Post-Christmas: The Recovery

Well I have been through five gift openings at four locations so far and just two more to go. The last will be back home when we finally return. I do not remember all this house-to-house gift opening as a child, but, then again, I don't remember this many gifts either. Any hoot, it will be nice to get home. I enjoy seeing family, but there is a lot to be said for home-sweet-home.

Santa Scrooge

Despite all the gifts I saw, it appears that this was a rather slow season for retailers. Despite massive discounts, the customers were just not coming in the doors. I know this is bad news for retailers, but they will have to get used to lean times for some time to come. Those that can survive it will do well in the long run, those that cannot, well, cannot, which apparently explains some predictions for massive bankruptcies in 2009 and 2010 in the retail sector. If you have returns to do, the sooner the better as January is a big month for retailers filing bankruptcy. Undoubtedly they wait to see if a good holiday season helps to bail them out. Well, this year it ain't, so get ready.

http://www.calculatedriskblog.com/2008/12/wsj-retailers-brace-for-major-change.html

The good news is that at least some U.S. comsumers are hunkering down and doing some deleveraging. Consumer debt reached an all time high a few months back in relation to income and we must, I repeat must, stay within our incomes. Americans need to pay down personal debt and increase savings. Doing so will be a painful exercise for both the consumer and retailer, but it is a necessary evil.

Now I am not saying all these consumers suddenly woke up and learned how to be frugal overnight. I suspect most simply are at a point where they are given no choice. Credit card limits are being reduced, home equity lines are gone and incomes are being reduced. Without credit or cash you are really given no choice but to spend less. Some day folks may thank the credit card companies for reducing their lines or their mortgage company for eliminating the home equity line. That may be hard to imgine now, but some day they will be better off because of it. Until then, most will have a few choice words for their banks.

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

Then again, the market was up today, so go figure. Bloomberg attributes it in part to GMAC qualifying as a bank and, accordingly, qualifying for government aid. Given the very thin trading volume today, I would try to avoid reading too much into this either way.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a9CgUozSEpmw&refer=home

Burning Calories

A doctor in California (where else) reportedly was taking the fat from liposuctions and using it to make diesel fuel for his SUV and his girlfriend's SUV. Apparently some legislator with good foresight already had a law on the books prohibiting the use of human waste for fuel - go figure - so the good doc is on the lamb doing charitable work at clinics in South America. Just think, he can do the liposuction and power the generator for the clinic all in one transaction.

http://www.ktla.com/landing_topstories/?Doc-Busted-for-Using-Human-Fat-to-Fuel-C=1&blockID=171088&feedID=1198

Glad it is Not My Tax Dollars

A study in Japan has determined, and I quote, that "teens who skipped breakfast began having sex earlier than teens who ate breakfast." Aside from the fact that teens who skipped breakfast get out of the house sooner and, thus, got a head start, I fail to see the connection. Still, I didn't pay for the study, so I appreciate it's entertainment value. I hear there is a lobby being lead by Kellog to keep this study from becoming public (Not). Nonetheless, had I only known that all those bowls of cereal were holding me back as a teen . . .

http://www.ktla.com/content_landing_page/?Study-Teens-Who-Skip-Breakfast-Have-Sex-=1&blockID=171017&feedID=1080

Thin trading, thin news, thin post. Night all.

Disclosures: None.

Santa Edition

Well, somewhere in the world Santa is spreading his joy and in other parts, well, not so much. But we can still hope.

My daughter finally seems down for the eight count so I thought I might sneek in a post before the jolly old soul arrives. And talk about jolly old souls; it seems Asian stocks are up a good bit this evening on news that consumer spending only slowed .6% in November in the U.S. versus the anticipated .7%. Woohoo, let's party!!

http://www.bloomberg.com/apps/news?pid=20601087&sid=ab.yi64ezPkY&refer=home

Before you pop that cork, however, it looks like December may not fare quite as well. The weekend before Christmas - you know the retail big mama - fell 24% over last year in what Bloomberg says may be the worst holiday retail season in four decades. Sorry, you cannot put the cork back in the bottle and return it, but if you use one of those pressurized corks you may be able to make it last to new year's eve.

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

Oh, and did I mention, that first time jobless claims rose to 586,000?

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

When markets rise simply because the bad news is not quite as terrible - on some fronts - as anticipated, then it is a bit hard to get a sustained rally I would think.

More Dong for Your Bong

I admit that this is not a big deal but I had to go there for the heading. How often do you have a link to a devalued dong. I hear that happens when you get older, but I am not going there.

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

All I Can Say is Staggering

How can one state have a two-year budget shortfall of $42 billion? I realize that California was one of the hardest hit by the real estate bubble bursting, but there are an enormous number of wealthy people living in California that may need to be tapped to fill that void. Big void indeed, but big state indeed. Their problem is that they all get to vote on whether they want to pay taxes. And I thought we elected officials to tell us what to do?

http://www.bloomberg.com/apps/news?pid=20601109&sid=a5GbgGwA7BKM&refer=home

So How Have The Really Smart People Done?

