What Makes This Market Hard

The current market is tough to invest in for both longs and short. While there are overvalued companies, many companies seem to be priced reasonably relative to earnings estimates. The problem is that the economy and credit markets are being artificially propped up by governments and central banks around the World. Without this assistance it is doubtful that earnings prospects would be nearly as high.

As the past decade and economic history has taught us markets and economies will eventually go to where they want to and government tinkering can only work for so long. What would the current economic environment look like if governments and municipalities were not spending well in excess of what is sustainable? What would credit markets look like if governments were not artificially supporting them? How does one evaluate an economically sensitive company or a financial whose book value is highly dependent on credit markets?

For the short side the environment is just as tough. An unsustainable environment based on leverage lasted from 2003 through 2007. Who is to say the same thing could not happen again? What if money printing leads to inflation and the market is down in real terms but not in nominal terms?

I am finding it more and more difficult to find investment ideas and am in hit and run mode. I know it must be frustrating for readers with longer time frames seeing me making the bear case one week and the bull case the next. Unfortunately, it looks like the current environment is here to stay for a while.


nicasurfer said...

take a look at CHK, just an investment idea that i have been focusing on. Large short interest and not overvalued

Anonymous said...

My rule is simple: buy what's cheap. If nothing is cheap, then buy nothing (i.e. stay in cash equivalents).

For those who are willing to short, change cheap to expensive and buy to sell in the above rule. But I refuse to short when central banks everywhere are committed to fighting deflation, even though I think deflation is where we are heading.

The big hope for those betting on inflation is a major war somewhere, such as the Korean conflict somehow escalating into an all-out war between the US and China which leads to the sea lanes being blocked by submarines. That would cause a massive boom in the US as we were forced to reindustrialize. Otherwise, the whole world is going the way of Japan: falling yields, falling stock prices, low inflation, stagnant growth.