We'll be selling into this rally sooner rather than later....

Listening to Hugh Hendry (an amazing fund manager) discuss this de-leveraging process only further confirms that this is a bear market rally and not the bottom everyone is looking for.



In case the link doesn't work here's a synopsis of Hendry's comments:

Banks won't return to their old highs for at least 25 years. Why? They will be regulated considerably (amen to that) so as to never repeat this meltdown again. The result is poor earnings potential and very modest ROE's. The exact same thing happened to banks after the Great Depression.

Hendry is a big believer of the current commodities super cycle (especially the ag names - fyi I got long MOS two days ago...more on that later)

but...

Hendry warns that the current environment is not hospitable to any stocks (regardless of how auspicious their future is) because we are in the deflationary stage of the cycle. First came the discovery process - we can all see that oil, coal, ag, copper, etc are not getting easier to find and brought to market. Next comes the deflationary stage as "hot money" gets overzealous with the trend (nothing goes straight up. Right hedge funds?)

The final stage is re-inflation as a result of low interest rates and excessive bank liquidity put into the system. However, this third stage won't likely come for at least another 2-3 years in Hendry's opinion.

In the mean time equities/stocks will suffer as deflation occurs (hedge funds, banks will delever and become more modest in their equity stakes - realizing that money and good credit scores don't grow on trees). Much to my chagrin Hendry claims that all finance guys are "perma bulls" and that they forget the Golden Rule of running funds - 1st priority to NOT to make money, but rather to not lose money (kinda like Buffett's "wait for your pitch analogy").

In the long run Hendry believes that this credit crisis will help the commodities super cycle because capital/funding is very scarce for all commodity projects and that will prevent more supply from coming on the market when we most need it.


I agree with Hendry's last point about this "credit freeze" prolonging the commodity boom. His reasoning about stock under performing in a recession/depression also makes sense (even if these stocks have PE ratios of 3-5 :-(

I guess the conclusion is that commodity stocks are now officially value stocks. They will produce adequate cash flows during this slowdown, and their true value will eventually be realized when we turn the page on this financial shit storm.