As I searched for ideas at the close of market on Monday in the midst of the Bear Stearns mess, a few things occurred to me. The first was that I believe Wall Street has gotten myopic in its view of the world and the markets. All the focus is on the Federal Reserve and their actions.
Ignoring the Numbers
There were several important economic reports issued Monday that were totally ignored by the wise men of the Street. Factory production and output reports indicated that the economy is running at recessionary levels, output was at the lowest level in two years as activity and mines, factories and utilities fell a much deeper than expected 0.5%. Manufacturing activity also fell, despite the belief that the sector would be helped by a weak dollar. The Empire state gauge of manufacturing activity in the northeastern United Sates was also released and was at the lowest levels since November of 2001.
Another report released Monday also blew a hole in the weak-dollar-will-be-good theory being offered by economic and market bulls. Foreigners are not stepping up to buy U.S. goods and assets in any meaningful way. Net foreign capital inflows dropped almost 50% last month to just $37.4 billion. This is far short of the $58 billion trade deficit and will likely lead to still more selling in the dollar against major foreign currencies. The overseas view seems to be that our economy is so bad, it is just not cheap enough to buy yet. This does not bode well for asset and stock prices in the near term.
A Silver Lining?
The second thought that ran through my mind was that there has to be some sort of opportunity in this type of mess. I think there is. The most obvious is to short longer-tem government bonds. There is still inflation in the system, and that is going to have a negative impact on 20-year-plus maturity bonds.
At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.
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