Email – 309
Markets Adjust, Corning Prepares to Report Earnings
Dear Reader,
A little over a week ago, I outlined how riding the sugar high could be very profitable. And I still believe that there are opportunities. But the view has been recently tempered more toward Mohamed El-Erian’s “need for structural reform” call. (The question over Bernanke’s nomination accentuates this.)
El-Erian, of course, is right. And the respected views of revered former Fed President Volcker took hold in President Obama’s initiative to reverse Glass Steagall by limiting the banks’ abilities for proprietary trading… and by limiting their size, too.
On that news, money-center bank stocks dropped like a rock and the regionals rallied. The business that the big ones will lose will be picked up by their smaller competitors.
Also, there is some speculation that other countries might follow the United States’ lead in this respect. Otherwise, the U.S. banks would be left at a disadvantage in competing with integral larger banks abroad. Should this speculation prove to be true, we are left with a more deleveraged world with more scarce credit and less banking competition.
This is likely to lead to wider banking spreads and lower potential economic growth for any given set of fundamentals, since banks could not leverage up as much during the good times. The other side of that coin would be that recessions could be milder, because banks would not be caught as over-extended as before, and thus they would be able to start lending sooner… and would need to take fewer losses.
At the same time, the U.S. dollar is sitting right at the 200-day exponential moving average – a key resistance level.
But the gridlock in Congress that could ensue following the election of Republican candidate Scott Brown to succeed Senator Kennedy could dampen tax and spend initiatives. And this actually has positive implications for the dollar.
Meanwhile, China, Brazil and other emerging market countries have enacted policies to prevent their economies from overheating. And we need to add to this the mess of the Google scandal in China…
It painfully evidences that the Communists are still far away from transitioning to representative democratic rule. They are not ready to admit their abuse of privacy and outright information theft through the Internet. Years back, I blocked all the IP (Internet Protocol) ranges on my firewall because I was so fed up with getting alerts from IP addresses in just about every province in China.
Do not try suing in China: Their brand-new legal system has many more judges than lawyers… because the government wins 98% of the cases. The judges are appointed by the Communist Party. So negotiation with the government is the way.
Over the long run, countries that trade together get closer and learn. And we hope that the Chinese learn enough about democracy and freedom that they will necessarily transition politically and economically to a more open and civil society.
So with the Chinese slowing down, the U.S. and the world looking at lower limits to leverage, the risk of the Fed exiting and the potential for less fiscal stimulus, the market adjusted… especially merging markets. And commodities took it on the chin.
We still have a huge “wall of money” sitting on the sidelines. Let’s watch the U.S. dollar and the political developments for some clearer direction. In any case, we are already seeing more attractive valuations.
Tomorrow (Tuesday), I’ll send you a special update on Corning (NYSE: GLW) following its pre-market earnings report and 8:30 a.m. conference call. Expect the company’s growth to be strong. We are now looking at new entry opportunities. Stay tuned…
Enjoy and profit,
Horacio Marquez
