Opinions in 2008

发信人: desertz (我所热爱的传说), 信区: Stock

标 题: 2008 Stock Market View (I)

发信站: BBS 未名空间站 (Thu Jan 3 20:57:45 2008)
I want to share some of my thoughts on the stock market next year.

Economy
Let me start from the economy. No doubt US economy will grow more slowly in 2008. The major worry comes from the consumers, which represent 2/3 of the GDP. The two major negative developments are driving this consumer slow-down: inflating commodity price, and housing market crush. The commodity price has been driving prices of everyday consumer products higher, from gas to food, and cutting into consumers’ allocable income. The housing market crush, as well as the follow-on credit crunch, has further squeezed people’s perceived wealth and actual spending power.
Is there going to be a recession? I don’t know. But it doesn’t matter. A 0.2% GDP growth is not much different from a -0.2% one. The key to determine a mere slow-down from a recession will be the job market. We should monitor it very closely. As long as people have jobs, everything will be OK. They may spend a little less, but they will continue to spend. So far the job market has held very well. We are not seeing any employment weakness across the major industries – except construction and financials. Even for financials, it seems not that bad – retailing financials are still doing well.
Are corporations going to cut capital spending? We are starting to see a little weakness sign, but still not very confirming. Overall, I don’t see major risk in near term. Opposite to the period prior to the 2001 recession,US corporations have been conservative on capital investment for the past these years. We are definitely not in a bubble state, therefore won’t have a quick burst. On the other hand, with a negative saving rate, US consumers have been spending more than they earned, and are far over-stretched. So clearly, no matter an economy slow down or recession, it will come mainly from consumer spending, not corporations’ investment.
Inflation
Inflation is the major fear to the economy. I was very surprised to see thatthe CPI had been pretty stable prior to November. According to conventionaltheory, the high commodity price should have driven up prices for every merchandize. But we are not really seeing that. Why? We have two possible explanations. First, commodity represents a much smaller portion in the economic flow. For example, even with $3+ gas price, gas’ portion in consumer spending (3%) is much lower than 1981 (5%+). A bigger portion of values are created from the skill, knowledge, innovation, and investment on information technology. So the effect of material-led inflation is not as obvious as in 70/80s.
The second explanation comes from a much deeper globalization. Developing countries like China have provided unlimited cheap labor, so driving down cost dramatically in the past decade. Now the worry is, China is also experiencing the inflation, and this will transfer to the export price sooner or later. But overall, globalization has helped the world a lot in regards to curbing global inflation.
I think we will see a modest inflation pressure in 2008. CPI will rise gradually to 2-3% for the year. Fed will have less room to loosen the monetary policy.
Corporate Profit
Corporate profit will be affected by factors from two sides: cost and end price/volume.
On the cost side, as mentioned above, globalization has helped the multinational corporations to drive down labor cost and generated unseen level of profit. Corporation profit as percent of GDP is on the historical high. Will this trend reverse? It will sooner or later some day (and might be happening locally, as seen from US’ import price index), but this will be long process and reversal won’t be that fast. There are still a lot of cheap labors left in low income countries. Capitalists will do everything toexploit every bit of profit. Capital will hold an advantage competing against labor in the world scope in the foreseeable future. (I had an interesting discussion with coke mm long time ago on this topic: http://trader818.com/bb/viewtopic.php?f=4&t=6074&start=0&st=0&sk=t&sd=a)
More immediate risk is from raw resource input. High commodity price will drive up cost and cut into corporation’s profit. And this is difficult to be passed to the end consumers. Every company which can not control the natural resource input will be hurt hardly in this transition.
On the demand side, we know US economy will be slowing down. So companies who focus on US market, especially consumer product market will be negatively affected.
Here again, globalization will save those corporations with diversified markets. Emerging economies will likely maintain strong growth. South America, Russia, and Australia will prosper due to the raw material boom. Europe is another risk, but European companies’ hard work to transfer manufacture to low cost regions, Euro’s emerge, and the improved flexibility across the European countries in the past years have made Europea stronger economy compared to a decade ago.
As a summary, corporation profit will likely to grow more slowly in 2008. Itmay even be flat or down, if Europe has a sudden unexpected slow-down. However, the impact will be dramatically uneven, with some companies hit hard, and some others even benefiting from the process (those who have globalized market and can control raw input).
US Stock Market
I mentioned that prolonged benefit from globalization will somehow offset risk from commodity inflation and any weakness in a single market. So for long term (1-10 years), I don’t think stagflation in 70s will come back, and rather suspect we are still in the middle of the secular bull market brought by deeper globalization, more sophisticated economic/monetary policy, and continuous productivity gain from innovation and information technology investment.
This doesn’t say that we won’t see corrections, even major corrections (20– 30% down). But they won’t be long and staggering, like those in 70s’.
Still, 2008 will likely be a lackluster year for stock. No matter if we willhave an actual recession, the fear will likely throw the market up and downdramacitally, especially in the first half of the year. But honestly, no matter it is 3% or 10% rise in year end, I don’t think that forecast reallymatters a lot. Instead, I am sure about two things: First, it will be a volatile year. A lot of structural changes are happening for the economy, and a lot of contradictive forces are emerging in the market. Second, we will see huge uneven performance from companies across different sectors, regions, and with different relative strength – some will prosper and others will fall down like stones. So, be cautious and be selective.
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发信人: desertz (我所热爱的传说), 信区: Stock
标 题: 2008 Stock Market View (II)

