October 1, 2002
Military Boot Orders in Limbo
The ‘war on terrorism’ has fueled a jump in military spending. Further, such spending is unlikely to slow in the coming months and years as the U.S. continues to spend money safeguarding its borders and possibility attacking Iraq. However, recent military contract announcements suggest one thing: after record orders late last year the U.S. military has enough boots, at least for the moment.
Wellco was awarded a $5.2 contract yesterday for an ‘indefinite-quantity’ of boots for the U.S. Army, Air Force, and Marine Corp. The contract announcement is good news for Wellco shareholders, who had been waiting since August to see what business, if any, their company would be doing in the future. However, the amounts are smaller than previously announced contracts in April 2002 and late 2001. As such, unless the U.S. attacks Iraq and/or expands its military presence in general, near term demand for Wellco products may decline. In sum, while obviously good news, the contract award may not be enough for Wellco to maintain its 9/11 share price spike.
Others companies receiving similar orders for boots yesterday included Altama Delta Corporation (private) and McRae Industries, Inc.
September 30, 2002
October Will Be Volatile
Reggie Jackson has a World Season batting average of .357 or 95 points above his regular season average. Thanks to his playoff heroics Mr. Jackson is known as Mr. October.
Todd and I firmly believe that the markets are on the verge of shakeout. Further, we foresee the Fed having to enact an emergency, and possible intermeeting, rate cut(s) before year end. We base our opinion on a series of interrelated speculations:
1) The next four months are historically (last decade) some of the weakest for auto sales (BEA), and 3 of the next 4 months rank 1-2-3 as the worst layoff months (C,G &C). This does not bode well for the U.S. economy which is feeding off of auto strength and creating few new jobs.
2) The U.S. consumer is, and will continue to adjust their spending habits. The refinancing miracle is nearing a wall and confidence (along with the markets) is sliding.
3) Stock prices continue to price in a rebound in both the economy and earnings. Corporate earnings estimates still have further to drop (particularly 4Q02 estimates), and this will strangle already fragile confidence.
Beyond these speculations, we are optimistic that a war induced collapse, if one should arrive, would not be as damaging as a possible implosion induced sell off. To be sure, the Iraq story carries with it many potentially sinister subplots, but unless these subplots come to pass an Iraq war is not a stock market negative. That Saddam does something to aggravate the situation and/or Middle East tensions escalate is.
By contrast, an ‘implosion’ of an American institution could have severe repercussions. And while those who remember LTCM may argue that since the Fed stands ready to bailout any fund or firm in trouble a blow-up can be absorbed, the fact is that unlike when LTCM was imploding today’s U.S. economy is extra fragile.
This is not to suggest that a bailout of JPM, Fannie, or any of the other suspects would not be successful – it would. Rather, that another Enron type blow up due to something new (OTC derivatives exposure, mortgage defaults, etc) would surely create havoc on the financial markets in the near term.
Prepare For a Possible Crash
To reiterate our sentiments, we believe that being cash heavy in the coming weeks is prudent. Traders may opt to short stocks, buy and sell equity derivatives, or trade gold futures – and these could be extremely profitable pursuits. However, the risks associated with these types of gambles are large. The most radical opinions we have is to limit one’s exposure to the U.S. dollar (via precious metals) and/or hold cash rather than bonds.
As suggested in our Crash Alert, we may be making swift changes to the Wish List in the weeks and months ahead.
The Week Ahead
To be released on Friday, the jobs report for September is expected to show an uptick in the unemployment rate and a slight increase in payrolls. Other notable reports due out this week include Sept ISM Index (manufacturing and services), durable orders (Aug), personal income/spending (Aug), and Chicago PMI (Sept).
The Companies Tell The Story
The best evidence that the hot U.S. housing market is about to cool can be found by looking at the companies in these fields. For example, why is Toll Brothers trading at only 6 times 2003 earnings estimates? Additionally, why are GSE’s and related mortgage backed players crushed in September?
October – Crash/Recovery Month
Although October is best known for crashes (1929, 1987) it is known to seasonal investors as the time to buy. Due to an array of factors, October 2002 could well turn out to be a ‘bear killer’. However, the more important question may be from what level the markets begin to rally from. Clearly the ‘bottom’ is not yet thought to be in…
Suffice it to say, by then end of October Fed’s McTeer and Gramlich may be thankful that other Fed members voted to hold off in cutting rates – the Fed may scrambling to try and save the markets with what little ammo they have left.
These extreme speculations aside, we believe that the markets are overpriced and with further weakness in the markets investors will continue to find reasons to sell. Yes, Reggie Jackson was Mr. October. He also holds the record for most stikeouts at 2,597.
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