The Apple Falls - Stocks Face Massive Headwinds
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The sky is falling, along with the even more unthinkable, Apple (NASDAQ: AAPL). With JPMorgan's (NYSE: JPM) two, no wait make that three billion dollar loss (and counting) there will rightfully be increased fear raging through the markets, as to whether the unnecessary risks they took may lead to bigger losses, and what other banks have similar exposure.
Here’s what’s interesting about JP Morgan's bets, they wrote insurance against some of America’s biggest corporations going bankrupt. If the economy, and stocks hit the skids, these losses would balloon, and potentially send massive ripples of panic through the markets, further exacerbating losses.
Meanwhile over in Europe recalcitrant and fiscally irresponsible nations are dragging down the Euro. The run on the banks in Greece has already begun, as citizens anticipate them leaving the monetary union, and don’t want to be stuck with the Greek Drachma. How long will Germany and the Netherlands, Europe’s paymasters, continue to shell out their hard earned money to keep Greece in the Euro, a culture rife with fraud, where paying taxes is considered a "chumpy" activity, whose people don’t wish to work, but want all the benefits and hand outs of living in a modern society?
In America, states are dealing with crippling budgetary deficits. California for one, has a 7 billion Wider dollar budgetary gap than previously expected.
The infrastructure of the nation is falling apart. In Los Angeles, where I live, the roads are in need of a major work. True story - my friend was driving down Olympic Blvd (one of our most traveled corridors,) hits a pothole, flat tire. He stops, puts on his spare, continues down the road, and thirty seconds later runs over another rough patch of road, flat tire number two, decides on the spot, “it’s time to move.”
Where is the money to pay for all the government programs (some good, most wasteful) going to come from? Parking tickets? Raise taxes? Look, nobody likes their money being wasted, raise taxes too high and people get tempted to move, Eduardo Saverin of Facebook style.
More and more American jobs are being exported overseas, as barriers to conducting business across continents decreases, money follows suit, osmotically trying to balance itself throughout the world. (which isn’t a bad thing or humanity)
The Republicans and John Boehner are already talking tough on the budget. Not that they shouldn’t, we clearly need across the board cuts, and few people want to see inefficient government spending displacing private industry, but this will create more uncertainty for the markets. Last year financial markets fell 20% when we came within a few hours of defaulting on debt payments.
Plus, let’s not forget the possibility of Israel attacking Iran which would send oil prices skyrocketing, at just the wrong time.
And what will come to the rescue? The Fed? Their policy instruments are limited, and like a knife, become dulled with use. The government? They have already implemented Keynesian fiscal policy with the stimulus in a response to the credit crisis.
As the middle class dissolves, the demand for everyday products diminishes, and in what is a vicious cycle, production falls, and layoffs follow, reinforcing the cycle until the prices of commodities get low enough to spur economic activity.
These confluences of events will leave the market in a free fall. How much? 20%? At minimum.
So am I predicting that we’ll go back to the time of massive soup lines, and black and white photography? (sorry, we don't accept color here) No. What I’m saying is for too long we have averted the perils of overspending, and eventually, the bill becomes due.
How have we managed to avoid paying the piper, as the Greeks are in the process of doing with their 20% + unemployment and run on banks? Because the US has been the world’s post WWII superpower, leading to the dollar being the world’s reserve currency. We can weather the blow more than any other nation on earth, as even as you print more money, demand still exists for your currency. However, you can only eat into that reputation, into that credit, for so long.
So what should you do with your money in the meantime? Go cash? Yes. Load up on cash and have powder to strike when prices go down. Either that or invest in defensive stocks like Wal-Mart (NYSE: WMT), Proctor&Gamble (NYSE: PG) who make products we use daily, and those companies which continue to innovate and make life simpler and more fun for society, like Apple (NASDAQ: AAPL) or Google (NASDAQ: GOOG), or robotic stock plays like IRobot.
Wal-Mart is actually doing surprisingly well just into an online world, and their Retail Stores add value to their website and vice versa. After having shopped at Amazon for years, I tried in price comparisons at Wal-Mart .Com, and found prices to be substantially cheaper in many cases. Recent earnings announcements bolster its idea, as the stock shot up on a big down day in the Dow.
Procter&Gamble produces products we use every single day. They continue to raise the dividend each year, and this is unlikely to change, as consumers will continue to buy the staples necessary to survive. It’s not sexy, but it’s simple, and I’m convinced shares will stay much more intact a down market than other companies.
Now, some of you might be scratching your heads, saying, “Apple and Google aren’t defensive stocks, Google’s cash cow is advertising and their revenues will go down with the economy, and Apple caters to the high end market.”
This is all true, but taking the Warren Buffet long view, companies that continue to innovate and continue to produce products that make lives more fun and easy will reward shareholders in the long run. Both Google and Apple do that, and I’m perfectly willing to bet the farm all these companies will be around, and in much higher prices few years from now.
I am only predicting an economic winter, not a nuclear holocaust, and the only way our economy and standard of living will continue to rise in the long run is via innovation, so if I have to have my money somewhere, I’d rather bet accordingly. Look for stocks to be hit hard over the short run, but in the Warren Buffet long run, stocks will still be the best investment. Thank God for our visionaries and scientists who help mask our political incompetence.
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funspirit is long GOOG, PG, IRBT, and WMT. The Motley Fool owns shares of Apple, Google, and JPMorgan Chase & Co. Motley Fool newsletter services recommend Apple, Google, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.