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Five Themes for 2010: After the Comedown


Disinterest, a lack of excitement, and 52 weeks where nothing really seems worth doing.


1. After the Comedown

I've heard people crave more speed during the comedown, but I actually wanted the feeling to go away. It was kind of frustrating because my body wanted to keep moving but my mind wanted me to stop...After the comedown I felt disinterested in anything. Nothing really seemed fun or exciting. I wanted to do something, but nothing seemed worth doing. But this feeling faded too... Speed was fun, very fun, but after hours and hours of it I just wanted to calm down, but couldn't because it lasts kinda long.
-- Erowid Experience Vaults, Methamphetamine user; 150 lbs., gender not specified

It's somehow fitting that 2009, the Comedown Year, is best summarized by a meth head: The economic body wants to keep on moving but the economic mind wants to stop. Indeed. All we really wanted last year was for the feeling to just stop. Well, it's stopped.

Welcome to 2010: after the Comedown. This year, in the unfolding aftermath, there are three main things to watch: disinterest, a lack of excitement, and 52 weeks where nothing really seems worth doing.

2. Deleveraging... of a Type... Consumer Credit Repudiation

The current level of US outstanding nonfederal debt is $27 trillion, which is astounding both in absolute terms and even more so relative to nonfederal GDP -- a 206% ratio. It is down fractionally from the 208% peak, but here is the rub. If mean-reversion means that we get back to some norm of the 1990s, then we are talking about the need to extinguish $8 trillion of nonfederal debt. The only question is how this happens, not if. If we're talking about mean reverting to the very stable trend of the 1960s and 1970s, then the credit contraction is very likely to exceed $11 trillion.
-- David Rosenberg, Chief Economist & Strategist, Gluskin Sheff + Associates

Naturally, After the Comedown, if you're serious about getting clean, you gotta throw the drugs away. If we're talking about an addiction to credit, then Rosenberg anticipates at least $8 trillion, possibly as much as $11 trillion, in credit "merchandise" being flushed down the toilet. Prepare for mass Consumer Debt Repudiation.

In the New York Times Magazine's "The Way We Live" section, a piece from Roger Lowenstein, perhaps best known for his book, When Genius Failed: The Rise and Fall of Long-Term Capital Management, is set to run this weekend, called "Walk Away From Your Mortgage!"

In the piece, Lowenstein observes that everyone from the CEO of the Mortgage Bankers Association to President Barack Obama has argued that walking away from your mortgage if you have the ability to pay it is "irresponsible" and/or "immoral." But is it really? He writes:

Time was, Americans would do anything to pay their mortgage -- forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Maybe not.

Businesses -- in particular Wall Street banks -- make such calculations routinely. Morgan Stanley (MS) recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral -- perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials.

If it seems that Main Street borrowers are held to a different moral and ethical standard than Wall Street borrowers (and lenders), well, that's because they are. This two-tiered moral system will further increase the tension between Main Street and Wall Street throughout 2010.

Look at it this way: You're 45 or 50 years old. You may or may not have a job, but you sure as hell have too much debt. Your house is worth less than what you owe on it. Need a new roof? What about new central air? And the basement keeps flooding. Thing is, coming up with the cash to service that depreciating asset is getting tougher and tougher. If you don't have a job then you've probably run through a significant portion of your 401k and savings to keep the mortgage current. After all, you don't want to ruin your FICO score. That's what they keep telling you, anyway -- a man is nothing without a good FICO score. Except for one thing: When no credit is available, a good FICO score is the same thing as a bad FICO score. And look, who needs a good FICO score if you don't plan on running up any more debt anyway?

Do I really need this house? Wouldn't it be easier to rent? Let the landlord replace the roof. And don't even talk to me about a new car. I like the one I have right now just fine. And who wants to take the immediate off-the-lot depreciation hit anyway?

A lot of people in this country right now are kicking those very thoughts around right now. And they're wondering what possible incentive they have to pay those debts.

3. Death to Happiness

That's an overstatement -- like shock and awe -- but some things require an overstatement in order to properly position the reality of the situation. Psychologists call this "anchoring." What I've done here is anchor death to happiness so that anything less than death right now seems pretty good.

Don't worry; be happy.

Look on the bright side.

Think positive.

In the New York Times recently I ran across an article, "Seeking a Cure for Optimism," which mentioned a fascinating book by Barbara Ehrenreich, Bright-Sided: How the Relentless Promotion of Positive Thinking Has Undermined America.

"Happiness is great, joy is great, but positive thinking reduces the spontaneity of human interactions," Ms. Ehrenreich told the Times. "If everyone has that fixed social smile all the time, how do you know when anyone really likes you?"

Ehrenreich said she hopes to see a day when corporate employees "walk out when the motivational speakers start talking. It's all about control and money." Her goal? To encourage realism. Yes, After the Comedown, when the living gets day-to-day, seeing things for how they are, not how you want them to be, is the cure.

4. The Return of Stock Separation and Sector Rotation

Disinterest and a lack of excitement sure are healthy when we're talking about financial markets. In fact, every good bull is born from a lack of enthusiasm and casual disregard. Whoa, easy killer. I'm not saying the bull is back. What I am saying, though, is 2010 will be a year where disinterest trumps obsession in financial markets.

Along with that disinterest comes decreasing correlation and a return of stock separation and sector rotation. For a few years now, it's been all-one-market where every stock, every commodity, every financial instrument in every corner of the globe has looked the same. That's what massive central bank reflation gets you. And fear.

Now, however, for good or ill -- you be the judge -- there are signs at least a few stocks, if not yet sectors, are beginning to disengage from the all-one-market theme. The triggering factor is public debt being substituted for private debt. And naturally this will set the stage for the second act of the corporate debt crisis, but we're likely at least several years removed from that.

5. 10 Stocks Showing Separation

These aren't stock picks. Creeping Jesus, haven't you people learned by now not to rely on Internet financial advice? No, these are simply 10 stocks I've come across that don't look like the broad market as a whole. I own some of them, may try to buy some of the others, and will manage the risk along the way as best I can.

As noted in Number 4, when I scanned through various sectors, I found a large number of sectors still moving in lockstep. So what do we do? We look for stocks to focus on that don't look at all like the sectors.

Below are 10 stocks that have the following technical criteria on longer-term (monthly) charts:

1. They haven't qualified downside breaks of long-term DeMark TDST Down levels.

2. Their counts aren't moving in unison with the broad market or most economic sectors.

  • Corn Products Intl. (CPO)
  • Del Monte Foods (DLM)
  • Cal-Maine Foods (CALM)
  • J&J Snack Foods (JJSF)
  • Quest Diagnostics (DGX)
  • Badger Meter (BMI)
  • Cogent (COGT)
  • Tetra Tech (TTEK)
  • Owens & Minor (OMI)
  • Ford (F)
Follow Kevin and 30 other professional traders as they trade these names and more on our Buzz & Banter. Start your 14 day FREE trial today for real-time insights.
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Positions in F, CPO, BMI, COGT.

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