Sunday, January 07, 2007

Time to be Fearful:

It's been quite awhile since my last post. In truth, I wasn't exactly sure where I was heading with this blog. I originally wanted this blog to be focused mostly on investing. But recently, I have been very pessimistic on the future returns available in the market. I will save the detailed economic explanation and my entire outlook for upcoming posts, but for now I will pose this question for active investors to think about. With prices rising and yields falling quickly on all sorts of investments, (think, stocks, junk bonds, real estate) how long will it be until this mass of liquidity starts pouring into corporate investment, and as a result, increases competition and lowers corporate profitability? In 2005, Greenspan said that corporate profitability was at an all time high at about 14%. With PE's on stocks nearing 20, treasuries at 4.7%, and junk bonds not much higher, it seems coroprate investment will be the next victim of yield chasing. Just as stocks and bonds start being priced in for a lower return environment, they risk being hit by increased competive pressures. Already high prices mixed with lower earnings bodes terrible consequences for an investor.

I will try to outline my reasoning in further detail as time goes on, but in terms of investing I will still focus on individual companies. I have recently added two short positions to my portfolio. Interoil (IOC) and Silver Wheaton(SLW). These are not plays on a slower economy. Rather, I have analyzed both stocks and concluded that they are both worth slim to none. The Interoil position was not originally my idea. I urge everyone to sign up at Value Investors Club and read both reports on Interoil. The website is also a good site to check regularly for new ideas. I will post my report about Silver Wheaton shortly.

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