous consumption, are newly engrained just as it was in our grandparents’ generation after going through another depression era. This is now the fourth year that I’ve argued to get out of debt, don’t use debt and owe zero to anyone.

This is toughest on youngsters who have student loans set up on salaries they anticipated but won’t exist as they graduate.

The good news from this debacle is that it will be uphill for the youth, who have time on their side. The bad news is that this projected recovery will take so long that the established elderly who thought they were solid may never recover to where they were, while the vast middle-aged crowd of white collar workers laid off will find it very difficult to get rehired again.

Bottom line: we are one headline away from a shot-across-the-bow of this market; so while it’s fatiguing if concerned and risky if you’re not, it is an orchestrated upside move that is “at risk” of reversing from a slight provocationalmost like the hottie you are sure wants to meet you, let’s you buy drinks for hours, then leaves with someone else, which sort of crashes your night.

The Nation went through a transformation into something less than the power that we were. Now we must go through a redirection of that transformation, which is a lengthy process as we warned. It will also restore balance and stability – in time but not on a dime. It’s like meeting your newest love interest; don’t expect too much too fast. And as usual, don’t assume the top’s not out there, or that the bottoms are all behind.

 Gene Inger provides expert market opinion via several Internet videos daily, focused on trading and economics. For more information, visit www.ingerletter.com.