The Credit Crisis
By
Timothy Lutts, Chief Investment Strategist and Editor of
Cabot Stock of the Month ReportFor Cabot Wealth Advisory 2/7/08
Sign up for free Cabot Wealth Advisory e-newsletterThis week's email brought the following, from P.I. in Connecticut.
"I am very concerned about the credit markets and what havoc they could send around the U.S. and the World and I think it is a far greater problem than we realize. I just hope that we get out of this without a major meltdown that affects all facets of the economy here in the U.S. and the World. It could be very serious and it is far beyond me to understand how this circle of debt will be resolved. I would appreciate your views on the subject."
OK.
First, P.I. clearly wants to use rational thinking to divine the future of the economy and, by extension, the future of the stock market...and I appreciate that.
If I try to think rationally about this problem, here's what I get. Debt is bad; equity is good. Consumers and businesses are already working to reduce their debt loads, and as they continue, they will develop stronger balance sheets and greater financial health, which is a good thing. (One aspect of this that is often forgotten is that this debt shrinkage is right on schedule for aging baby-boomers.)
Our Federal Government, on the other hand, continues to borrow heavily, and the result is a weakening dollar, which is a bad thing.
The shrinking dollar is one reason (though not the major one) that investments in foreign stocks have beaten investments in U.S. stocks in recent years. But I don't believe anyone in the U.S. seriously wants that trend to continue.
And I don't believe it will. I can't identify what mechanisms will be responsible for the change, but I know that trends go to extremes, and that the point at which the majority of people identify a trend and expect that it will continue is the exact time the trend stops. Seems to me we're approaching that point with the dollar.
Also, I look at the chart on my wall that shows the ebbs and flows over the past century of GNP, corporate earnings, the Dow and the Nasdaq, and I note that the long-term trend is up. We've come through wars, depressions, droughts, floods, waves of disease, massive corporate fraud, and equally massive government malfeasance. Yet the uptrend remains intact, giving me confidence that this credit problem will be surmounted as well.
Trouble is, none of this tells me where to invest!
Which is why we watch the charts. Remember, the stock market is VERY GOOD at anticipating the future. In fact, it's better than any one of us, simply because it uses the combined wisdom of all of us. So the best way to predict the future is not to rationalize; the best way to predict the future is to watch the stock market.
And what is the market telling us today?
That the main trend is still down, but that we may have seen a bottom two weeks ago.
That homebuilders have definitely bottomed.
That financial stocks may have bottomed.
That coal stocks are a leading sector.
That certain pharmaceutical stocks are strong.
But that breadth is still very poor, and that most growth stocks remain in poor shape, factors indicative more of a bottom-building phase than anything else.
In short, it's not a particularly good time to be an investor; the odds are not with you. Cash is preferred.
But this downturn won't last forever, and when the new uptrend gets under way, I want you to be ready for it. I want you to accept it. And I want you to be buying the stocks that will lead the market to new heights.
Information on Cabot Stock of the Month ReportMore Lutts' LogicCabot Wealth Advisory Featured StocksCabot Investing Advice