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.