Bottom?
I think not. It is promising that we did not give up a significant part of yesterday's gain and promising that the Asian markets are (right now) up three days in a row. Also promising that credit continues the slow thaw and that emerging market currencies are rebounding. All promising. So why am I a bit skeptical?
Let me count the ways:
1. Credit, while thawing slowly (the three month LIBOR down 13 days in a row) is still at very high levels and it is leading to companies paying very high rates. Some companies, to secure new credit lines, are agreeing to tie their credit rates to the rates on credit default swaps (CDSs) rates on their bonds. CDSs are not regulated, are not on an exchange and are not uniform. Their rates vary wildly on daily market sentiment, so it is insane for them to agree to this. While these companies are negotiating caps and the CDS rates are only a portion of the rate calculation, the very fact that they are agreeing to this indicates how desperate companies are for credit.
http://www.nakedcapitalism.com/2008/10/money-market-rates-still-improving.html
And in another sign on how credit lines are tight, companies involved in international trade are having incredible difficulty getting letters of credit, which is bringing international trade to a screeching halt. The Baltic Dry Goods Index, a barometer of shipping, dropped over 90% in a matter of days. This has consequences of monstorous proportions. Food not making it to hungry people, being number one on my list. And beyond starving people, there are starving companies. Perhaps not yet as companies live off inventories, but in the not too distant term, companies will need to get supplies flowing again. This needs no further explanation. It is a global logjam and it is scary. As I said the other day, time to not smell the coffee.
2. Stories abound more and more each day about how consumers are at their limit, how credit card companies are cutting lines, making fewer offers and charging higher rates, and how companies are cutting jobs. Yes this is a lot of the usual stuff you see in a recession, but we are at the beginning of this show, not the end. The markets do usually rebound about six months before a recession ends (traditionally) but anyone who thinks this recession is ending in six months is medicinally advantaged. As Meg Ryan said in When Harry Met Sally, "I'll have what she is having!" When 71% of your GDP is cutting back sharply (consumer spending is 71% or our GDP), sustained gains in the market are not likely. Hell, when consumer spending is 71% of your GDP, you should not expect a rally.
3. Consumer spending (see above) brought us out of the last couple of recessions. The last one, the dot com bubble, was centered on technology companies, not consumers. Sure, consumers who put big dollars into companies that bragged about how much money they were losing lost some spending ability, but overall, consumers were still spending (as it now turns out this was because of easy credit allowing consumers to spend beyond their means, but that is for another longer post). Consumer spending will not get us out of this one and will, in fact, make it worse.
4. While some reports noted that the Lehman, WaMu and other CDS settlements were not as drastic as anticipated, they are still apparently draining liquidity from the market and adding to the credit problems. The Fed is not supporting weaker and smaller failing banks, so there will be a lot more defaults, and companies that cannot get credit will be on the default wagon too, so CDSs will continue to add stress.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aAlL4MNH7M8Q&refer=home
Keep in mind that CDSs were up to a notional value of $62 trillion and are now back to just $54 trillion (with a T), which is several times over the GDP of the entire planet. Now this will not be the payout, but it does not take a large percentage to soak up a lot of the liquidity that the Fed and Treasury are pumping into the system.
http://www.nakedcapitalism.com/2008/10/how-credit-default-swap-settlements-are.html
5. The misery index (don't ask) is at a record high. Very similar to the consumer sentiment being at an all time low, but more factors are considered in the misery index than just consumer sentiment. Do you really need some index to tell you how miserable you are?
6. There are various mutual funds that are required to keep a certain percentage of their dollars in equities. Now they can get by with having some of the assets in cash on the side-lines between month end reports, but come month end they need to be able to report that they have the required amount of funds in equities. Guess what, we are nearing month end and the equity markets are up. What might happen at the bigging of next month?
7. The subprime mess started the ball rolling but it does not end there. Adjustable rate mortgages (ARMs) are for the most part in the Alt-A category (between subprime and prime) and most of these are resetting on rates next year. We will have 3-5 years of poor ARM loans resetting in a relatively short period and that is all at a time when a significant number of homeowners are under water (owe more on their homes than they are worth) are facing job stesses and other credit problems. And a lot of ARM reset rates are tied to the LIBOR, which is still near record levels, so people are looking at their mortgage payments going up 50-80% next year. I think we have the programs in place to address this, but it will be painful and the worst is not necessarily behind us.
