It is hard to want to buy stocks when the short term trends seem so clearly negative. There is no doubt that the US economy is in a recession- the question is how deep and how long the slowdown will last. Anyone that follows technical analysis is bearish and the pessimism is everywhere. The media is in its heyday- recession, inflation, stagflation, technical bear market in most markets, and problems in the credit and lending arenas. However, even the most bearish experienced investors are asking “when to get in" not “when to get out".
Wall Street has the problems- not Main Street. When polled, 84% of Americans say they are happy with their lives, and 95% of those eligible and willing to work have a job. Worldwide populations are growing and being rapidly introduced to the free markets, and their unlimited product opportunities. In essence, “Main Streets" are expanding around the world.
The money changers on Wall Street are a different story. Abundant liquidity led to the development of financial products that were appetizing to those looking for a “little extra yield". Institutions were experiencing problems generating income, because interest rates had declined. This created serious problems for groups that were over exposed to fixed income while trying to run entities experiencing rising costs. Most of these loan packages were further re-packaged and then had derivatives written against them. Only when the problems began to surface, did their creators find out how illiquid they could become.
As history repeats itself, the “big" money is scooping up these “problems", and will profit handsomely when things stabilize. The collateral on most of the development projects is sound. And while real estate has taken a hit, we must be careful to put things in perspective. Currently 95% of all mortgages are current within 30 days. Foreclosures, while reportedly “skyrocketing up 40%", are still below 3% nationally. Much of the collateral for these investments remain solid today. The problem with the sub-prime loans is not the defaults occurring, but the liquidity of the products themselves. Once this is resolved- and it will be, growth will resume not only across America, but all over the world.
It is no doubt that Wall Street and the banking industry have taken a tremendous hit that will have a short term effect on the economy- but growth in almost every other area continues unabated. What is missing now is the “wealth effect" domestically. People can no longer refinance cash back loans to over indulge beyond their means. In fact, families are scaling back and pulling in their spending. So yes- business cycles have not disappeared and neither have recessions or bear markets.
If we are expecting, or experiencing, a bear market and a recession - how can I be so bullish? There are two reasons. First, equity prices are already down 15-30% off their highs, depending on which sector or individual company you are looking at. I believe we will see the recession end up being post dated back to the last quarter of 2007 and the bear market to have begun at the October 2007 highs. We are already through much of the damage. The Fed has already announced the measures that they need to take to resolve the credit issues overhanging the markets.
My second reason for being bullish (I hinted at it earlier in this article) is more important, based on its long term economic impact. International global build-out is clearly occurring. While the huge population of self indulgent domestic baby boomers, and marketers alike, have changed the supply and demand equations, advances in communication and the internet, are introducing the free market economy to the entire world. The result is what I call “The Inter-Boomer Generation". Everyone from everywhere desires a higher standard of living that they can see being enjoyed in developed countries, and it's becoming easier for people around the world to access these goods and services via the internet. The growth in the size of the capital markets over the next decades is being ignored by today's investors thinking short term.
I will leave the dramatic “entertainment commentary" to others. They can waste their time trying to answer the questions: Are we in a bull or bear market? Recession? How deep will it be? I am contacted almost daily by the media to answer these questions, and I politely do, because this is their focus right now. But my real attention is on the companies with the good ideas and the good management that continue to generate what I call “Free Earnings"- accelerating cash flow while trading at a discount. Our Magnet System is finding an abundance of them like it always does, in good times and bad. In the meantime, the free market will continue to spread, Wall Street will find a cure for the current liquidity crisis, and an even greater number of investors will bid the markets significantly higher over time.
Jordan Kimmel (http://www.magnetinvesting.com ) is a hedge fund and mutual fund manager. Jordan is a frequent guest on CNBC, ABC News and Fox News. He has been featured in Forbes Magazine and is often quoted in major newspapers including USA Today. He is the author of “Magnet Investing, build a portfolio and pick winning stocks using your home computer".