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Monday, August 24, 2009

Why I find it hard to go long stocks

I have minimal shorts, and may ADD to my gold miners (we will see).
Just wanted to orate/document why I am having a hard time going long this market.

1) Latest US asset bubble was Real Estate, and I find it hard to believe the real estate bubble can return to 2006 highs. Banks won't give out 700K loans with zero proof of employment (that's good), but that means the over-extension of real estate can't surpass previous one in the near future. Further, Commercial Real estate is about to face a cliff dive, and home valuations are FAR from the historical mean. Home foreclosures is about to skyrocket, not retreat. (click)

2) The Stock Market's purpose is to reflect the valuation of companies. It has been distorted by politicians as the proof the US economy is doing well. Billions (if not trillions) has been spent to inflate the market, and very little spent to change fundamentals of financial businesses. This is just yet another asset bubble waiting to burst. (54% gain in 6 months)

3) Unemployment is over 12%, if you include people on unemployment AND federal extended unemployment benefits. The US economy is 70% consumption.

4) Energy costs are rising, not falling, as oil hits 74 a barrel. With new Obama "carbon trading" adding costs to energy, as basic costs go up, this will hurt business and employment.

5) REAL losses have been taken in the real estate sector. Banks have not recognized these losses. If the US government "absorbs" the losses, the losses must manifest someplace. It is not possible to just "avoid" losses. These losses can manifest in other areas such as USD devaluation, higher interest rates, etc. All of which will hurt business.

6) Look at the Fundamentals of businesses. In "good times" your financial advisor will say buy a stock based on fundamentals. In times like this, the reason to buy is "get in while cheap". If you look at business fundamentals, they are horrible. The market is over-valued for the current economy.

7) The government has spent YTD 2.5 Trillion dollars, with 1.2 Trillion deficit spending. You read that right, and we have another 4 months to go. At some point the US can't deficit spend at this level, and when it stops, the economy will get much worse. You can't create propserity through debt! (click)

Think about that a second, the US spendign 2.5 trillion dollars YTD, that is part of the reason why the stock market is rising. This isn't on fundamental strength.

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