Global Market Insights and Investment Advice
I issue periodic letters with market insights, analysis of stock groups, credit markets and current market conditions. You may want to bookmark this page so you can come back and check for the latest updates.
2008-Will It Be the Definition of Risk and Reward?
We’re all well versed in the risks of our equity and fixed income markets going into the New Year:
- Banks, brokers, insurance companies, and non-sovereign debt, essentially many of the core components of the global financial system, are almost untouchable until we know how much exposure they have to bad mortgages.
- U.S. and European consumers are starting to reign in their spending, leading to a slowing in their respective economies.
- At the same time higher commodities prices, especially fuels and foodstuffs, are creating inflation pressures.
- What happens when China slows down? It’s been one of the drivers of global growth in the last several years.
- The Middle East situation feels as unstable as ever.
- There may be big changes anticipated in U.S. domestic and international policies as a result of the presidential and congressional elections in November.
What we’re not as well versed in is how to take advantage of the potential opportunities that these conditions, and the resultant market volatility, may present to us:
- At some point during the year, when there’s either a large financial institution that fails, or something serious done to save at-risk mortgage holders, or we finally learn the real size of the mortgage problem, the bank, insurance company, brokerage stocks, and REITs, as well as non-sovereign debt, are going to bottom and become a buy. Income seeking retirees especially can benefit from this potential opportunity.
- U.S. companies, based on currency exchange rates, are on sale 30% off in Europe. Counting the low valuations of many U.S. firms, especially in the financial and consumer sectors, there could be plenty of acquisitions next year.
- Emerging markets are, historically, especially volatile. However, their economies generally are much more stable than in the past, and many now are growing rapidly from internal demand, not just from exports. 2008 could be the year of the big correction in one of these markets. Usually trouble in one emerging market brings the rest down, hopefully creating a reasonable entry into these increasingly important markets.
Some Continuing Trends:
- There’s a significant possibility that healthcare policies will change in the U.S. The initial loser, big pharma, was identified 6-7 years ago. Although there may be some pain in the HMO/insurance group, there are also going to be some big winners in that group. There is not one single electable candidate proposing single payer healthcare. The most likely outcome is a government subsidized, multi-payer system with some HMO/insurance providers as key participants.
- As we all know, aging boomers will need more healthcare. Medical device makers, medical IT, biotech, generic drug makers, and even big pharma can be winners, especially if a volatile market helps us with reasonable entry points for adding to positions.
- The upgrade cycle in enterprise IT should continue into 2008, possibly more selectively. Valuations seem fair now, and should become attractive during pullbacks.
- Energy and alternative energy stocks should continue to work. Valuations in traditional energy categories are still reasonable, and alternative energies are finally becoming real industries.
It’s going to be important to raise cash positions somewhat going into the New Year. Cash (money market funds) provide a safe haven in volatile markets, and the ability to add to important positions during market pull backs.
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