President and founder of Kynikos Associates
People keep pointing to the fact that capital spending is great. But they pointed to the same thing in 2000, when the market was tanking even as telecom was booming. We pointed out then that the telecommunications build-out was almost over--and was increasingly focused on projects that didn't make any sense. Today, whether it's the 48th planned community in Dubai or the marginal factory in rural China, you're going to find out that the capital projects in the works don't make a whole lot of sense either. But there's a huge lag effect on that. Financial firms are the canaries in the mineshaft, and the laggards are the capital-goods companies.
We don't know how bad this gets. The problem is we don't know how bad the hole is. And by "the hole," I mean not only what the bad credit is but also the accounting of it. I think we're seeing that a lot of financial institutions probably weren't as profitable as we thought they were. That is, they showed big profits and everyone got big bonuses on the way up, and there are going to be big write-offs on the way down.
At the individual level, what's happening right now is probably an argument for indexing and not taking the risk of individual stocks. Certainly anything that looks suspect because of its accounting is going to get broad-brush--and harsh--treatment from Wall Street. The areas of excess are going to get pulverized, and any overreactions will be areas for people to look for bargains ultimately. But I don't think we're anywhere close to that yet.