Thursday, August 13, 2009

Demand Deterioration Continues

I have been on the road all last night and today. Closed the San Antonio deal I have referenced previously.

If you have read my quarterly letters, you know what I consider most important is demand. In the long term, inventory and production levels do not matter if you do not have a rebound/stabilization in demand. As long as demand is deteriorating, true underlying intrinsic value is deteriorating. As the value declines, the market may pass it numerous times like a drunk individual trying to walk the yellow line. The markets may go below intrinsic value and then surge above the value before realizing that value is not following.

In a deleverging cycle, the end is reached when the system has delevered and demand has found a bottom. This is why I am and will continue to be bearish regardless is the market heads higher.

Today, you saw horrific retail sales numbers. Currently, I consider this one of the most important economic data points that comes out each month. It did not fall nearly as hard after Lehman. Whereas production in some cases fell 50% after Lehman, overall consumer demand fell a few percentage points. Production had to bounce after that sort of cut. It is bouncing. This bounce will not continue unless demand stabilizes. The numbers today, showed they are not stabilizing.

Economically my thesis has been following exactly the way I thought it would. At some point the markets will react to this economic reality. All in all, I was very pleased with the market action today, especially considering the Dow futures were up over 120 points at 7 am. this morning.

As a side note, debt markets were wider across the board today. First you had China leaving the rally party, now you have the U.S. debt markets leaving the rally party.

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