Cody on RM: Speaking the Language of Change

Speaking the Language of Change
07/26/2006 12:14 PM EDT

It's been one heck of an economic boom and bull market for the last three-and-a-half years. Despite the endless warnings of pending economic disaster from all the permabulls who became permabears after the tech bubble popped in 2000, the economy -- especially the tech economy -- has been on fire. Consumers, who the permabears mistakenly pointed to as the weak link, were indeed the strongest link. Utilizing all that excess liquidity from the Fed, they kept the economy afloat and catalyzed the boom.

The fact is, things change! I started my own change 10 years ago, riding my meager savings and a one-way ticket to go east of the Mississippi to NYC. It took years of fighting, scrapping and living in slums, but at some point, New York City became more my home than my much smaller hometown. It's quite a change, let me tell ya.

The economy changes, too. It goes through cycles, even if they are muted and accelerated by the digital revolution. At first, this latest downturn in the cycle was subtle, indicated mostly by climbing inventories and an end to the acceleration of end-user demand. The turn can be impossible to time, but at some point, the turn does indeed come, and a good economy turns south.

I was one of the most vocal bulls, shouting out loud about the boom. Talking about the good times to most Wall Streeters, most of the time I felt like Big Bird talking about Snuffleupagus. In early May, I pulled in my horns and went almost entirely to cash (and Softee), and though I want to get excited and bullish again, the fundamental picture remains muddled at best and weak at worst.

Coming from New Mexico, where we say things like "I'm fixin' to ..." as in "I'm fixin' to go down to the orchard to pick some apples," sometimes I feel like I speak a different language than most of the folks here on the Street. The latest case in point has me question whether I am crazy or are many of the guys I call "permabears" (because they've been predicting economic and market doom) continually talking about "rebounds" and "long side schnitzels"? Is that some strange Wall Street dialect that I haven't figured out yet? Perhaps it's just noise? Heck, perhaps my own rantings are just noise.

Meanwhile, the market has continued to, as I call it with my New Mexican twang, "dislocate" to both sides (mostly to the downside) as the market comes to terms with the turn that the economy has already apparently gone through. From the companies themselves:

* UPS, CSX, Rockwell Automation: The real question now becomes how sustainable the downturn is. Will the digital economy mute and accelerate this downturn as it has others during the boom?
* Wal-Mart, Target: Will consumers collapse or just catch their breath before running again?
* Black & Decker, Stanley Works, the homebuilders: Will housing only "cool" or "bust"?
* Broadcom, Corning, the semis: Will inventories balloon and crush these companies under their own weight? Or will sell-through flow and clean out the channels?

Gun to head, I think the economy will indeed turn and get booming again. But I'm not going to risk much capital on that thesis until prices come down even more or the fundamentals begin to pick back up. More to the point, I plan to remain focused on trying to find secular growers, regardless of the outlook for the broader economies and markets. Do you speak my language?