Friday, January 11, 2008

Down Express

It looks like the economic slowdown is starting to affect the credit card companies. Yesterday Capital One set aside $1.9 billion to cover bad loans in the 4th quarter. The bad loans come from the credit card division as well as the mortgage division. After the close yesterday, American Express announced that it was taking a charge of $440 million to cover loan losses. Both companies are expecting earnings to be up this year but significantly less than Wall Street was expecting.

Merrill Lynch is also rumored to be set to write off another $15 billion but ironically the stock is up on the day. It is often a sign of a bottom when a company reports bad news and the stock goes up, but I'm still not ready to make a commitment to the financials. Even if this is the bottom, I suspect there will be plenty of opportunities to take positions. When a sector gets hit this hard it rarely makes a V bottom; more likely is several months (at least) where the sector trades sideways and builds a base. Patience is a virtue in this case.

Gold hit another new high today. Last I checked the high was around $899. The gold stocks (we have clients who own GG and AEM) have been one of the best performing groups so far this year, but the enthusiasm for them may be starting to get overdone. These are not cheap stocks and everybody seems to love them. That makes me nervous, but for now we're sticking with our positions.

Commodities and commodity stocks may both be getting ready for some kind of correction. The Goldman Sachs Commodity index is struggling a bit near its highs as oil comes off. Energy is a big part of the index. The DJ-AIG index is performing better with a bigger weighting in the agricultural commodities. The thing that worries me about these is the rampant bullishness. Everybody, it seems, is bullish on commodities and everybody is bearish on the dollar. At some point one has to wonder who is left to buy...

The flip side of that is the stock market. I haven't seen the sentiment so negative since the bottom in 2002. Calling for a recession this year places one firmly in the crowd. I've said for over a year now that housing would not be enough to cause a recession; that has proved true to this point, but it's getting hard to swim against the current. Is it possible that everyone expecting a recession actually causes one?

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