Which Way Now?
Investment Research for Online Investors

by John Dalt

02/09/09

Thursday and Friday were led by financials and tech.  Where do we sit today?  The range of opinions varies from both extremes.  Dow Theory tells us that productivity must be followed by transporting the goods to market.  Another words, if you produce goods they have to be sold, or the inventory will build.  If goods are not being delivered to customers, the production must slow to match actual sales.  Since transports have not participated in the latest rally, the bear market is not over yet.

Another view is that a bear market takes down bonds, then stocks and lastly commodities.  Well, they all have been knocked of the perch that they occupied less than a year ago. This would tell us the pressure for a rally is building in a bottoming process that began in September. The bottoming takes a few months and then the recovery begins. The problem this time, government is activist. OH! Bama and democrats in control of both houses of congress are using this recession to justify a huge increase in government. The wild card is the potential for the government to make the current slowdown worse.

I read a great quote “Recessions are part of the natural business cycle, governments cause depressions.”  The danger of overreaction by the government using deficit spending is that the money is not used as efficiently as business would allocate it for growth, and that the resulting debt becomes a drag disproportionate to the benefit received.  If that sentence made your eyes glaze over, sorry.  Here is an example:

Spend $40,000 by the government to hire one person.
Creates one public sector unionized job.

Or:

Spend $40,000 by business to produce widgets

Employee manufactures widgets

Warehouse stores widgets

Trucking company delivers to distributor warehouse

Office bills distributor

Distributor salesman creates demand from customer

Manufacture office bills warehouse for widgets.

Distributor ships widgets to customer retail location

Distributor bills retailer

Retailer buys advertising to sell widgets.

Retailer sells widgets to customers that need them.

Retailer pays rent.

Retailer pays wholesaler for widgets.

Retailer orders more widgets, which starts the cycle over.

Taxable income is produced to help pay for the public sector job.

 

How many jobs were created in the two examples?  The answer is obvious, except to the current occupants of elected office in Washington.  Maybe a better question to ask is which can exist without the other?  The individual or the government?  The individual can exist without government.   The government is a leach; it must have the individual to tax to exist.

Conclusion:

We are doomed to a hard slog.  The economy has bottomed, recovery is on the horizon.   Congress wants to spend almost one trillion dollars on questionable ‘investments’.  The debt created will raise the costs for productive loans to businesses and fuel an inflationary spiral as the economy begins the inevitable recovery.  The Treasury is going to try to sell a record amount of bonds this week.  Interest rates are starting to rise.  If you own U.S. bonds, get out!

Berkshire Hathaway injected $2.6 billion into Swiss Re, the world’s second-biggest reinsurer.  There was a great article on Bloomberg about the transaction.  This article also highlights some of Warren Buffett’s strategic moves in the last six months.  You have to admire Mr. Buffett; he plays on a world stage with a big bat.  You can read the article here.

The market is waiting on the treasuries announcement for using the last $350 billion of tarp funds.  This is anticipated to be positive. The ‘stimulus’ bill is the tough one. I think a rally is imminent, but the stimulus bill is bad for business and may kill it.

I thought you might enjoy this picture; it is making the rounds on the internet. 

Wing and Seat Cushions or Raft? 

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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