Lets Talk Some Stocks

The way I look for stocks is somewhat of a three step process as I outlined below:

1. Get a Macro view of the economy in general
2. Find a sector which will logically or reasonably do well in the future economic picture
3. Follow and research several stocks buy or watch to see if they rally or if anyone else begins to talk about these stocks

So lets talk about where we are.

The markets have been in rally mode, the effect of massive government spending and the impact of the general realization that we are not courting financial collapse. The question is will the recovery take hold or will the spending run out and the problems that caused this recession re-emerge and send the world economy back into recession.

With cheap money and massive liquidity injections, not surprisingly, some sectors are doing well. Banking, atleast the depository portion is reaping large profits with fed rates so low. The spread between what they pay for money versus what they pay in interest to depositors is several hundred basis points. I have heard a few commenters mention this as a reason to buy
Bank of America or Citi.

OK, lets go back in time to see what happened. The last time this occurred was 2001, however it was a different world, at that time mortgages and housing boomed, not so this time. So scratch buying those stocks.

The last time the world was flooded with cheap money, apparently unaware to central bankers such as Greenspan, there was the build up of the shadow banking community, the securitization of debts, SIVs and the rest.

I don't really see any good reasons to buy financials, I know that some like Goldman Sacks is making money, I am not sure how. I know that financials are likely at generational lows, but it is hard to pick winners in this environment.

A thought, the last time interest rates where lowered in the 2000/2001 timeframe things became distorted, like housing.

What is being distorted this time by the presence of easy money?

The last time money was cheap, it was cheap and available to the consumer - not so in this cycle. Back then cheap money supported consumer durables such as autos or even airplane purchases. While that is not occurring in this market at this time, auto makers or manufactures in general may find themselves a stronger competitor due to reduced input costs and more market share due to the bankruptcy of competitors.

I believe that is a important theme to remember and to look for that in a variety of industries.

The last time we saw a bottom of the cycle we saw energy drop, spare capacity in electric demand, wipe out IPPs and some subsequent recovery in that market. The last cycle saw a slow build in energy prices due to emergence BRIC demand. Its hard to remember but that kinda of came out of the blue. Even when it was apparent other commodities didn’t rally till a year or two after oil prices began to rise.

Oil prices have risen, but the world is now on the hunt for renewables and energy effiency.

Input costs are now less for users of iron ore, costs are less for miners and manufacturers however so are the prices of their goods. However gold mining is in the sweet spot, mining costs are down, gold prices are up. Maybe we have found something that deserves more investigation. Over the last decade many have watched the rise of gold prices and in the past we would have seen the same rise in the rise of the stock price of gold miners, but we didn't. People who anticipated the rise in gold prices and bought the big gold miners didn't catch the wave. I believe this was due to the the gold ETFs now available.

But now gold miners may get the respect they deserve.

Tech never saw the recovery of the last cycle tech giants, but the emergence of something entirely new - Google.

Healthcare such as one of my favorites PFE has been a perennial wallflower, will the collapse of the Obamacare, bring on a rally in healthcare? Well see.