Not so well, apparently. According to this calculation, Harvard through the Harvard Management Corporation has lost up to 50% in this down-turn. I sure am glad I am not nearly that smart. I would be in pretty bad shape if I had done what they did. Really, though, this is a good lesson. A lot of what is now considered a toxic investment was extremely complex but, for a while, very profitable. So much so that it seems no one really understood the risk. Well folks, when you cannot understand the risk, by definition it is to risky for you. But try telling that to someone from Harvard.

http://www.huffingtonpost.com/ed-epstein/how-much-has-harvard-real_b_152711.html

I know it is a bit light tonight, but tis' the season! So let me end with something not as light.

China

No catchy heading, no big lead in, just the bottom line. Some are predicting growth to go to zero or even negative in 2009, which for a country needing 5% to break-even this is a drastic recession. Moreover, even when it recovers, some are predicting it will never return to the growth rates of late (I agree) and will be in a difficult economic situation for years if not decades to come.

http://www.nakedcapitalism.com/2008/12/guest-post-how-can-no-one-see-imminent_23.html

Think about the knock on effects here. First you have the social and political problems, which I have discussed. It is kinda like a big panda bear with a hangover; not much is needed to piss it off. Second, think about the short to medium term impacts on various commodities. China was an increasingly major consumer of metals, oil and a variety of other commodities. If its growth rate goes to negative in the short term and single digits in the medium term, this is a major pressure valve letting the steam off of commodity prices. If accurate, commodity prices could well languish for some time. This helps the U.S. by making things more affordable, but it hinders other countries dependent on these commodity exports, which will lead to more instability in those countries. Remember the balance thingy I mentioned yesterday? Well this is an area where that is needed.

All-in-all, China sneezing is not a good thing.

http://www.nakedcapitalism.com/2008/12/guest-post-how-can-no-one-see-imminent_23.html

Disclosures: None

Happy Holidays!!

There is a chance that this will be my last post until after Christmas. Whether you celebrate Christmas or something else, happy holidays (or at least days off)!! I know I will probably get bored and sneak back on tonight after all are tucked away in bed, with visions of sugarplums dancing in their heads. I hope Santa does not consider me naughty for doing so. Later!

The Joys of the Mountains

Well, we had a nice strong wi-fi signal last night but I could not connect to the internet. Must have been a server down somewhere. I need to be brief as we are preparing for company, but I wanted to respond to a comment by Midnight. He/she notes some homebuilders will likely be going down in 2009 and can be expected to seek their own bailouts. Well, some already are going under or are already under, especially the small shops. The guy that built my house, for example, gave up and moved to Florida to do odd jobs. And those big ones still around are already asking the government to be included in the bailout. I do not have the link right now but I read about this happening just last week. So Midnight, you are dead on.

I suspect the relief will come more in the form of some homeowner related relief than direct support to home builders. They have already shed their employees so supporting them is not avoiding job losses. Moreover, we probably have too many home builders out there at the moment and shedding a few makes sense. From an investor perspective, figuring out those with the capital and credit to survive is key. Not that housing is going to come roaring back anytime soon, but if you are interested in that sector the key at the moment is avoiding those destined for bankruptcy.

Madoff Contagion

It seems Bernie Madoff is having repurcussions far and wide. From one reported suicide of someone who invested client funds with Madoff, to litigation flying left and right. I mentioned one fund-of-funds (FoF) last week, Fairfield Greenwich, that was likely to be sued. Well, it is being sued. Imagine that. Now NYU is in the game too, suing those that managed some of its money. And by "manage," NYU alleges they just handed it over to Madoff. Some "management?" Well, I suppose they earned a nice fee for this "management." It is nice to be middle man, at least until the crap hits the fan.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.vf3pTm9hlQ&refer=home

Disclosures: None

Hate It When I Am Right

literally. I am no big fan of doom and gloom and am hoping for a bright spot to show up soon. But I read the cards as I see them and lately not getting many good cards. I like to play blackjack in Vegas, though I have not been there in some time. Those that gamble know you have hot streaks and then some that are, let's say, not so hot. The former is what keeps people coming back and the latter is what prohibits them from coming back more often. Well, we are in the latter right now, from what I can tell.

In a word - housing

Another dismal performance by the housing sector. As Bloomberg reports:

"Sales of single-family houses in the U.S. dropped in November by the most in two decades and resale prices collapsed at a pace reminiscent of the Great Depression, dashing speculation the market was close to a bottom."

Now I am not going to say I told you so, but heck, why not. I told you so!
This is not tea leaves, it is just two-plus-two.

Another key point here is that foreclosures and short sales accounted for 45% of the sales, according to Bloomberg. Not a pretty sight. Actually, I beg to differ. I think it is a pretty sight.

