The Mean Season

John Mauldin is an economic pundit I have been following for a number of years. He not only writes a weekly newsletter that is very informative but he also has many guest writers of equal note. Yesterday, he had Michael Levitt of HCM write for him and what he said about the U.S. economy should give one great pause.

“While many economic pundits are trying to predict the end of the American recession that began last summer, HCM regrets to inform everybody that the United States’ economy is entering hurricane season. And we don’t call it The Mean Season down here in Florida for nothing. The economic headwinds that have been buffeting the United States for the past several months are only increasing in velocity despite the Herculean efforts of the powers-that-be to bolster the system against collapse. At this point, the domestic economic picture can only be described as ominous. Energy prices have risen from dangerously high to prohibitively high. Housing prices are continuing to drop at alarming rates in many sections of the country. Banks remain reluctant to lend either to individuals or corporations for virtually any type of transaction. And our political and business elites remain a prosper of Hollow Men who continue to whistle past the graveyard as their limousines chauffeur them home each night to their gated mansions.”

I guess you can anticipate that he’s not bullish, huh? Now, I happen to be fairly bearish on financial and housing stocks but I do hope the Armageddon scenario he paints does not come to pass. It is largely up to our policy makers and financial leadership to make sure we do not enter a deflationary spiral. But, Levitt also sees trouble in Airlines, Autos and a host of other areas. His call on investment strategy?

In the credit markets, the best long-term opportunity is to take advantage of the dislocation in the market for leveraged bank loans. Despite some recovery in this market, loans of many attractive credits continue to trade at healthy discounts. The enormous disparity between technical conditions in this market and credit fundamentals that opened up last summer with the demise of the Structured Investment Vehicles (SIVs) remains extant and offers an opportunity to earn attractive risk-adjusted returns in the hands of a seasoned manager. In the equity markets, HCM would advise being more cautious due to the outsized presence of quant funds and other short-term oriented investors who have raised volatility to unhealthy levels. The energy sector remains attractive for those who believe, like HCM, that we are seeing the early stages of the Peak Oil thesis come to life. Companies contributing to the enormous buildup of infrastructure in the Middle East and Asia are also attractive. Financials should be avoided at all costs. Asian and other emerging markets are more attractive than the U.S., though in all cases we would consider stocks on a case-by-case basis.

Do read his stuff. It is quite thought-provoking.

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