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7/11/2012 7:51 AM
An American Elegy
By Charles Payne, CEO & Principal Analyst
Yet once more, O ye laurels, and once more
Ye Myrtles brown, with ivy never sere,
I come to pluck your berries harsh and crude,
And with forced fingers rude,
shatter your leaves before the mellowing year.
Bitter constraint and sad occasion dear
Compels me to disturb your season due,
for Lycidas is dead, dead in his prime.
Who would not sing and build the lofty rhyme.
He must not float upon his watery bier
Unwept, and welter to the parching wind
Without the meed of some melodious tear.
Although this pastoral elegy was in reaction to the death of a friend who died too young, it does recall Lycidas, from a story told by Herodotus. An Athenian envoy, Lycidas delivered a message from Persian King Xerxes and his ambassadors telling the Athenians to surrender. Despite the siege and feeling of imminent demise, the thought of sacrificing their freedom angered the citizens so much they stoned the young man to death (Upon learning what happened and without provocation, the women of the town marched to Lycidas' house and stoned his wife and children to death).
Yesterday, the stock market made a sharp intraday reversal to the downside, erasing a strong start that in which the Dow jumped more than 80 points early in the session. News from companies like Cummins Engine (CMI), one of my favorite names, got smacked on news that the US is slowing; that Brazil, China, and India are not coming on as fast as anticipated; and that the dollar is too strong. While none of this is exactly news, the stock got hammered (we have a long position in the model portfolio) because it only heightens a sense of helplessness. It feels like siege not unlike the one Athenians were enduring when offered a chance to succumb.
Sadly, a determination to live free or die has been replaced with a greater willingness to live under conditions where pride takes a backseat to the easy way out and freebies. The economy and politics are intertwined in the worst kind of way these days as the former is being held hostage by the latter. But what's holding politics hostage? It's a kind of gutless reaction to adversity that's transforming a nation of warriors into a nest of baby chicks unable to fend for themselves. Sure, the Cummins news reflects a world hampered by miscues and refusals to deal wisely and dare I say, painfully, with predicaments. But in the end, it's America's leadership that's really hurting our stock market and not healing the global markets.
The value of great business names means little right now, as they remain vulnerable, to a war they've never seen before, while citizens consider giving up freedoms (one of the greatest is the freedom to be great and extraordinary) for freebies.
We are in the midst of an American elegy, and I weep melodious tears.
Earning Season and Riding It Out
We asked subscribers to take profits on a couple of positions yesterday, weeks ahead of schedule because I can't have too many names under water. This is a dilemma. Over the last two decades the same pattern has reoccurred. Markets get hit, people either hold losers but don't buy anything on weakness, or they sell into the lows and say never again. I've dealt with this so many times, watching names that were hammered rebound, and after asking subscribers to take profits learn they already sold- at a loss. But this is a tough market, and the mental toll is as high as the financial toll. Despite the strong start to the year, the current pressure is tough to handle.
On that note, it's best to look under the hood and understand what you own. At some point Cummins will rebound, but it's not the company that's the issue.
Earning season has begun with the wrong kind of bang, with eight of the first ten companies reporting missing or offering poor guidance. Some of these names have to be sold at a loss and others have to be put on a shelf. Although any company that warns, I wouldn't be looking to pinpoint the bottom anytime soon. But, the broader market weakness does present opportunities. Make sure you have cash on hand to take advantage.
More than anything else you must be wary of taking emotional losses. I recently had a woman tell me she didn't like McDonald's because it wasn't growing. I asked how she came to that conclusion, and she used the stock as evidence. Stock movement can be a harbinger of things to come, but these days it reflects a short-sightedness that ignores long term fundamentals. Nobody likes to take a paper loss yet that is part of investing in this period. The point is to be in stocks before they make the big moves higher and avoid the true sin of investing-buying at the top.
Markets seem happy with news from Spain of further austerity. A series of actions equals 65.0 billion in austerity with the goal of bringing down debt and resetting the economy. I don't consider higher taxes to be austerity, which should be focused on government spending and incentives for private sector investment. Be that as it may, here are some of parts of the package:
Standard VAT goes to 21% from 18%
Lowered VAT goes to 10% from 8%
Jobless benefits cut on new claims
State worker salaries cut 7%
Eliminate property tax breaks
Privatize airports, rail and ports
The list above is what happens when a welfare state runs out of money. It also underscores how government spending in the past was a mistake along with giant salaries and pensions paid to government workers. If Spain is too far for you to connect the dots or get the point, then consider San Bernardino California. The third California city in the past month to choose bankruptcy, San Bernardino can't meet its obligations and has already begun to stiff vendors.
Once again futures are higher but not convincing. You have to pay attention, but we should keep our powder dry at the open.
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