Or No Bounce, That Is The Question.

Hardly surprising to retrench after a collasal day yesterday. We seem to be in a bit of a range, which I suspect we will be in for a while until we all find our way. Unlikely to be any awe inspiring good news in the near term. Yes, bits and pieces, but nothing to change the overall mood. The fact that we did not give up all of yesterday's gains on a record drop in retail sales (at least since records started in 1992) is probably a good thing. Retail down 2.8%. Have I mentioned that consumers are tapped out?

And they have a perfect storm to add to the fact that debt is near record levels on a consumer basis. Their piggy banks, also known as homes, are now under water. Their credit availability has dried up, thanks to new tighter lending standards (which Paulson is foolishly trying to loosen now). They are losing jobs, which, last I checked, tends to cut into spending habits. They are losing money in the stock market, be it a brokerage account, college account or retirement account. And consumer sentiment numbers continue to be near lows, which means consumers are depressed. Now my wife likes to spend money when she is depressed, but not so much when she is depressed about finances. Any how, did I mention that consumer spending is hitting a wall? Well, it is and I have been pounding that drum for a while.

Over two thirds of our GDP is tied to consumer spending (which is a somewhat unhealthy percentage from what I read), but that means a 2.8% drop in spending correlates roughly to almost a 2% drop in GDP. Add to that likely export drops due to global recessionary pressures, and we should easily get a 2% annualized drop, probably more like 3% annualized, this quarter. For the one economist still on the wall on whether we are starting a recession, you can now join the recession crowd. I know technically it takes two quarters of GDP drop (the official definition is a bit more amorphous, but most think the definition is two quarters of GDP drop, so I will work with that) and we have to get another quarter of drop to qualify. So raise your hand if you think the GDP will go up next quarter. Anyone? I see no hands, so it is unanimous - we are in a recession. You can quote me on that. Or you can quote Buffet who said something to the effect that it sure feels like it, and that was a couple of months ago when things seemed darn right rosy compared to today. Let me move on, because there is a lot of juice out there today.

You Likely Own a Car and You Likely Will Own a Car Company

It is no secret that the American car companies are on the ropes. I heard a report tonight that they each have roughly three months of cash at the current burn rate, which may or may not get to the new administration. But we all know that this President or the next will likely save them one way or another. It's the jobs stupid.

The current Pres may be more concerned with the corporations but the next cares about the jobs, and there are tens of thousands of jobs on the line here. While I care about the jobs I wonder whether Chapter 11 might not be the better path to long range health. Still, bankruptcy financing, which is needed to get through Chapter 11, is reportedly non-existent, so that may not be a present option, absent government financing in Chapter 11 (gee, there is an idea). Yet, it is unlikely that the government will let this get worked out in the bankruptcy courts. Why? Well one forecaster has about 200 billion reasons:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNv90nwWR0Wg&refer=home

They predict letting just GM fail will cost the U.S. $200 billion in aid to states, unemployment and the like. I have not done a critical analysis of this forecast (not that I am capable of that but it sounds good to say) but it sounds plausible that it is cheaper to keep the tens of thousands of jobs around for better days than to let the companies fail. I know Obama is going to tie support to a speed up in greener and more efficient cars being brought on line faster. I suspect these companies already have that message and are converting as fast as they can, though gas prices are down 50% in the past few months, so maybe they still need prodding. Either way, I don't see the government allowing these companies to fail. Perhaps one?? Who knows. By the way, I am not saying to buy stock, as this could be an AIG type of deal where the we get 79.9% of the stock (at 80% the government brings the company onto the government balance sheet, and we don't want that (because the government balance sheet looks so great right now)). If we are putting in big bucks, it should be that way. Isn't Communism great!!

Surprise!! Surprise!! Surprise!!

99% of the top selling brokers of Merrill Lynch are staying on to work for Bank of America. THAT IS UNBELIEVABLE!!! OH MY GOD - 99%!! This seems like an incredible percentage - until a single thought crawls into your brain. Which is . . . . . . . where the hell else are they going to get a job in this environment? These people are lucky to have a job. Beggars cannot be choosers and this is proof of that pudding.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZj2MHOlnlCI&refer=home

"Strong and Stable"

Gee, where have I heard words like these. Perhaps from executives of Lehman, Bear Stearns, Wachovia, WaMu, Merrill, Morgan Stanley (and as Yule Brenner said in "The King and I" "ectetera, ectetera, ectetera!") If you believe this from Citibank, you are on the wrong blog, respectfully.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYOr08Ji4N98&refer=home

For more on the financial strength of Citibank, this may interest you.

http://brontecapital.blogspot.com/2008/11/citigroup-whachovia-sheila-bair-and.html

This is Bad (I am pretty sure)

All this derivative stuff still makes my head spin (and hurt), and when you get to CDOs and CDOs squared and CDOs cubed and so on, my brain really begins to hurt. You have to consider tranches and the like, but overall, CDO is now a bit of code for "run away, run fast, run hard, and don't look back. Run for your life!!") Yves, who does NakedCapitalism.com, probably my favorite blog, has a nice piece on CDOs you would be wise to read. She knows her stuff, though pretty much all of this article is from Financial Times, and they also know their stuff:

http://www.nakedcapitalism.com/2008/11/more-cdo-defaults-in-offing.html

The Big Red Country

My five year old daughter, who is adopted from China, likes to look for China on globes by looking for the red country. A fair number of globe manufacturers depict it in red. So much so that when on a new globe we ask her to look for China she says she is looking for a red country.

The events in the past few years, or months, reflect that China has been privatizing businesses at a tremendous rate (which is making the government's task there in addressing their downturn more challenging), but as of late U.S. seems to be essentially nationalizing businesses at a similar rate. Go figure.

Nonetheless, China is having big problems. I have noted this repeatedly and I have said repeatedly that this is a major problem globally, especially for us. They are a major trading partner and they have been buying our Treasuries to support our spending and deficits. Soon, they may not be able to fund our foolish debt laden ways. And then what? Seriously, there are other countries that are enablers for us, but they are all having their own issues. What happens when the U.S. tries to sell bonds to support the alpahbet soup of facilities and the TARP and everything else and no one buys? What happens when the spigot is turned off? I suspect Bernanke starts up his printing press and climbs in his helicopter and inflation be damned. Just food for thought. For now China is still our (financial) ally. They do it for their own economic well being, but they may wake up to a different tune soon.

Later!