Bad October, Bad, Bad October - Go Sit In the Corner

Okay, this is my first (and perhaps last) post in my new blog. Hope you all enjoy. Or as they say where I come from, "Hope y'all enjoy!"

I just read a blog today that said blogs are out of vogue and if you want to be "in" right now you need to go to Facebook or other similar location. Obviously, this means I am timing this perfectly.

Let me start with a disclaimer that I am sure will make you all want to read on. In the eternal words of Schultz on Hogan's Heroes "I hear nothing, I see nothing, I know nothing!" I am trying to just be the messenger here. NO investment advice intended.

October Bad


It seems that October is maintaining its reputation as the worst month for stocks (even though September is worse on average). I mean October did bring us the crashes in 1929 and 1987, so its reputation is not unearned. This month it will earn it in spades, especially in foreign market. Hang Seng down over 12% today and Japan down another 6% after nearly 10% Friday, putting the Nikkei back to where it was in 1982, when I graduated college (yes I am old). So anyone in Japan my age who started putting retirement money into the market when they graduated college would now have significantly less money than the invested principal, especially since a lot of that would have been invested when the market there was significantly higher. How do you say "that sucks" in Japanese?

Seriously, if some poor Japanese guy followed the advice you get from every investment advisor I know, they would have been told to invest the max every year and not worry about fluctuations as historically you always do better to continue investing and leave the money there. This advice leaves out the Great Depression (where prices took 25 years to recover) and the Japan episode, which now went from the lost decade to the lost quarter of a century. Admittedly, when the Nikkei shot up to something like 42,000, it was irrational, but that is not too reassuring if you are pushing 50 and your retirement will only last a couple of years.


Yet, the US market managed to show some respectable strength today, so I look with hopeful eyes to November. I know, no one wanted to go long into the dark of night and we lost traction at the close (the last 10 minutes were a bit painful to watch, with me sitting here yelling "Close already! Close ya filthy bastard!! (think of it with an Irish accent - it sounds better)"), but we did alright, all things considered.

Below is a link to a post by Brian Pretti. I have not read a lot of his stuff, but he was among the sage few who saw this mess coming. And unlike when Paulson or Bernanake or Bush say the worst is behind us, Brian I think is someone who is calling it like he sees it. Notably, Brian is not saying the worst is behind us and is not saying it is time to buy, he is saying it is time to look at the margins for signs that things are not getting as bad or as bad as fast, that the bad news is diminishing or less severe. He does lots of different analyses and the example he gives here is based on Personal Consumption Expenditures ("PCE"), which I noted to some last night just went well into negative territory, I belive down well over 2%. As he notes, this happens in almost every recession, but rarely lasts more than a quarter or two before rebounding, which also seems to correlate well with the end of each recession. He, like most others, thinks this recession will be nastier and longer than most, but his advice is still sound. Now is the time to be looking at the margins for signs the tide is about to turn, because if you wait until it turns, you missed it.

http://www.financialsense.com/Market/wrapup.htm

By the way, I'm am and old fart but I do have a five year old daughter. I plan on dumping some significant dollars into her 529 account, when I am convinced we have turned the corner. I will miss the bottom but she has a lot of time to build the investment. If I scrape together several thousand for it now to invest, it could pay off in spades by the time she goes to school and save me a lot in the long run. Those of you with really young children might want to look at this as an opportunity.

Food Supplies


In a sign that the tide is not quite ready to turn, here is a worrying development. Farmers facing tight credit and recessionary times are cutting back production. This could lead to food shortages in some countries, which in turn leads to social unrest and increasing instability. Countries might start hoarding their own food production, which some countries did earlier this year during the commodity bubble, only making things worse. Paulson should be capitalizing the farmers more than the banks, though conditions seem to be far worse in other countries than the U.S. - so far. The last thing we need at this point are food shortages.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.YrOnFi9aJM&refer=home

Paulson's Folly


Seems that not everyone is thrilled with the TARP or the remaining alphabet soup of lending facilities set up by the Fed. For an interesting couple of takes on these and why they are not thawing credit lines as much as hoped, I suggest the article posted below. It seems that in dire financial times when you cannot trust anyone's books (not even your own) you decide to not loan to anyone for fear it will not be repaid. The Fed tries to deal with this by lowering rates initially (we will likely see another .5% drop this week) but at some point that has no effect and becomes more symbolic. At that point, you have what some call a liquidity trap.

