The Cavalry Is Late

09/09/2011 11:53 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

As politicians wake up to the rising economic risks, CEOs are already cutting and assembling layoff lists, writes senior editor Igor Greenwald.

That was a nice speech President Obama made last night.

We can agree to disagree on whether the $447 billion Son of Stimulus will solve anything, or whether it might be sensible insurance against the possibility of a renewed recessionary spiral that would devalue the blood, sweat and tears of the last three years. But give the man some style points.

That was a plainspoken, forceful, no-nonsense call for bipartisan action. After a summer of ill-tempered partisan nonsense, the president came off like an adult, which is the quality Americans miss most in their politicians these days.

Bring back the smoke-filled rooms where they used to hammer out deals, instead of the sterile ones where each side hones its talking points.

Alas. “Despite his call for bipartisanship, White House advisors have privately acknowledged that passage of the full package is unlikely,” the Washington Post reports. “Advisors say Obama will blame Republicans for the jobs crisis if they don’t accept his proposal.”

Republican leaders in the House responded to the president’s challenge with noncommittal politeness, and may even be motivated to pass a modest measure so as not to get blamed for the economy next year. But no one believes that any compromise likely to emerge from a divided and increasingly dysfunctional Congress will provide much downside protection, much less serve as a springboard to growth.

And so the hopeful hop in the stock-market futures in the wake of President Obama’s address overnight degenerated into another faceplant by the market open.

Why? Because remote as real fiscal stimulus seems this morning, the rest of the news was worse. Peripheral bond yields in the Eurozone are up, and bets that Deutsche Bank’s (DB) stock will continue to tank are selling big.

Hilariously, Deutsche Bank’s CEO says his last profit forecast is still achievable, if there’s “a recovery in European capital markets and progress with regards to a solution of the European debt crisis.”

But he disputes increasingly urgent calls from the head of the International Monetary Fund and US Treasury for Europe to shore up the capital of its banks. The banks say they’ll be just fine, but their growing reluctance to lend each other money argues otherwise.

Meanwhile, Greece’s GDP is shrinking at a 7.3% annual rate, we learned the same day Germany’s finance minister demanded that Athens deliver the promised pound of flesh in return for the next tranche of band-aids.

The European Union’s finance and economics chief said this morning that while stimulus is all well and good for the US, Europe is focused on cutting debt. He seems clueless that it’s doing nothing of the sort by lending money to Greece on unaffordable terms so that the day of reckoning can be postponed.

While Europe dithers, growth is slowing, perhaps precipitously, around the world. The signs run the gamut from Indian steel to Canadian and Australian jobs.

Even the heretofore strong corporate profits in the US are in starting to come into question, as companies trim their forecasts. Texas Instruments (TXN) blamed its diminished outlook on the fading demand for its chips across product lines and geographies.

“Since this downturn is macro-driven, we really have no insight as to how long it will take,” a top exec said. “Orders are weak, and we expect, in total, orders will be down from the second quarter.”

The same and growing reticence among customers tripped up Corning (GLW), when it warned that sales of LCD glass will disappoint as TV makers cut inventories. Consumer demand has held up well to date, the company noted.

But it’s clear that macroeconomic fears are now causing corporate retrenchment in anticipation of weaker demand. And you don’t have to be a Bank of America (BAC) manager updating your resume to know it.

Investing in an environment like this becomes a process of tedious elimination of any stock in the path of the recessionary train. The portfolios I manage for relatives are down to what I view as attractive special situations, names like Annaly Capital (NLY), Kinder Morgan (KMP), and Spreadtrum (SPRD), along with bets on copper, grains, and an eventual drop in market volatility.

Another attractive opportunity seems to be at hand today, as traders punish McDonald’s (MCD) for strong but still disappointing sales. I’d bet that the bullish long-term outlook is undiminished by the recent hiccup in Japan. McDonald’s is where people go instead of the Olive Garden when layoffs darken the horizon.

The 2.7% yield and the strength of the brand, the menu, and the chart provide decent downside protection.

The same, unfortunately, can’t be said for the market as a whole. CEOs don’t need legislative approval to act, and it’s clear that they’re turning increasingly conservative on spending and investing.

The effect of that attitude change will be felt long before Congress acts, if it does. That’s a good reason to stay cautious and skeptical.

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