8. Housing seems to be closing in on a bottom, but I just saw stats on how the FHA's percentage of loans this year has skyrocketed, but they have new reqiurements hitting this month that will slow that rise, i.e. homeowners have to pay their own down payment, builders cannot pay it for them. It seems that the previous loan standards, which basically allowed buyers to be homeowners with nothing down if the builder paid the down payment, were resulting in a significantly increased rate of defaults (go figure?). This (new and good requirement) will slow down those sales and may make a dent in the apparent progress of home sales.
9. And the biggest factor in why I do not expect we are at a bottom yet- drum roll please - I put most of my retirement back into equities a week ago, and there is no way I was that good at catching the bottom. In fact, reading 1-8 above has me reconsidering my move.
.5% Rate Cut - Hip, Hip Hooray!
That may not have been quite the reaction. A lot of analysts were predicting .75% and some 1%, so today's move was to some a disappointment. Then again, to those who know what is happening, who cares. Yes, dramatic rate moves have led to one or two day bounces this year, but they have had no lasting effect. Lending is still relatively non-existent and at high rates. Equity markets only get better for a day or two. It just does not work in this environment. Bernanke knows this, as do the other Fed folk, but they also know that no cut when one is expected has a negative effect. So what do you do? Make a big cut like the market expects, only to see the effects wear off in a day or two? Make no cut and suffer the consequences? Or do a minimally acceptable cut that is okay and meets most expectations but that still keeps most of your powder dry. Right now the Fed has more influence by what they have left to cut than by what they have cut. Think about it, if they cut the rate down to .75%, people realize there is a pretty short limit to how much more they can do. Hope is lost. Japan went to zero, I believe, during the lost decade (now 26 years), and it did nothing to help (okay, perhaps a little). The Fed does not want to be sitting in a corner with no more bullets in its gun, so cutting the least they could do with a straight face made abundant sense. More important now to have the prospect of future cuts than the realization that the Fed has little left it can do.
Sorry so short and so late but a busy day at the office and I am still sick and tired (excuses, excuses)
Wednesday, October 29, 2008
Tuesday, October 28, 2008
WOW!!
Why The Bounce?
So we had an okay kind of day, UNDERSTATEMENT!!! Second largest point climb in the Dow ever! So the real question becomes, why? Are we at the elusive bottom, is it a dead cat bounce (my wife hates this phrase by the way), was it some news that was announced or are people just bored and wanting to do something with their money. THE ANSWER IS - YES!!
In short, we were ready for a bounce, ready for any news to justify it and the market was a great deal oversold. And there were some positive signs today justifying a change in direction. Perhaps not the - Starsky and Hutch slam it in reverse at 90 miles per hour and flip the car into reverse - kind of change in direction, but who does not like a little drama. With the VIX hovering near all time highs, this kind of volatility is not altogether surprising. Let's dig a bit deeper on why.
As noted this morning, cheap valuations and BP beating estimates is hardly an excuse for this big of a rally. Small rally yes, near record settging, not. Valuations, I must say, should not be underestimated, as we are incredibly cheap. That explains some, but not these levels as valuations have been cheap for some time.
Money sitting on the sidelines itching to get in is another reason, but again this has been the case for weeks. So why now?
Well Bloomberg is now in part attributing the rise to some fairly significant progress in commercial paper. Not to toot my own horn, but I said yesterday that the most effective move by the government to date was to insure that the companies in this country that are our life blood - not the assinine banks - get the credit they need, is the key to moving us off the mark. Well, it seems insuring credit to those that matter, not those that got us here, may be important. May not be the end all and be all, but this is my bet on why the markets did so well today - at least one of the top of many reasons.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAVJwAsjSn2Y&refer=home
There are other reasons here, probably millions of them, but these seem to be up on the list. One issue I have with Bloomberg is that they seem to pick a reason or two for any market change and leave it to that, which is a disservice. Don't get me wrong, Bloomberg is one of the best financial news servises and has less agenda than most others, but they are always providing the "why?" whether they have any clue or not (and of course I just tried to do the same.) Their headline today could have plausibly read "Consumer Sentiment Reaches Record Low - Stocks Gain The Second Most Ever." Oddly this would have been factually correct, which is another reason I expect a bit of selling tomorrow into this rally. Yes,it seems, we consumers are a rather depressed lot, moreso than ever since records began in the 1960s:
http://www.elliottwave.com/freeupdates/archives/2008/10/28/Lowest-Confidence,-2nd-Highest-Stock-Gain-What-Gives.aspx
So What Is Next
That is the question daily. What is next? Will people play into the rally and cash in some short term gains? Will this have legs for another day, another week, another month or are we at bottom and into a sustained long term rally? I can decisively say that no one in the entire world has the answers to these questions. But, if you want input from someone who hears nothing, sees nothing, knows nothing and promises nothing, here we go.
