I am sitting here with a mouthful of crow. I had to be such a smarty-pants and say gas prices won't go down, there was no price fixing at the pump, the oil boom wasn't over, and the oil sands were going to explode. My personally bullish headlines marked the end of the positive trend for my portfolio, and I have felt a lot more pain than joy over the past month.
What's going on?
I am sure that the economic world as we know it is coming to an end. All that easy money that has been floating around for 20 years has disappeared. With no easy money, bubbles cannot inflate, stocks cannot go up, and we are all going to live in poverty. We, as a species, cannot survive without easy money. Here are just a few signs of the impending financial apocalypse.
The yield curve is inverted again. What does this mean? I don't know, but an inverted yield curve has occurred before each of the past four recessions. If the Fed raises rates again, it will be even more inverted. How can we possibly survive?
Another nightmare scenario is that Japan will end ZIRP (zero interest rate policy). ZIRP allows big-money investment banks and hedge funds to borrow money over in Japan with no interest and invest it in the U.S. to receive a return. As long as the yen does not appreciate against the dollar (something the Bank of Japan does not want), there is big and easy money to be made. Word on the street is that untold billions or maybe trillions -- huge sums -- have flowed into U.S. equities because of ZIRP. Japan ends ZIRP, U.S. investments collapse.
The housing bubble has burst. Inventories are exploding, buyers won't buy, speculators refuse to speculate, and Pulte (NYSE: PHM ) , Centex (NYSE: CTX ) , Beazer Homes (NYSE: BZH ) , and many more builders have reduced sales forecasts. Beyond that, soaring home values led to hundreds of billions in consumer spending because of cash-out refinancing. No soaring home values, no cash out. Retail is dead.
Worse yet, at least for me, inventories of oil and natural gas are near record highs. The Americans and Iranians seem willing to talk to each other, Abu Musab al-Zarqawi is dead, and the "fear premium" on oil is finally falling. DaimlerChrysler (NYSE: DCX ) looks like it will export the SMART to the U.S., adding 20,000 more fuel-sipping, micro-cars to the highways. The result: stocks like Apache (NYSE: APA ) , Chesapeake (NYSE: CHK ) , and TODCO (NYSE: THE ) have been pounded into the trash heap of the now-defunct oil boom.
How to survive?
First, consider the words of Peter Lynch, in Beating the Street: "Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts, and concentrate on what's actually happening to the companies in which you've invested." If you own homebuilders, take a good, hard look at their balance sheets, their valuations, and the inventory of unsold homes in their primary building areas, and either buy more, hold, or sell based on sound ciphering, not the emotional pain of losing 50% from the highs.
For those of us in the oil patch, we need to keep an eye on those inventories, along with company-specific metrics. For example, TODCO is getting awfully close to my buy price, and I think it looks cheap. Before I increase my position, however, I'll take a cold, hard look at dayrates (the industry term for pricing) and contract activity. If business still looks solid and the price drops below $35, I'm buying.
Second, learn how to forage for cash. Dig in between the cushions of your furniture and under the seat of your car, and empty your children's piggy banks while they sleep. Again quoting Peter Lynch, "A stock-market decline is as routine as a January blizzard in Colorado. If you're prepared, it can't hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic." Put together a watch list of quality companies, figure out their fair value, give yourself a margin of safety, and if you see your target price, buy before it's too late.
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