Monday, March 26, 2007

Two Tribes Go To War

There appears to be two investment camps in global equity markets. Who has more power? You decide.

Hard Landing Camp - This group believe that the US subprime shit will hit the fan and everyone will get some in the eye. They are bears and they keep shouting that we all need to be very afraid. Pessimists maybe but nonetheless they have more substance than Dr. Doom Marc Faber. They don't think US hosuing market has bottomed out, in fact it has a lot more downside to it. They also believe that sub prime lending has also crept into some prime lending areas over the last 12-18 months. They also think the housing recession will affect other areas of the economy. Most importantly, this camp believe the US hard landing will affect global markets as well. Believe housing bubble is a global problem. They see slowing growth and rising inflation which is stagflation in the US ... and to add a bummer into the works, a collapsing US dollar which can cause all markets to be in a tailspin as that would also cause the yen carry trade to reverse.

Soft Landing Camp - Believes the subprime is mostly self contained. Much of risk has been spread around to brokers, mutual funds and banks who bought the repackaged loans. Federal Reserve will now be pushed to reduce rates aggressively for the rest of the year. Believes a soft landing in the US and also the decoupling of US and global markets, especially Asia. While housing will slow and property prices may end 2007 down 10%, the firm labour markets will help ensure a soft landing scenario.

My Take - I am more in the Soft Landing Crap err.. I mean Camp. I do believe there is a problem in US housing and that a 10% dip in prices is almost inevitable, but seriously look at the comparative gains in housing over the last 3 years in the US, there's plenty of equity still. It is also a common fallacy to think that Americans have a poor savings rate, hence their trade deficit problem is magnified in terms of consequences. However, that does not take into account housing equity in the US, where the bulk of American savings is located. Sure, speculators on their second and third property will feel the heat but will be a limited grouping. The hard landing group seems to be made up of a lot of people who have MISSED out on the equity rally over the last 12 months, and now have their half-empty glasses to cry wolf over! There is a lot of fear in many of their opinions. Sigh!

Markets will decouple soon with the Fed lowering rates and the ECB raising rates again soon. This will give rise to an area where currency is strong, growth is strong as well - the emerging markets and Asia in particular.
Things that I am comfortable with (which I have oftened mentioned in my previous blogs): more private equity M&A activity bringing up valuations; same event causing a shrinking of scrips; an aggregation of funds in investing; company earnings growth and margins intact; a lowering rates environment; pre-election year... second stage of a super bull market.

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