I think this is a short term bounce. It is anyone's guess whether this is a one day bouce or a three day bounce. If we see any more significant bounce on Wednesday, I can live with that, but I will be surprised to see more bounce Thursday if that happens. Too much turmoil to support a sustained bounce in my opinion and I still think hedge funds have more liquidations to do in the short run, though no sudden drop in the last half hour today (like yesterday) is promising that the hedge fund redemptions are mostly "spent" for this quarter (like Johnny Holmes (God bless his soul) at the end of one of his movies). We will see.
Tomorrow, two scenarios are leading the odds in my thinking. There could be a further rise off of today's momentum. But given today's near record climb, I expect some profit taking. Nothing too major compared to today's climb, but I expect a 2-3% decline. The better question is after that, and this depends more on news than market dynamics. The banking crisis seems to be largely behind us (systemic crises ONE), the credit crisis - mostly commercial paper - seems to perhaps be behind us (systemic crisis TWO) and we are now working on the submerging economy/currency crisis, which is not yet behind us. Improving markets globally will help this last crisis a lot, but it is still a worry. If we can put this latest systemic crisis behind us and no more line up to replace it, it could be off to the races- but for that old nasty recession (longer and deeper than most) that we are squarely in. Still, recession is one thing and systemic crisis is another. If we get behind the latter, I am all in on the market as the valuations in the market are indeed ridiculously low. You decide for yourself.
Okay folks (or perhaps just folk based on my hit count) but I am sick, literally, tired, literally, and I would love to post more but I need rest. Tomorrow. Peace.
So we had an okay kind of day, UNDERSTATEMENT!!! Second largest point climb in the Dow ever! So the real question becomes, why? Are we at the elusive bottom, is it a dead cat bounce (my wife hates this phrase by the way), was it some news that was announced or are people just bored and wanting to do something with their money. THE ANSWER IS - YES!!
In short, we were ready for a bounce, ready for any news to justify it and the market was a great deal oversold. And there were some positive signs today justifying a change in direction. Perhaps not the - Starsky and Hutch slam it in reverse at 90 miles per hour and flip the car into reverse - kind of change in direction, but who does not like a little drama. With the VIX hovering near all time highs, this kind of volatility is not altogether surprising. Let's dig a bit deeper on why.
As noted this morning, cheap valuations and BP beating estimates is hardly an excuse for this big of a rally. Small rally yes, near record settging, not. Valuations, I must say, should not be underestimated, as we are incredibly cheap. That explains some, but not these levels as valuations have been cheap for some time.
Money sitting on the sidelines itching to get in is another reason, but again this has been the case for weeks. So why now?
Well Bloomberg is now in part attributing the rise to some fairly significant progress in commercial paper. Not to toot my own horn, but I said yesterday that the most effective move by the government to date was to insure that the companies in this country that are our life blood - not the assinine banks - get the credit they need, is the key to moving us off the mark. Well, it seems insuring credit to those that matter, not those that got us here, may be important. May not be the end all and be all, but this is my bet on why the markets did so well today - at least one of the top of many reasons.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAVJwAsjSn2Y&refer=home
There are other reasons here, probably millions of them, but these seem to be up on the list. One issue I have with Bloomberg is that they seem to pick a reason or two for any market change and leave it to that, which is a disservice. Don't get me wrong, Bloomberg is one of the best financial news servises and has less agenda than most others, but they are always providing the "why?" whether they have any clue or not (and of course I just tried to do the same.) Their headline today could have plausibly read "Consumer Sentiment Reaches Record Low - Stocks Gain The Second Most Ever." Oddly this would have been factually correct, which is another reason I expect a bit of selling tomorrow into this rally. Yes,it seems, we consumers are a rather depressed lot, moreso than ever since records began in the 1960s:
http://www.elliottwave.com/freeupdates/archives/2008/10/28/Lowest-Confidence,-2nd-Highest-Stock-Gain-What-Gives.aspx
So What Is Next
That is the question daily. What is next? Will people play into the rally and cash in some short term gains? Will this have legs for another day, another week, another month or are we at bottom and into a sustained long term rally? I can decisively say that no one in the entire world has the answers to these questions. But, if you want input from someone who hears nothing, sees nothing, knows nothing and promises nothing, here we go.
I think this is a short term bounce. It is anyone's guess whether this is a one day bouce or a three day bounce. If we see any more significant bounce on Wednesday, I can live with that, but I will be surprised to see more bounce Thursday if that happens. Too much turmoil to support a sustained bounce in my opinion and I still think hedge funds have more liquidations to do in the short run, though no sudden drop in the last half hour today (like yesterday) is promising that the hedge fund redemptions are mostly "spent" for this quarter (like Johnny Holmes (God bless his soul) at the end of one of his movies). We will see.
