Ok, so let's recap, TSM has been at this blog thing for 2 months now (slightly under I guess), but the investment thesis and economic perspective has remained unchanged and consistent. Essentially that the economy stinks (real creative bold call, right?). No really, no seriously. TSM just doesn't see/understand the 8500 mark on the Dow and is a fan of something more along the mid 7000 level. Today the Dow is around 8400; for 2 months its tried to beat 8500 and can't seem to do it. Perhaps with earnings season coming up and companies raising guidance for 3Q and 4Q 2009, but TSM just thinks that the economy stinks - despite our constant hearing of green shoots and return to growth and then inflation (which is semi-good because it goes with growth), blah blah blah.
What TSM sees is a financial system that was saved from melt-down, albeit with some timely refi earnings, some helpful mark-to-market suspension accounting, some major bailout money to recapitalize their truly bankrupt status, and stabilized confidence in the fact that they won't be going away. What's next? Banks that are going to fight these toxic assets on their sheets, continued tightened credit and low lending levels, less refi activity and earnings from market investments as interest rates stay at current levels (meaning mortgages above 5%) and markets maintain sideways action. Continued loan losses from residential and now commercial investments. Basically, banks aren't going anywhere but they aren't going anywhere (upside) for that matter.
TSM also sees a consumer driven economy that no longer has a consumer. 70% of GDP from consumers that had a NEGATIVE savings rate?!! yikes! Now consumers have a savings rate of around 6% and if that goes to 10% (we hope it does), then GDP takes a serious hit - probably 3-4% annually. So that means if prior annual GDP was 4% (very strong by the way), it would now be 0%.
Is the consumer going to turn around and spend (even though it shouldnt)? Doubtful. Unemployment is so high but more importantly, companies aren't going to start hiring anytime soon. So even if job losses plateau, people aren't going to get hired. That means people are tight financially bc they can't pay bills. This means companies don't make as much and GDP stays low. Unemployment is a serious serious problem that will be around for years and wont return to the 6% level until 2011 or later. Not to mention that while unemployment is reported at 9.6% currently, the ACTUAL level of unemployment is closer to 20% (part time workers who take jobs out of necessity and, thus, are 'employed' and people who dont even claim to be looking for a job despite being unemployed -- neither are included in the 9.6% number).
What about corporate profits? Earnings season starts next week and expectations are for not great results but for improved guidance from companies for 3Q and 4Q 2009. Yeah, true, TSM expects to see companies move back into the black and possibly see a multi-month rally based on the positivity. But TSM doesn't play rallies or trends, it calls what it sees, and it sees companies moving back into the black due to cost cutting (including firing employees), NOT because of increased sales and actual expansion or growth. This is a significant difference. So while GDP is expected to increase and be positive in 3Q and 4Q (and even TSM sees it positive in the 4Q although minimally so - below 2%), that does not a recovery make.
Additional thoughts and headwinds... Emerging markets to lead us out of this mess and their recent growth? It's a growing sentiment that the commodities rally and China's growth has largely come from stock piling commodities and raising inventories. This is a short term blip. While TSM still loves oil, PBR, and China - even this action is ready for a longer-term pause.
Are states the new banks? As California (and a number of other states, most all really) face fiscal meltdowns and seek federal help, will they be bailed out. Kudos to IN for cutting costs and making sacrifices, not dipping into a sizeable savings it will need even moreso down the road, and not needing federal aid (yet). But as unemployment benefits, school funding, and debt raising all continue to suffer, how long can states shoulder those burden before they begin asking the government for help - and if you help one (cough, cough Cali), then you're going to have 49 others in line. The 48 smallest states account for a budget shortfall of about $166 billion.
Another stimulus? Its generally accepted that the last stimulus (whether you believe in them or not) has helped but isn't a cure. Stimulus programs can be a bump to try and get you to better times where the private market creates actual growth (altho thats a risky and unnecessary bet at times too), but if we're saying another stimulus may be in order to help home buying and hiring and debt in general, then it's clear that the economy isn't going anywhere anytime soon. Not to mention, how can a nation that already has a debt level of 10% of GDP afford another stimulus? Pretty soon you get into topics like - losing your AAA rating on your debt and reserve currency replacement (which both would be strong blows to US "supremacy" and leadership).
There are more thoughts but this post is already getting to long --- so here's to say that 8500 on the Dow still seems like the roof for TSM on accurate economic valuation. TSM likes the low 7000 level better. Would TSM be suprised to see the rally in fall of 2009? No. But TSM would bet that when we look at the markets in early or mid 2010, they'll be back at this level if not lower - and who wants to park money in markets that are going to earn you 0% (or lose you money) over the span of 18 months?