U.S STOCKS ARE DOWN FOR 3 VERY GOOD REASONS
1. Refco Capital Markets, which I believe to be one of the biggest over-the-counter derivatives firms, has serious problems. This company is a non-regulated arm of Refco, Inc., which handles over-the-counter transactions (derivatives), foreign exchange, fixed income trading and stock lending. In other words, they are active as a party to many derivative contracts. The Fed and every other central bank must act quickly to bail out this mess before it spreads. In my opinion, Jim Sinclair knows as much about this problem as anyone, and is the most truthful person on earth about the magnitude and potentially devastating effects of a derivatives failure. Everyone should go to www.jsmineset.com and read Jim’s article entitled “Run On Major Financial Entity Occurs”, which he published October 13, 2005.
2. Interest rates are rising.
3. Corporate profits for most stocks are declining. The exceptions are U.S. energy stocks, gold mining stocks, and the capital goods companies supplying the extractive industries like mining, energy and some medical.
If interest rates rise, alternative investments like T-bills and other income generating instruments, such as short-term bonds, rise in yield and offer better competition to the interest sensitive buyer.
If corporate profits fall due to higher interest rates (which increases the cost of capital to hold inventories and make capital investments) and increased energy costs, profits and dividends fall, and people move out of stocks to seek better returns elsewhere. Stocks lose investors and decline.
WE HAVE A VERY SHORT LIST OF US INDUSTRIES WHERE WE SEE CORPORATE PROFITS RISING AND STAYING UP FOR A WHILE
As we have been saying for a long time we do not like consumer stocks. We have also been saying, that the only sectors that we like in the U.S. are energy, energy services, gold and medical related companies. It is simplistic but true to say that America is aging rapidly, therefore the consumption of services for medical treatment is rising. It looks like the Refco problem is beginning to create a panic, much like several we have seen in the last 30 years. The last one was the Asian contagion / Russian debt default of 1998. Such panics have historically led to buying opportunities. We will buy stocks in the above groups as they get cheap and oversold during the panic.
WE WOULD NOT BE SURPRISED TO SEE THE CURRENT DECLINE IN U.S. STOCKS END IN 2006
The market might be in for a big rise if current problems can be solved. The ensuing stock market rise will probably be accompanied by a decline of the U.S. currency. We have noticed that the early stages of a stock market rise are often correlated with a decline in the currency of that country.
WE ARE EXCITED TO SEE STOCKS GETTING CHEAP
At this time, we are not buying U.S. stocks, except in the aforementioned industries. However, we think it is time to start a shopping list. We may not be buying for a few months, but having a shopping list is always wise. We are looking for growth stocks that get cheap and become unloved.