Tomorrow, two scenarios are leading the odds in my thinking. There could be a further rise off of today's momentum. But given today's near record climb, I expect some profit taking. Nothing too major compared to today's climb, but I expect a 2-3% decline. The better question is after that, and this depends more on news than market dynamics. The banking crisis seems to be largely behind us (systemic crises ONE), the credit crisis - mostly commercial paper - seems to perhaps be behind us (systemic crisis TWO) and we are now working on the submerging economy/currency crisis, which is not yet behind us. Improving markets globally will help this last crisis a lot, but it is still a worry. If we can put this latest systemic crisis behind us and no more line up to replace it, it could be off to the races- but for that old nasty recession (longer and deeper than most) that we are squarely in. Still, recession is one thing and systemic crisis is another. If we get behind the latter, I am all in on the market as the valuations in the market are indeed ridiculously low. You decide for yourself.
Okay folks (or perhaps just folk based on my hit count) but I am sick, literally, tired, literally, and I would love to post more but I need rest. Tomorrow. Peace.
Gentlemen, Start Your Engines
Hang Seng up 14%, Nikkei up 6.4% and Germany so far up 4.8%. What gives? Bloomberg attributes it to BP Plc's earnings topping estimates and stocks globally being at low levels. Both accurate points but stocks being low is nothing new, and one stock beating estimates does not a bull market make.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a1cgRaO.u4o8&refer=home
Nonetheless, there is a lot of capital out there on the sidelines waiting to get back in the market, so it may not take too much of an excuse, especially with increased noise lately on nearing a bottom. I don't see an extended bull run until things globally calm a bit, but this could have legs for a couple of days. There are a lot of terrific values out there as the MSCI World Index shows, so this will eventually take hold, but I suspect we will bounce around for a while as we gyrate from occasional good news to more bad news.
More Good News
On the good news front (and better news than just one company beating estimates), credit continues to thaw, at least for most the world. This is still a slow thaw and rates are still horrible compared to traditional norms, but keeping this going in the right direction is an important step. It indicates credit is becoming available from entities other than the governments.
http://www.bloomberg.com/apps/news?pid=20601087&sid=abK4GvSOlofE&refer=home
And Some Not So Good News
The Baltic Dry Goods Index continues to languish. Given the fall off in demand, one would expect this to happen, but perhaps not to the extent it has happened. Yves at NakedCapitalism has for some time suspected that it is not due to simply a drop off in demand. Rather, it is in part due to traders unable to secure necessary letters of credit. Apparently they are not at the top of the banks' lists in terms of credit-worthy applicants and without letters of credit, trade collapses. This is not a situation that can be allowed to persist and hopefully will soon get the attention of the governments of the world. This also might magnify the looming food crisis as crop exports sit in ships and rot. A world dependent on global trade will hopefully soon wake up and realize it cannot smell the coffee because the coffee beans are still sitting on some ship in South America.
http://www.nakedcapitalism.com/2008/10/confirmation-of-role-of-financing.html
And Some Decidedly Bad (Potential) News
Jim, at Survivalblog.com points out some reasons why he thinks a depression today could be far worse than the Great Depression. He largely ties this to people today being less self-sufficient and the country in general being more dependent on foreign trade for what we need. He makes some sense, so let's hope we don't go there.
http://www.survivalblog.com/2008/10/letter_re_the_depression_of_th.html
I Didn't See That One Coming
Here is an interesting piece on how Goldman Sachs and Morgan Stanley becoming banks, Bear Stearns merging with a bank and Lehman going under may have contributed to the problems in emerging economies and currency changes. Capital requirements for banks are more stringent than for securities firms (especially after the SEC loosened requirements for the securities firms a few years back), so when these companies became banks earlier this year, they had to rein in credit. Unfortunately for hedge funds, this meant a lot less credit from their prime providers of credit, which came at the same time as unprecedented redemptions. The result was lots of hedge funds liquidating assets, including, apparently, lots of emerging market investments. Undoubtedly this had an impact on the markets of developed countries too. The question you need to ask yourself punk, is do you think the hedge funds have any more bullets left in that gun.
http://www.nakedcapitalism.com/2008/10/emerging-markets-capital-flight.html
Auto(matic) Problems
GM and Chrysler are still debating a union of two negatives making a positive. Meanwhile, Ford is no better off. And with the Yen appreciating big time, who knows the impact on Toyota. Short story, car companies, wherever based, are going to suck air for a year or two. Long story - very long story - unless you think some new company will come in with biodiesel, solar, hydrogen, electric or some other alternative energy cars that totally change the dynamic, then some of these car companies will survive and thrive. The trick, as always, is timing and picking the survivors. The U.S. auto companies are on the ropes and likely will only survive with (more) help from Uncle Sam, which I suspect will be forthcoming. But who really knows?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aET247KR5diM&refer=home
It could be that the winner here will be Volkswagen. Up over 50% today in the German market on an announcement that Porsche will raise its stake in the company to 75%. I saw one report that, at least temporarily, VW surpassed Exxon as the largest company in the world in terms of market cap.
