Barrow Bits

I Blame the Media

Yes, the economy is in horrible shape, but how much of this condition is the result of the constant drumbeat of negative reporting by the 24-hour media?  This is the first recession that is accompanied by the wide array of business news channels thatexist today.  These channels that are basically staffed by lots of long haired bimbos (especially Fox Business Channel) that don't know much about economics and finance that isn't read off a telepromter.  Every day they spread the doom and the gloom about economic disaster and in my humble opinion are responsible for making things worse in the process of scaring the crap out of people.  Yesterday's retail sales figures were bad, but how much of that was fueled by the scare tactics that permeate the TV screen every day?  We would all be better off if these business channels were not around. 

Some folks are still bullish

Despite the overwhelming gloom concerning the economy some so-called experts are still bullish concerning the prospects of stock prices.  For my part, I would point out that these folks have been proven wrong in the past and will likely be wrong again.  For the life of me I just can't see any reason for long-term bullishness.  The more I talk with people the more I hear about the horrible state of the economy.  The more I walk around Manhattan the more stores I see closed.  And of course, the real estate market is still putrid.  How in the world can this translate into higher stock prices? Still, I look for the market to perform relatively well this week as Obama euphoria takes over. Probably a good time to sell.

Buckle Your Seat Belts

For investors 2007 was a year of bi-poplar extremes that has left many market participants emotionally and in some cases financially exhausted. In all the years that we have toiled on Wall Street we have never seen such extreme market movements like those that evolved over 2007. Still, when all the dust has settled the “average” stock will have been up for the year and despite the “mega” economic and financial problems that are currently impacting the U.S. economy. Indeed given the current environment we believe the stock market has behaved rather well. Does this suggest that 2008 will be the year that reality finally sinks in on investors?

Indeed, economic reality is not very good right now. A lot of greedy and supposedly smart bankers lent money to folks who were very high risk. Now the folks who wanted in on the housing boom and saying that they didn’t understand the risk and therefore the government should protect them from foreclosure. Of course the government is more than happy to oblige thereby putting one more nail in the coffin of free markets, while not solving the underlying credit problems. If we were to see a major blowup - say, several financial institutions simultaneously taking large and unexpected losses in sub-prime or other risky debt - already-anxious lenders could drastically cut back on new loans and cause a real credit crunch. That could prompt both consumers and corporations to dramatically lower their spending, which could be the catalyst that sends the economy spiraling downward and into recession. At the same time the US dollar has been in free fall reflecting the global view that U.S. economy is a mess. Oil spiked to the $100 per barrel level in 2007 once again punctuating the rising cost of energy and the failure of anyone in power to really address the longer-term energy outlook. All of this negativity has spooked the American consumer and spending is beginning to slow down, making the risk of a recession very real. And the potential icing on the cake is a bunch Democrats running for president who cannot wait to raise taxes. If one acknowledges that all of the points raised above are not good news for the stock market, we wonder how any reasonable investor can be bullish for 2008?

To be sure, the bullish among us will point to the moderate valuation of stocks as reason to be optimistic. And we admit that valuations are attractive, but traditional analytic measures may not apply when such mega-problems loom in the immediate future. If the economy were just on the verge of recession we could handle that since that is just part of the normal business cycle. However, when the possibility of economic slowdown is combined with tighter credit and high energy costs we begin to really worry. Our view is that it would be prudent to reduce the exposure to stocks. So buckle your seat belts, it’s going to be a bumpy 2008.