Punk Ziegel & Co’s contrarian Richard Bove couldn’t have summed up the bearish case any better after a rough day in the markets yesterday. He’s the financial stock analyst but his comments are apropos of all stocks.
Liquidity was the one factor driving up asset prices and he argues that it is drying up…
The Issue Is Liquidity and It May Be Eroding
The core theory that has been driving my commentaries for the past few months is based on these falling dominos:
• Low interest rates, low labor costs, and increased globalization created an environment for sustainable economic growth.
• This, in turn, stimulated higher housing values and higher employment levels. These factors, augmented by record levels of borrowing, stimulated a surge in consumer spending.
• The trade deficit of the United States surged and this stimulated money supply growth worldwide.
• The growth in money supply was magnified (velocity increased) by improved technology resulting in a proliferation of new financial products.
• High profits were being generated in foreign companies, many of which were/are located in China. These profits attracted a surge in invested capital into a wide variety of companies.
• Too much money began to chase too few deals.
What Changed?
This environment changed here and abroad:
• Firms, rich in profits and invested capital, expanded capacity at record rates.
• In the United States, interest rates began to rise, labor tightened, and housing values began to fall. Income and wealth creation began to weaken.
• Holders of funds gave up their willingness to be paid for the risks being taken in deploying funds. Risk premiums evaporated.
• Underwriting of every type of financial instrument weakened appreciably. Sub-prime loans blew up at one end of the scale, while private equity funds pushed prices up to levels where cap rates virtually disappeared.
• Values in the debt capital market reached dot.com levels.
Consequently …
The present situation is fraught with risk for which no one is being compensated:
• There is excess capacity facing weakening demand.
• There are huge amounts of money invested in sectors where returns are inadequate.
My belief had been that the economy was at risk, the financial system was in danger, and the outlook for earnings in financial stocks was poor. However, I was willing to buy stocks because liquidity was so great that it would push financial asset values higher. Now, I am looking for places to cut back on holdings because it appears that liquidity is drying up. It is not advisable to jump while the market is panicking but once a sympathy rally develops, positions should be pruned.
Tanks and watch the emergence of Tiffany reached the highest peak in the features, technologies and aesthetics of the watch, so that all competitors works are obviously the lack of creativity eclipsed.