Monday, January 12, 2009

In The Grip of DEFLATION

We have been debating the inflation/deflation debate on our shows and blog over the past several months. Over the short run it clearly seems that the D's have it. I am not sure which D---Disinflation or Deflation---but inflation is at bay at the moment. But why? I am not normally the one to talk about the "conspiracy theory" but it seems to me that the strength of the dollar is virtually impossible to explain. Could the Treasury be buying dollars? They certainly could and I think they might be. I have no other explanation as to why we did not see the dollar decline today. I know the arguments--that other countries are diluting their currencies as fast as we are. But are they really? Are they really printing the number of dollars as a percentage of GDP that we are? I do not think so. Why did gold fall today---on a day when our financial stocks were the center of negative attention? Could the Treasury be selling gold and buying dollars---unless today turns out to be an anomaly and we see normalcy tomorrow--I would submit that they could very well be and when their actions end the dollar will fall and gold will rise.

So where are the markets headed and how do I plan to profit? That is a good question since I have mastered the art of losing in the past few months. I think that we have much more pain to go in the banking sector. All you hear from the mainstream media is that the credit markets are beginning to thaw---but will it be too late? I think we are going to see 2 classes of companies in the coming year---those that have the pristine balance sheets (and they will get very favorable interest rates) and those that are not so pristine (these companies will find a much higher cost of capital and may very well have a difficult time expanding or even surviving. We will be looking for companies on both ends of the extremes. I have mentioned FLR over and over again and I think today's downward price action gave investors a decent buying opportunity. FLR has tremendous cash flow and will has such diversity in the terms of the countries that they serve---they will continue to post profits to their bottom line and will benefit as we start to see the economies (domestic and international) begin to grow again.

On the other hand, I believe that Aarons Rents RNT. They have done very well as of late--beating estimates and raising forecasts---but I think this trade is overdone. It sounds good, but a rent company as the economy begins to weaken. But customers on the "lower end" that can't afford a washer and dryer, etc. might not do well as we see more and more layoffs. A former boss liked to remind his salesforce that sales aren't sales until they are converted to cash. If banks have been hammered for extending credit---how will the rental business fare much better over the long haul---especially when the long haul may very well include the worst economic slowdown in modern history.

Now don't take this paragraph is unpatriotic--but the dollar needs to fall. To get our workforce back to work--we need the boost that a reasonably weaker dollar would provide. We are not going to get that benefit if we see the dollar continue to strengthen. Many would argue that we must have a strong dollar---I would agree especially as oil prices climb. But oil prices are declining and now would be a great time for the dollar to give up about 15%.

I think we saw a bottom in natural gas today. I will consider adding to my UNG tomorrow with a stop at 21.75. I believe that we will see companies such as EOG begin to bounce as I can't see oil below $33 any more than I can see natural gas going much lower.

For those of you that haven't heard Larry Summers made comments to the effect that since the current recession is of a global nature we will work with foreign counterparts to fix the situation and craft the proper regulatory environment. WAIT A MINUTE DID HE SAY INTERNATIONAL REGULATION???? CAN YOU SAY NEW WORLD ORDER? Please tell me that he wasn't serious because if this comes to fruition we are all going to be in real trouble.

Gold and Platinum look like they may be poised to fall more---but are eventually going to offer a decent buying opportunity for investors. I still hold UDN as I think the dollar will weaken soon.

Good Luck!!!!