Paul Krugman, who just won the Nobel for economics, writes about this and it is heavily debated what to do in response. Krugman follows I believe the Keynesian school of thought that you should throw money at it. One differing school of thought, which I believe is the Austrian school, which is free market oriented, says you need to let the bad eggs spoil quickly, so you can throw them out and start over; the quicker we hit bottom the quicker we can rebuild. My view, not that it counts, is that we need a combination. Allowing all the bad eggs to spoil has consequences that are too dire. The Swedish approach in the 1990s was to nationalize and capitalize certain institutions that were needed and quickly let the insolvent ones go under. There is no taste in the U.S. right now for nationalization (other than Fannie, Freddie and AIG), so we seem to be just throwing money at the problem, which does not seem to be helping much just yet.

Some of the banks may use the money for acquisitions, which simply consolidates the problem and increases risk. And there is the issue of why anyone would borrow from a bank at high rates if they can go to the Fed at lower rates. Bottom line, it seems we are wasting a lot of tax dollars for (perhaps) nothing.

http://globaleconomicanalysis.blogspot.com/2008/10/ny-times-lending-conspiracy-madness.html

http://www.financialsense.com/fsu/editorials/sutton/2007/0413.html

Lender of Every Resort


The Fed is taking on commercial paper to try to restore some stability to medium term (three month) business lending. They are doing so through the best acronym to date, the ABCPMMMFLF (not kidding). I would spell it out but I am sick today and lack the energy. Let's just say it starts with Assett-Backed Commercial Paper and leave it at that.

This is a critical move and much more important than the TARP, in my uninformed opinion. I for one would love to see all the big banks that created the derivatives mess fold and have the Fed nationalize them. They deserve it. If you disagree, just read this article on how they are still paying themselves tens of billions in bonuses (with our taxpayer money). Can you spell INFURIATED!!

http://www.bloomberg.com/apps/news?pid=20601109&sid=aVann0.cv9Tw&refer=home

As might have been predicted, however, the Treasury (Hankie) is somehow screwing up this commercial paper lending too:

http://www.nakedcapitalism.com/2008/10/fed-commercial-paper-program-raises.html

Still, if they can work this out, the companies that do deserve money are those that keep our economy going, actually make things and provide jobs. These companies need credit to operate and it is good to see the government doing something to get money to where it will do some good. They should take all the $700 billion in the TARP and spend it here instead. It infuriates (word of the day) me to hear the head of JP Morgan come right out and say that they will use their $25 billion TARP gift (which is on top of the $29 billion backstop for Bear Stearns) for strategic acquisitions or maybe set it aside for a rainy day and have no intention of lending it out. Sure, you have to be careful where you lend but they should be lending it as that was the whole purpose of the TARP. That we gave them this money with no strings attached is incredible. I hope that Paulson keeps in mind what JP Morgan is saying and doing with the money when they come back again in a few months asking for more. You know between their Bear Stearns and WaMu purchases, they will be back.

http://money.cnn.com/2008/10/27/news/economy/commercial_paper_facility/index.htm?postversion=2008102710


I don't understand a lot of the following regarding the Fed's balance sheet, but it does make clear that the US government has thrown trillions of dollars at the crisis with little impact to date, and it will likely continue to find more ways to do so. Not real encouraging. Then again I watched an interview of Paul Krugman yesterday and he thinks they are doing the right things, generally, though he thought it was a mistake to let Lehman fail. Just because he is a Nobel laureat and professor of economics at Princeton does not make him right, but let's hope he is.

http://www.econbrowser.com/archives/2008/10/the_federal_res.html

From the Ashes


Another promising sign is that new home sales are up 2.7%, month-over-month, which is more than forecast. Still 10.4 months of inventory, so we have a lot further to go, but progress as the inventory dropped 7%. Note this is month-to-month progress from a terrible August and this was still the worst September sales since 1982. The year-over-year decline was 33%. Nonetheless, we may be approaching a bottom and this is where the mess all started. It is not where it will end but improved housing sales is a needed part of the puzzle. Hopefully this increase is not due to government pressure on Fannie and Freddie to lend more, which could lead to more reckless lending. If government pressure has created a false bottom in the market our woes will only be prolonged.

http://money.cnn.com/2008/10/27/real_estate/September_new_home_sales/index.htm?postversion=2008102710


If you go to Calculate Risk (http://calculatedrisk.blogspot.com/) you can see a chart that shows house prices have fallen off a cliff, but we are back around lows seen in prior recessions, so we may be approaching bottom.
Calculated Risk, by the way, is the best housing oriented blog site I have found and it always provides nice easy-to-follow charts.