发信站: BBS 未名空间站 (Fri Jan 4 20:00:57 2008)

Now let’s look into the sectors.

Natural Resource
The natural resource sector will continue the boom into 2008. However, therehas been a great run so far and most of commodities are at historical high,so it doesn’t look as safe as one or two years ago. We need to look more closely at the fundamental dynamics to distinguish values from hypes.
Out of the all resources, I think oil and agriculture are the most promising. This is drawn from the analysis of long term demand and supply. I won’t repeat the long story here. But in short, these two are the ones that are the most difficult to increase supply and with inflexible demand. The unbalance of supply and demand will last far longer than most people can think of. So they fall into the so called “secular” boom category. My forecast is oil will reach $150 as early as in 2008, and prices for all the agriculture products will continue to rise.
I see more uncertainty in the development of other commodities, especially gold (and other precious metals). First, not like oil, gold doesn’t disappear after being consumed, only to be recycled, so in theory we will have more and more gold available with year after year production. Second, gold’s role as a financial reserve choice is much less significant nowadays. Third, gold’s current appreciation is tied closed to dollar’s depreciation. Although dollar inclines to the further down trend, I really suspect how long this trend will sustain. My instinct is that it may be not very far to the bottom and the dollar may reverse the decline against Euro sometime in 2008. At least there is a lot of uncertainty involved here. Backa step, if you are certain dollar will depreciate, why not short dollar directly? Historical record shows the precious metals have the worst long-term performance compared to other commodities adjusted to inflation.
As a whole, commodities will continue to boom in 2008, but I would focus on oil and agriculture and be cautious on others.
Financials
No need to repeat the current state of financial industry. The question is, where is the bottom? I believe many people are eyeing the premium names likeCitigroup, which is cut half on stock price and wondering if it is the timeto step in. I can not say more than a few guesses since I am not expert in the industry. First, don’t try to guess how deep the water is if you are not capable. Only well-educated and well-informed can make a good fortune. Second, try to distinguish one-time event from repeating ones. Sub-prime write-off is one time. Permanent losing securitization business is repeating. Default provision is one time, disappearing loan customer is repeating. Aslong as you are confident about to do this, you can try your luck. The third is, as a long term value investor, bear market is the best opportunityto get rich. You identify the ones which are strong and suffer from only temporary bad environment. But the process will be painful.
Consumer product
Consumer product is not promising in 2008. We already see consumer discretionary (dining, apparel, auto) fall hard when the economy poses to slow down. But even consumer staple won’t be saved in a consumer-led recession, though they will fall less. The food companies will continue to struggle to code with the skyrocketing raw material cost and lukewarm end user demand. As long as they don’t control their raw input, they will suffer. We will see the highly-respected brands dive to water through the next few months. When everyone lost hope, then maybe it is the opportunity to grab a few shares. Overall, I see it is easier to do the bottom fish herecompared to financials. It is not because the timing is easier. It is because it is more transparent to outsiders, and you know consumers will pick up stream finally and those highly-respected brands will be fine then.
However, there are always a few bright spots in the depressed industry. I see some major trends are emerging and they will change the consumers and the industry.
The first is the transition of shopping to online. Amazon/Ebay/Google will buck the industry’s atmosphere and continue to prosper. The second is portable electronic devices (or gadgets)’s moving to mainstream. We alreadysaw the blowout of GPS and smartphone in the past year. And we will see continuous emerge of new devices. The third is the new gaming/entertaining industry. Game console transition and PC/gadget’s convergence will continueto help this industry to grow in 2008.

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