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Goldata Financial
Dedicated to above average returns in the stock market.
STOCK MARKET COMMENTARY
May 26, 2009
From Elliot
Goldberg, Registered Investment Advisor, Goldata
Financial
Last week, one of Dick Cheney’s comments
was the major influence on the market, although none of his verbal spars with
President Obama over terrorism was the one. I’m referring to his
comment, years ago, that “Deficits don’t matter” and they
didn’t until Thursday when S&P, a major ratings agency, decided to issue
a warning that the British may lose the AAA rating (highest) on their
sovereign debt if they keep racking up deficits at their current rate. Hours
later, Bill Gross of PIMCO, the bond king, trumped S&P by saying the U.S.
is right behind them for a potential future downgrade for the same reasons. This
got the market’s attention as most of the week’s early gains
vanished by week’s end. Especially
hit were financials whose game plan for revival is to rely on cheap money
(low borrowing costs) to lend at much higher rates. Even a perceived
reduction in Uncle’s credit quality puts a damper on the availability
and price of money as lenders ask for more to compensate for the reduction in
buying power when paid back and some borrows shy away as potential projects
become unattractive at higher rates. With the dollar down on these reports, gold,
oil and commodities stocks rose, continuing the trend identified here a few
weeks back and there is no reason to believe that this will not continue. The
bond market vigilantes, on hiatus since the 80’s, have started to send
out recruitment fliers as the 10-year Treasury closed at 3.45%, a new
post-crisis high yield. At the zenith of their strength, they will force the
Obama administration to scale back borrowing by raising its cost. Until then,
the drumbeats will get louder and louder, until they are headed. As stated in
previous missives, the vigilantes always win these fights. The good news in
this story is that credit continues to loosen and IPOs and secondaries continue to raise capital for their respective
firms. The much-watched volatility index, the VIX, peaked
its nose below 30 to great fanfare early on, only to high-tail it back above
32 after the above stories appeared. For those who consider our
government’s bailout of the major banks a necessity, consider the
real-world actions of Wilbur Ross, a major investor, and some of his cohorts
this past week. They bought a Florida bank, BankUnited,
from the FDIC after it failed, injected close to a billion dollars of private
capital and now have an entity (overnight) with a strong balance sheet that
can actually be a bank without concern about capital constraints or potential
failure. This was true capitalism at work and the thought here is that we
would be less in hock (AAA ratings are important) and much further along in
recovery had the government not kept the large banks on life support and just
let capitalism do its thing. Conclusion: Financials need to be watched
carefully, but opportunity for nice gains appear to be in the commodity-based
equities that meet our investment criteria as memories of two summers ago
(remember $140 oil?) lead to thoughts of staying long any commodity-based
positions, not stopped out. They have the capacity to amaze us on the upside.
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