Hang Seng up 14%, Nikkei up 6.4% and Germany so far up 4.8%. What gives? Bloomberg attributes it to BP Plc's earnings topping estimates and stocks globally being at low levels. Both accurate points but stocks being low is nothing new, and one stock beating estimates does not a bull market make.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a1cgRaO.u4o8&refer=home
Nonetheless, there is a lot of capital out there on the sidelines waiting to get back in the market, so it may not take too much of an excuse, especially with increased noise lately on nearing a bottom. I don't see an extended bull run until things globally calm a bit, but this could have legs for a couple of days. There are a lot of terrific values out there as the MSCI World Index shows, so this will eventually take hold, but I suspect we will bounce around for a while as we gyrate from occasional good news to more bad news.
More Good News
On the good news front (and better news than just one company beating estimates), credit continues to thaw, at least for most the world. This is still a slow thaw and rates are still horrible compared to traditional norms, but keeping this going in the right direction is an important step. It indicates credit is becoming available from entities other than the governments.
http://www.bloomberg.com/apps/news?pid=20601087&sid=abK4GvSOlofE&refer=home
And Some Not So Good News
The Baltic Dry Goods Index continues to languish. Given the fall off in demand, one would expect this to happen, but perhaps not to the extent it has happened. Yves at NakedCapitalism has for some time suspected that it is not due to simply a drop off in demand. Rather, it is in part due to traders unable to secure necessary letters of credit. Apparently they are not at the top of the banks' lists in terms of credit-worthy applicants and without letters of credit, trade collapses. This is not a situation that can be allowed to persist and hopefully will soon get the attention of the governments of the world. This also might magnify the looming food crisis as crop exports sit in ships and rot. A world dependent on global trade will hopefully soon wake up and realize it cannot smell the coffee because the coffee beans are still sitting on some ship in South America.
http://www.nakedcapitalism.com/2008/10/confirmation-of-role-of-financing.html
And Some Decidedly Bad (Potential) News
Jim, at Survivalblog.com points out some reasons why he thinks a depression today could be far worse than the Great Depression. He largely ties this to people today being less self-sufficient and the country in general being more dependent on foreign trade for what we need. He makes some sense, so let's hope we don't go there.
http://www.survivalblog.com/2008/10/letter_re_the_depression_of_th.html
I Didn't See That One Coming
Here is an interesting piece on how Goldman Sachs and Morgan Stanley becoming banks, Bear Stearns merging with a bank and Lehman going under may have contributed to the problems in emerging economies and currency changes. Capital requirements for banks are more stringent than for securities firms (especially after the SEC loosened requirements for the securities firms a few years back), so when these companies became banks earlier this year, they had to rein in credit. Unfortunately for hedge funds, this meant a lot less credit from their prime providers of credit, which came at the same time as unprecedented redemptions. The result was lots of hedge funds liquidating assets, including, apparently, lots of emerging market investments. Undoubtedly this had an impact on the markets of developed countries too. The question you need to ask yourself punk, is do you think the hedge funds have any more bullets left in that gun.
http://www.nakedcapitalism.com/2008/10/emerging-markets-capital-flight.html
Auto(matic) Problems
GM and Chrysler are still debating a union of two negatives making a positive. Meanwhile, Ford is no better off. And with the Yen appreciating big time, who knows the impact on Toyota. Short story, car companies, wherever based, are going to suck air for a year or two. Long story - very long story - unless you think some new company will come in with biodiesel, solar, hydrogen, electric or some other alternative energy cars that totally change the dynamic, then some of these car companies will survive and thrive. The trick, as always, is timing and picking the survivors. The U.S. auto companies are on the ropes and likely will only survive with (more) help from Uncle Sam, which I suspect will be forthcoming. But who really knows?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aET247KR5diM&refer=home
It could be that the winner here will be Volkswagen. Up over 50% today in the German market on an announcement that Porsche will raise its stake in the company to 75%. I saw one report that, at least temporarily, VW surpassed Exxon as the largest company in the world in terms of market cap.
Monday, October 27, 2008
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
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!
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
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!
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