Texas Tea


Oil down to $61 a barrel. That was a very fast drop and it has to have some oil dependent countries realing. Squarely in the category of "I'm okay with that." is Venezuela. They do not have the cleanest oil or the cheapest to produce, so they cannot make money at these prices. Anyone remember Citgo (Venezuela) trying to better their image last Winter with cheap heating oil offers? Don't expect that this year. The good news is that the financial loss may lead to less military purchases by Venezuela from Russia. The bad news is that low oil prices might lead Russia to be more agressive with countries like Georgia.

http://www.bloomberg.com/apps/news?pid=20601109&sid=akTFBDZHqr34&refer=home

Even the Middle East is having financial woes, with a run on one bank in Kuwait and lending for massive construction being frozen. No one is immune this time around. So much for the decoupling theory that was being espoused a lot just a few months ago. For entertainment value, here is an article from Economist.com back in March discussing how decoupling is not a myth and how emerging economies will do much better this time around. Oops.


http://www.economist.com/finance/displaystory.cfm?story_id=10809267

Pack Your Bags

The continuing troubles in submerging economies have led the charge in a retreat to the dollar. That makes the dollars reserve currency status stronger, which helps us here in the U.S. of A. generally. Unfortunately, that spells doom and gloom for some foreign currencies and it raises our export prices in relation to other countries. The leading exception is the Yen, which is appreciating against pretty much everything, putting pressure on Japanese manufacturers.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4eOuxv1IKV4&refer=home

What does all this mean? Well, I am still struggling to understand currencies, but if you are planning a vacation to Eastern Europe, Iceland, Australia, Russia, or pretty much any other place on Earth but Japan, now is a relatively cheap time to go. Otherwise, it may be prudent to hold on to those dollars. If we have a currency crisis, things could turn sour quickly. Alternatively, if we make the turn on this recession, you will want all your dollars, pounds, yens, reals, zlotys, and pesos to put to work in the market. As Buffet says - I paraphrase - when everyone is afraid it is time to be greedy. Well, everyone is afraid right now, and I have not seen that much greed out of Buffet just yet. He made a couple of good deals with Goldman Sachs and GE but has been largely radio silent lately. Could it be that he is afraid?? Or, just waiting for better deals?

EU Banks (Pronounced Eeeeuuuuuuuu Banks)

A lot of EU Banks have big exposures to the submerging economy issues, U.S. subprime issues, EU real estate issues and other assorted bad ideas. In short, their problems may make U.S. banks look rather sound in comparison. Hey, the good news is that they are a much better investment than Icelandic banks, which are frozen (pun intended), but betting on my mother to win the next Olympics for syncronized swimming is a better bet than Iceland banks at the moment, so that is not the most optimistic support for EU banks. The following report is on DB:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a8zYbqrxQTn8&refer=home

Hard to Underwrite

For those that follow the insurance industry, bad news for CNA. Down 28%. The good news is that they are getting a capital injection, so all is not lost. This is investment losses and hurricane losses, unlike AIG where a few hundred people in an office in London were able to take down the largest P&C carrier in the world by issuing credit default swaps. We The People now own 79.9% of those CDSs, thanks to the largess of the Fed.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ah8zrk3.CyGQ&refer=home

"Formidable" Gifts of Joy

The Anchorage Daily News just endorsed Obama, saying Palin has fromidable gifts but is not prepared to be Commander and Chief. I think McCain picked her because of her "formidable gifts" but what do I know.


http://www.telegraph.co.uk/news/newstopics/uselection2008/3263896/Sarah-Palins-home-state-Anchorage-Daily-News-endorses-Barack-Obama.html

In the end, Schultz was right, though he defined the situation too narrowly. He should have said "We hear nothing, we see nothing, we know nothing!!" This is all way too complex for anyone to understand. All we can do is try to follow it closely and take advantage (avoid disadvantage) of this evolving situation. Financially, these are the best of times and the worst of times, and the difference is in your understanding of what is happening and what to do next!