Tuesday, August 23, 2011

Corporate Balance Sheets

Sell-Side Analysts
The sell-side analysts are busy trying to calm the masses these days.  These are the people we see on TV all of the time giving their valuations for sectors and companies.  The thing we need to remember is their job is to make certain sectors and companies look attractive enough for retail investors to want to buy them.  Since it is unlikely analysts can follow the whole universe of companies all of the time, their recommendations will often be relative to the things they do follow. 

Buy, or Sell?
For example lets pretend I am one of these analysts, and I follow the telecom sector.  Since I have to have more buy recommendations than sell recommendations (people won't buy companies with a sell recommendation), it would be easy to recommend AT&T and Bell Canada.  Normally, energy, gold, and agricultural companies do better during this time of year.  Arguably, Suncor, and Potash are likely to do better over the next few months.  As an analyst my top picks come from those companies that I do follow, even though the other one's are likely to outperform, or have better valuations.

Buy & Sell Strategies
That is how, in 2008, we went from everybody telling us not to sell, to everybody telling us it was too late to sell, practically overnight.  Now I am not saying that what we are currently experiencing is on a par with the last financial crisis, but I don't look to the analysts to tell me when to sell.  I have a buying strategy, and I have a selling strategy, and I follow them as the markets gyrate up and down.  My strategies allow me to make money even in down markets, and they also allow me to sleep at night.
Recession, What Recession?
I am not sitting in judgement of the analysts, just saying that is what they do.  So when we hear them saying there is no risk of a double-dip recession, and they are all saying it, I start to get cautious.  First, when everybody seems to be taking the same side of the argument, that is a caution sign.  Second, when they say the reason we can't be headed into recession, again, is because of the pristine balance sheets for almost every company across North America, my intuition kicks in.

Around seventy percent of the U.S. economy depends on consumer spending.  Just over 10 percent comes from corporate investment.  That would imply that for every dollar consumers don't spend (because they can't spend what they don't have), corporations would have to increase their spending by seven!  Why would companies do that in the current environment?  Given the uncertainty, the lack of consumption, and the difficult economic environment, what would cause U.S. companies to go on that much of a spending spree?

While China is seen as saving the world economy, the U.S. imports almost four times as much from China as it exports to China.  How are U.S. companies going to make up for the lack of sales of imports (i.e.: lack of consumer spending)?  China, basically, imports from other Asian economies, and exports to the U.S..  Reversing that flow isn't suddenly going to happen.

Advanced Planning
I try to keep in mind that most of what we hear in the media is "sales talk".  I should determine, in advance, the conditions under which I should buy and those under which I should sell.  That will prevent me from being at the mercy of the sales pitches and the obvious but irrelevant arguments constantly playing out in the media.

Have you formulated your buy and sell strategies in advance?


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