Vad's Best Ideas

The world is round...

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"The world is round and the place which may seem like the end may also be only the beginning"
Ivy Baker Priest

It seems like we finally starting to see a healthy amount of fear in the market place and in my book it is a good sign... Dow has dropped almost all the way to the last year's low which means the "funny" gains of 2007 have been finally erased. My guess is that during the next several months there will be numerous opportunities for the long term investors to make some terrific investors. But until everyone believes that the recession is inevitable and real, markets might just continue to find another reason to sell off every week... So with the goal of principal preservation as the main goal in the short term, the question now is simply how to avoid severe losses during the next few months.

Here are some quick thoughts to consider before jumping in too heavily into some of the sectors that are widely being touted as extremely cheap by "historical measures":

- Yes, write downs in the financial sector might seem quite severe, may be even unreasonable, but given that most ABX indexes just hit the new lows last week- expect more bad news from financials. We still haven't heard from many insurers and other firms that make their living predominately by making investments into various securities. Some states and municipalities will be forced to cut costs hence more layoffs are very likely. Asset managers held up better than most other financial stocks but with markets down in double digits since October- expect similar declines in asset driven fees and even more severe declines in performance incentive fees. Hence more lay offs again...

Below is an example of a BBB rated ABX Index- we are talking 13 cents on the dollar here...

Source: http://www.markit.com/information/products/abx.html

- Decoupling of the emerging markets from the US economy seems to be a very popular theme with many people believing that even when recession in US becomes obvious emerging markets will behave differently than they have in the past. But I think one needs to look behind the hyped up stories of the booming stock markets and skyrocketing real estate prices- the truth is- boom of the emerging economies has been driven predominately by growing exports to the outside world and not their own consumers.

- Consider this simple fact reported in WSJ last week: "...In Asia, for example, exports hit 55% of the total economic output in 2005, according to the Asian Development bank, compared with 45% output in 2002. While intra-Asian trade has grown, about 60% of Asian exports are eventually consumed in the US, Europe and Japan."
So, with Japan's economy on the brink of another collapse, US economy either in recession already or almost there, and finally with European economic growth showing fresh signs of strain almost daily now, how could the emerging economies possibly hold up?

More to come in the next few days,
Vad

P.S. One more little note - For all those who actually believe Chairman Bernanke, who keeps reiterating that the US Economy will somehow avoid recession. Everyone is confident that Fed actually knows something we don't. Yes, I am pretty sure with thousands of staffers on the payroll that could be the case, but consider another fact- Fed's statements about what they think the economy is going to do are not designed to be realistic. They simply can't be too pessimistic, period! Fed's job description assumes guiding the economy out of the recessions and thus any express statements supporting the view that US economy is heading into there would make it a certainty that will end up there even quicker- so my advice ignore Fed's projections and statements and look purely at actions. Cutting rates by 100BP with inflation at 17 year high is not designed to simply "provide insurance" against slowdowns...