Michael Phelps remains, The Man. Phelps became the most decorated athlete in Olympic history last night, winning his 10th and 11th gold medals. He has 3 more events to swim, and he won’t be doing it naked. As Warren Buffett said in his 2001 Chairman’s Letter, “you only find out who is swimming naked when the tide goes out."
“Naked” short selling, as the Street likes to call it, quickly became public shareholder enemy #1 of all things US Financials, allegedly. Yesterday, the SEC dropped its month long ban on short selling provisions however, and the tide rolled out on the levered long community again. The S&P 500 closed out the day at 1289, after drowning for a -1.8% down move from where I issued my “Trade” sell signal at 1312 the day prior. Call me lucky, or call me right – I’m happy to have my swim trunks on. Keep a “Trade” a trade.
Who’s naked now? Who will be revealed as naked next? Only time will tell, but the Japanese government gets no medals from me here this morning. I have been pounding on this country more aggressively than any other as of late because it has fallen so far from the shores of free market capitalism that it is putting the global economy at risk.
Japan is the world’s 2nd largest economy, and sometimes people forget that. Wall Street had some of the levered long lemmings convinced that, during the “its global this time” peaks of 2007, that the “BRIC’s” were going to take them and their chariots of consensus to the Olympic podium in 2008. Brazil and Russia (B + R in BRIC) have sunk -27% and -28% since May 2008 alone. Check that spelling, it’s “BRICK”, and the theme has sunk to the bottom of the pool like one.
Japan’s GDP growth was reported overnight at down -2.4% for Q2 of 2008. This economic deceleration is shockingly negative when considering that Japan grew +3.2% in Q1. We flashed the “Japanese Stagflation” chart in the portal yesterday. When Producer Price inflation is running +7%, and economic growth is negative like it is being reported now, there is no “bottom” to where this country’s equity valuations can go.
Year over year export growth in two of Asia’s largest island economies is now NEGATIVE. Japan and Singapore are EXPORT led economies. This is not trivial. However, for whatever reason, every other day I see a Wall Street buy recommendation on a shipping stock. I even saw the launch of a shipping “SPAC” (special purpose acquisition company) a few weeks back! Names like Dry Ships (DRYS) look cheap. Sure. So did Bear and Lehman before they lost all of their cash flow. Being levered long cyclical businesses who are levered to the world slowing down, materially, is the next scary movie coming to a theater near you.
US commodity driven inflation has certainly deflated in the last month. The CRB Commodities Index is down -19% in a straight line, and we can all see the crude oil quote on CNBC. This has buoyed US stocks for a “Trade”, but is quickly morphing into consensus. What is not consensus is the potential tail risk associated with a meaningful slowdown in global growth. If it was consensus, Japan wouldn’t have had its largest down day since August 1st last night.
In a global “growth” slowdown environment, Warren Buffett is one of the few investors in this world who can truly be a “value” investor. He is one of the few out there who has unlimited duration on his investments. He is also carrying a 47% cash equivalent position right now, by the way.
Any hedge fund product that needs to report weekly and monthly returns is being revealed for what it is. Investment products with tight duration constraints are called “momentum” strategies, not “value”. My definition of value incorporates time as a factor. That time clock is ticking. The world is slowing. Don’t get caught swimming naked as this tide rolls out.
KM