Oil held steady on Monday. So did stock prices. Whether we actually get a rally, it’s clear that the market is waiting for the Senate to pass the stimulus bill and is eager to hear Treasury Secretary Geithner’s plan for dealing with banks’ impaired balance sheets.
I have to think that the stimulus plan is priced in to a large degree. The contents of the bill have been circulated. We know, basically, what the strengths and weaknesses of the bill are.
There are tax cuts. They’re not huge, but they put some money in people’s pockets. Not many think this money will hit the economy. Rather, it will likely pay bills, in the case of the unemployed, or be saved, in the case of the employed-but-nervous.
That’s actually a good thing. Savings, the capital base of U.S. citizens, needs to improve. And believe it or not, the savings rate for Americans has risen over the last couple of months. This is a critical component to getting the credit markets freed up to improve the economy.
*****Between 2002 and 2007, a lot of lending was supported by asset values, like homes. In some cases, proof of income wasn’t even necessary for a mortgage loan. That never ceases to amaze me.
Of course, as we’ve seen, home values can change. It’s not a good idea to base a loan on the full value of an asset that could actually fall 30%. And if there are no income savings to make up the gap, problems arise. It’s as if the U.S. economy were living paycheck to paycheck.
Lending must be supported by savings. And it could take a long time before savings reach a level where Americans and our banks are well-capitalized.
I can imagine a couple years of virtually stagnant growth as Americans re-prioritize and build their personal balance sheets. Of course, that will have some serious implications for certain economic sectors that depend on discretionary spending.
In light of the question from a reader that we had yesterday about casinos, they would be on top of my list here. I hear December was the worst month on record for Vegas and Atlantic City.
I would expect restaurants to suffer, along with attendance at professional sports games. I can see people choosing Safeway and Wal-Mart over Whole Foods and Nordstrom’s. And I don’t mean for a few months, either. This could go on for years.
*****I also see fundamental changes for the investment world. In particular, the mutual fund industry should suffer as ETFs grow in popularity. There’s always risk in investing. But there’s a difference between broad market risk and the risk of a particular stock or sector.
Buy-and-hold investing is supposed to lower risk through time, and mutual funds do it through diversification. But both leave you totally exposed to the market, all the time. And just as a rising tide lifts all boats, a receding tide drops them.
There have been strong sectors since the financial meltdown started. Biotech and health care, for instance. ETFs offer the flexibility to focus on strong sectors and minimize market risk.
*****Shifting gears a little, I want to say that Geithner better have some good ideas today. It seems that nationalization is not on the table. And I take this to mean that they are considering shareholder value in their bailout plans. That may or may not be a good thing.
One thing’s for sure – Geithner’s plan will need to attack the problem on a few fronts. A one-dimensional approach like the one used for TARP will lead to delays and a further erosion of confidence.
*****I understand that some of you were unable to attend last night’s video conference, Trademaster Investor Forum: Steady Profits in a Range Bound Market. TradeMaster strategist Jason Cimpl gave his outlook on sectors where you can make money, like gold miners and healthcare. Plus, he advised which sectors to avoid.
Jason addressed the all-important question – have stock prices bottomed? And he also revealed a few of his top stock recommendations.
So if you’d still like to get the latest investment insights from Jason, a replay of Trademaster Investor Forum: Steady Profits in a Range Bound Market is ready for you. You can access it HERE