2008 vs. 2011: “Same Same But Different”

“Same same but different” is a saying I learned from some Singaporean friends – and that’s how 2008 vs 2011 feels like.

  1. For starters the bi-partisan government continues to play a negative role in the markets (remember when a divided government was actually viewed as a positive?), we saw it with TARP and we are seeing it with the debt-ceiling debate.
  2. In 2008 banks capital was under pressure due to bad mortgage loans carried on the books, today banks are under pressure due to the lawsuits (large liability) that are coming from all sides (including the government, which seems almost comical since they will be shooting themselves in the foot), and of course we are starting to see a run on European banks, especially France, which is not very reassuring.
  3. European stock exchanges are talking about banning short selling – remember what happened in the US markets last time this happened? In my opinion it didn’t stop the bleeding and actually shined a bright spotlight on the weakness in that sector.

Regarding all the information we have had in the last few weeks, I think the most important one is the fact that economic forecasting has become more negative. As the FOMC meeting mentioned today, the risk to the downside in the economy has increased – that pretty much sets the tone for employment and economic activity in the medium term.

What is different is that corporations have used the time since 2008 to improve margins and strengthen balance sheets, something that will now be tested due to the slowdown in the macro front. Surprising we are still seeing some M&A activity in the markets, which usually indicate that large cash rich companies are thinking of longer term strategies. Jamie Dimon, CEO of JPM, on a bus tour in California this week basically is telling his employees and small business owners to put their heads down and get to work – sound advice. For now a loss of the AAA US rating has to be viewed differently than an actually default by Lehman Brothers.

As a Fundamental Trader, I continue to position myself with a negative outlook from the top down analysis, which indicates that you cannot be fully invested in the equity markets right now. Everybody needs to have a counter that indicates if they should be 100% invested, 75%, 50% 25%, or totally in cash. The bottom up analysis has also been damaged as the increase in the VIX volatility makes it very difficult to hold on to positions – all three new positions from last week have been stopped out (BAX, PM, and CMCSA) or reduced. When the market sentiment takes over, all stocks suffer; even strong dividend names with strong balance sheets get sold. The VIX is usually the best indicator of when the beta of the market will trounce the alpha of quality companies. The main reason is that funds and individuals have to sell anything available to meet margin requirements or to cover losses. Raising cash and doing homework for when the VIX index starts to decline is your best use of time under these conditions.

By: Mario E. Carias, CFA

Disclosure: No relevant positions

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