Another brutal market day. Three brief observations:
1) stocks are trading on fear, so by definition much of this action is irrational; bonds now look extremely expensive and stocks look cheap on a relative basis. Companies are set for a slowdown: they have cut costs, not hired anyone, and have huge amounts of cash.
I'll give you an example: look at Starbucks . They are talking about mid-single digit same store sales next year...how? They're in much better shape than 3 years ago. They have gotten out of bad stores (closed 475 stores in 2008, 57 last year, 34 this year...out of 6,600 stores in the U.S.). They have increased their international presence, increased their direct to consumer business with K Cups, taken out a lot of costs...they can clearly weather a slowdown better. All this, with higher commodity costs (coffee prices went up).
2) fear can predominate for a short while, but ultimately, stocks trade on a multiple of earnings.
Up until the second quarter, we had been in a rising profit environment. The events of the past three weeks are casting that rising profit environment into doubt; no one can agree exactly what the "E" in P/E (price/earnings) should be right now (see my previous post).
3) professional traders are pressing the European banks and . I hear vague mumblings that "the bailout isn't big enough," yet the ECB appears to be moving toward an almost open-ended committment to backstop sovereign debt.
Mark my words: three or six months from now we will find out that many of those macro hedge funds that are down 10 or 20 percent so far this year have reversed all their bad luck and ended 2011 positive because they shorted the hell out of European banks and European .
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