Danger Is Around Every Corner

We have finally concluded that the stock and bond markets are at a point that is the most dangerous they have been in years.

Let’s look at some of the recent data.  3 weeks ago we got a surprisingly soft employment report–horrendously bad. Then we followed that up last week with a GDP report of plus .2%–what a disaster!!  

At the time that crude oil was tumbling hard all we heard from the talking heads was that the global consumer was getting a huge ‘tax break’. At the time we opined that we thought the damage done by low crude prices would be larger than the benefit gained from the so called ‘tax cut’. It appears we were correct–the ‘tax break’ has not helped at all–or at least not enough for anyone to measure and the damages from oil field cutbacks are still reverberating through the economy.  The depth of the damage is now more apparent as locally the Donaldson Corp, a maker of filters of all sorts, announced that sales were droppingas the cut backs in the energy arena are starting to bite hard. Already there have been huge layoffs of workers on the iron range of Minnesota as demand for steel has dropped, at least partially attributed to the energy field.  So much for the ‘tax cuts’.   Recently as oil prices have moved somewhat higher the price of gasoline at the pump has moved to $2.60/gallon in Minnesota–up dramatically from a low of around $1.90—I guess we should call this a ‘tax hike’.

Now as the economy appears to be heading south, we have interest rates rising.  Rising rates strengthen the dollar which makes our exports too expensive to the rest of the world.  We have seen the issues this causes with tepid sales and earnings of our domestic multinational corporations and just today we saw a huge jump in the trade deficit as imports poured into the U.S.

This Friday we will have new employment numbers—if they are soft it means we are in real trouble.  Remember that the FED is looking to raise short rates in the months ahead–not lower rates.  What will they do if the U.S. teeters on the brink of recession–which may in fact be where we are heading.

So the bottom line is this.  We have tremendous economic cross currents and with each day that passes we appear to be reaching the point where we will be boxed into a corner (economically speaking).  We would not be surprised if sometime in the next 30 days we get a huge (I mean multiple days with 300-500 Dow point drops) market drops.

If you noticed today REITs were down 2.2%–we have tried to impress upon our readers that REITs are in a heap of trouble–not that their FFO (funds from operations–a measure primarily used by REITs) will dry up, but it doesn’t have to for share prices to drop by huge amounts. Prices will trade on expectations for the future and if the economy weakens and interest rates rise it is a recipe for tough times for REITs. At the same time the utility sector has been taking a shellacking and today was no exception as share prices fell 2-3%.  There are bargains in the making.

So what do we do???  We want bargains—we want bargains at much lower prices and much higher yields from both the Utility and REIT sectors, but in order to capture some bargains in a few months we need CASH.  Our cash position is standing just under 10% now—we want dry powder of 20%.  We have tried damned hard to stay near fully invested–you can’t win by being in all cash, but we also realize that problem areas shouldn’t be held (at least what we believe are problem areas).

So tomorrow (Wednesday) we will cut back more REIT issues, our 1 utility stock (Southern Company) will be sold and we are studying our common stocks looking for a sale candidate.  We don’t expect to get to a 20% cash position tomorrow, but we will get a start.

We will continue to look for super bargains like the NGL Energy (ticker:NGL) issue we bought 10 days ago (up another 3% today).  We are really patient folks so if need be we will hold cash for months waiting for bargains to arrive.