The Wall Street Macaroni
Just over a year and a half ago we mentioned in one of our articles
We accept that the meltdown was more brutal and faster than we thought. And we did not expect companies to be decimated to the stage that they held more money in bank accounts than their listed valuations, but that’s what sentiment is about, from one extreme to other.
So now what? Does this mean that it’s the right time to invest? Well, this may depend on your time horizon and the sectors you want to invest in. Clearly we favor companies with sound fundamentals, a well established business model and good management along with a vibrant sector background.
It’s also important to ponder on the lessons learnt from the recent Wall Street carnage. It seems that the entire American financial system is being socialized. The FED is taking over control from Wall Street bankers, which are no longer trusted and are loaded with massive loans and debt. American pride and resources of yesterday, decayed amidst a political debate with job losses and votes at stakes. The implications are huge; fewer workers will support a broken retirement system and a rotting national healthcare system.
The cutthroat capitalism and ruthless individualism that has made America the land of the unlimited opportunity has been redefined by a few short selling hedge funds from Greenwich Connecticut. Americans working two jobs to pay mortgages sold to them in an exuberant real estate market can no longer deploy their savings in Social Security and 401 retirement plans invested in the stock market. This will reduce both purchasing power and demand for stocks.
Now with the fall of Freddie Mac and Fannie Mae the government has turned America into the largest subsidized housing program in the world. It is worse than the communist era in which the communists have built buildings and forced people to live in them. At least those were not overpriced and were free of mortgage.
So why work 80 hours a week to pay for a house that is no longer what was paid for, struggle with credit loans on cars, credit card expenses and hefty college annual fees averaging $45,000? Paradoxically, the French have no mortgage debt, work 30 hours a week for half a month. This does not include strike and sick days. They drink red wine every day and have a free education system and social life.
The American credit collapse will have serious implications for the worlds’ economy. As the credit tightens, more firms will have hurdles to raise capital to finance operations. Further more the reduction in the multiplier effect will be felt across the board, as paper assets becomes illiquid and scarce. Hard currency will be deployed in transactions but a weak dollar will become even weaker. In addition, the budget deficit and 3 trillion dollars of economic loss will continue to create discomfort among potential debt holders. In the end it will be the American taxpayers and generations to come who will pay the stiff burden of past excesses and the extreme speculative pressure on the downside.
Several companies such as Bear, Lehman, true icons of the capitalism have gone broke, while AIG was just replaced by Kraft Foods in the Dow Jones Industrial Average. The insurance company had been added to Paulson’s nationalized portfolio, while macaroni and cheese has supplanted CDSs (credit default swaps). McDonald’s turned out healthier, after all.
Horatiu Tocan
Horatiu is an MBA from New York University and an Emerging Markets money manager. The views expressed are his own.
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This again brings us to the late economic story of food, staples, utilities, pharma and energy. XTR LE and BET NG (Energy Index) were the best performing indices for the week. Barring Energy, Staples also outperformed every other sector for the year. XTR 21 dipped more the last week, but remains the top performer for the year. Fear might throw fundamentals out of the window for sometime, but like everything else, the value returns as the cycle turns up.
Enjoy the latest XTR INDICES.
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[bold]XTR.INDICES[/bold] is our analytics product, which creates and manages Romanian market indices like XTR 21, XTR 100 and XTR 30 (Free Float). We also run models based on breadth indicators (Advance Decline ratio) and statistical parameters (correlations, betas, volatilities, top price changes, 200 day moving average etc.) XTR 21 – THE BLUE CHIP INDEX. REUTERS RICS COVERED.TRPS.BX, VNCA.BX, AMSL.BX, PEXI.BX, BATR.BX, ARTM.BX, COMI.BX, PTRI.BX, BRDX.BX, BRKU.BX, ARTM.BX, SNOS.BX, ARSB.BX, ALRO.BX, AZOM.BX, OTSP.BX, ALUM.BX, MOPN.BX, TSEL.BX, TGNM.BX XTR 100 – BROAD MARKET INDEX. XTR 30 – FREE FLOAT INDEX. XTR – EE (XTR EARLY ECONOMIC INDEX), XTR – ME (MID ECONOMIC SECTOR), XTR – LE (LATE ECONOMIC SECTOR)
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