A mountain of debt and the investor’s dilemma
A year after the market crash, we continue to be racked with debt, says KeyStone’s Small-Cap Stock Report, but there are still well priced stocks to buy.
In case you’ve forgotten — and who wouldn’t want to forget? — it was a year ago that the markets hit the skids.
Nobody really wants to reopen that wound again. Still, it is well worth gauging how far we’ve come since then and how far we have to go.
One group of analysts thinks we still have a long weary road to travel. We face a mountain of debt as formidable as any we have seen in history. And that raises a dilemma for investors — save or spend?
These experts haven’t stopped buying. But they have no intention of buying stocks unless they are very advantageously priced.
We take a few lessons on the crisis from KeyStone’s Small-Cap Stock Report, a Canadian advisory published by an independent research team. Then we see whether we might want to put some money in China.
We begin with the eternal argument between the bulls and the bears.
The bulls and Dr. Doom
In a Wall Street world in which compensation is king, “there are almost always more bulls than bears, save for the darkest of days,” says this advisory.
Today, with the S&P 500 Index up substantially from its 52-week lows, the bulls outnumber the bears. The bullish argument is a familiar one.
There are “gobs of liquidity” injected by government stimulus spending, “trillions of dollars” waiting on the sidelines just itching to be spent and a welcome environment of low interest rates and low inflation. Add to that the cost cutting measures of corporate America, and earnings are bound to increase in upcoming quarters.
Bears such as “Dr. Doom” – Mr. Nouriel Roubini — and financier George Soros paint another picture. The markets have risen too far, too fast. Several big U.S. banks are basically bankrupt. The job market is still very weak.
So who is right? Think of it this way, says the advisory. The way into the crisis, and the way out, both follow the same path. It’s all about debt.
Bogus growth
We know that in the run-up to this crisis, greed did not turn out to be good. The attempt to create profits out of enormous piles of debt amounted to trying to turn straw into gold. It didn’t work.
What it means today is that banks, consumers, companies and governments — everybody, really — has to cut down on debt.
One figure underlines just how serious things are. The ratio of debt to Gross Domestic Product (GDP) in the U.S. tells a hair-raising tale.
With the exception of the years of the Great Depression, the U.S. had always held less than 200 per cent of its GDP in debt. But in 1985, the advisory says, “we violated that barrier and have never looked back.”
In short, this problem has been festering for 25 years. More than that, it leads us to question the nature of our much-vaunted economic growth.
Look carefully, this advisory states, and you see “that all of our global economic growth was fictitious; an illusion of debt.” Consider that debt has been growing six times faster than GDP and you can see just how “bogus” the recent growth really was.
The great de-leveraging
As far as this advisory is concerned, the “great de-leveraging,” the reduction of debt, ought to have started as soon as the crisis hit. Companies should have been allowed to fail, while consumers made the switch from living above their means to below them.
This would have curtailed growth for several years, but it would eventually have restored sanity to the economy and the markets.
But governments thought otherwise, pumping trillions into the system to keep it from collapsing. That may stimulate the economy in the short run, but it is liable to depress growth over time, the advisory fears.
How do these analysts see the immediate future?
Where savings are high
“It is our view that the markets could use a correction,” say these small-cap specialists, but they will be buying. Not blindly, however.
They will add only quality names that are trading at a deep discount or those “babies that got thrown out with the bath water” — perfectly good stocks that went down through no fault of their own.
They will be wary of earnings that are bound to look better than last year’s results. Those earnings are pricing in a recovery that may not be as robust as many people think.
For long-term growth they continue to look at emerging markets such as China — where savings rates are still high. “We continue to stick with North American listed companies doing business in China with strong balance sheets and limited export exposure.”
One is fertilizer firm China Agritech Inc. (NASDQ-CAGC), which may be almost too good to keep now, says the advisory. Its revised figures show this year’s net revenues coming in $10 million higher than expected.
The shares rose almost 40 per cent on the news. Since the stock almost doubled from the advisory’s original recommendation, long-time shareholders may wish to take some short-term profits. “Alternatively, as we believe the company possesses solid long-term value, one could choose to sell half their position, removing all your initial capital risk, and hold the remainder for growth in 2010.”
The message is a little different for another Chinese stock, Asia Bio-Chem Group (TSX/V-ABC). The advisory issued a “re-buy” on the stock in September, and it moved up sharply. This maker of cornstarch — a vital element in food, chemicals and pharmaceuticals in China — is nearing completion of a big corn plant in Daqing.
“Despite the strong move, we continue to stay the course,” says the advisory. Revenues will soar with the new plant. It’s still a buy.
As we try to save our way through this mountain of debt, we can still spend on stocks, says this advisory. But only if we buy stocks that are trading below their means.
|
E-mail this article
Printer-Friendly