We need to get there and the faster the better. We especially need to do so before the government tries some stupid tricks to prop up mortgages or prevent foreclosures. I have friends and family on the verge but that does not change the fact that the pain is inevitable.

This reminds me of a child with a splinter. They would rather live with the pain of it for days to avoid the minor immediate pain associated with removal. They know eventually it has to come out, but they try to avoid that day of reckoning as long as possible. Well, in my book, the sooner the better, so the dismal housing report is a good thing, believe it or not. How is that for a silver-lining?

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

I will post more later after everyone goes to bed but the wife is complaining about the "financial guru" (she does not mean this) doing his blog on vacation while dinner is being prepared.

Disclosures: None

In-Laws Day Three

Surviving fairly well. Only a few minor meltdowns so far, and none of them by me. It is early yet, so we shall see how the week moves along.

Bail-out Smail-Out

Apparently the Bush (temporary) loan/bailout of the U.S. auto manufacturers is not making the rating agencies all warm and fuzzy. GM and Ford both got downgrades today, from S&P and Moody's, respectively. They are both several grades below investment grade so in some respects it is relative. Either way, neither is about to attract anyone's money until folks have faith that they will survive. Until then, Uncle Sam continues to be the lender of only resort (other than Canada, which gave their Canadian subs a few billion). Not big news, but the fact that this follows the supposed bailout is telling on whether this is a turning point.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeb9Jow5oXNY&refer=home

Stocks Down

Again, hardly a surprise. Not a particularly big drop. I mention it because I expect to see more of the same over the next two to three months. First, as we approach year end, you will have mutual funds and others realigning their portfolios and dropping some duds so that they do not have to report them in their year end books. Second, I believe there will be more hedge fund quarterly redemptions, which will create more pressure in January and beyond as they have 90 days to pay up, typically. Third, the fourth quarter and year end results will be horrendous, so this will put pressure on the markets throughout February and March. Just my take. Let's revisit in three months to see if I guessed right. And by the way, that is all it is - a guess.


http://www.bloomberg.com/apps/news?pid=20601087&sid=aEcUjf7SQK60&refer=home

Back to "Normal"

I have spoken here often about how the economy is not about to return to where it was in 2007 any time soon, nor should it, as we were at artificially inflated - or you might say abnormal - levels of credit, debt, consumption and everything else that builds a bubble. These were all things that in time simply revert to mean. The problem is in defining mean. Mean has been in a process of distortion for years, well over a decade, and mean itself may need to revert to mean. So what is normal? I suspect over the next 2-5 years we will all find out.

Here in a piece by Cassandra, she talks about what is normal and how recent past has distorted expectations in this regard. It is a common theme here. We are going to have a new world after this recession. Then again, you may view it as a very old world, depending on your perspective. Either way, we have all been spoiled and now they are taking the punch bowl away. Get used to it.

It will be boring or even down right depressing for a while living this way. Then again, all this fiscal stimulus could succeed in building yet another bubble to help us escape the current mess, which should truly make the next bubble prick most spectacular! Only time will tell. I just hope to have my retirement under my mattress before the next one pops, if that is what happens. The alternative I fear is a long recession followed by a slow and unexciting recovery. Not rosy either way.

http://nihoncassandra.blogspot.com/2008/12/if-you-cant-tell-who-sucker-is.html

Wage Deflation

It is what it is and it is happening left and right. Those that still have jobs are seeing wage deflation. This does not always need to take the form of smaller per hour wages. It more often takes the form of shortened work weeks, unpaid vacations, lessened benefits, brief shut downs and the like. Wage deflation is not terribly upsetting when there is commensurate price deflation to match it, but that is hard to expect across the board. Sure, we are seeing gas down, for now, and retail sales are providing bargains, as are lower housing prices, but certain things are not going down. Food prices and fixed rate mortgages for two. By fixed rate mortgages, I do not mean new mortgages, which are going down. Rather, I am talking about the millions of people like me who have them already. If you have one and your pay goes down, the bank still wants the same monthly payment. And other prices will either hold steady or increase in price in due order. This too will cause this recession to drag on.

http://www.nakedcapitalism.com/2008/12/wage-deflation-underway.html

Gettin' Down With The OTS

Quiz question, when is supervision not supervision? Answer, when it is supervision in name only, which has been the case with the Office of Thrift Supervision for quite some time. They were seen as the more "flexible" regulator, so banks preferred them. It is hard to say any regulator was exactly breathing down the necks of those they regulated this past decade, so when banks seek yet an even more flexible regulator that means something is afoot that really needs regulating. Looks like the OTS needed supervision itself. It is now accused of letting those it supervised commit fraud through backdating. In "normal" times I would be shocked. Hopefully some day stuff like this will shock everyone again.

http://www.calculatedriskblog.com/2008/12/ots-official-accused-of-backdating.html


Credit Watch

Calculated Risk does a nice daily take on a variety of credit indicators. Right now it is quite a mixed bag. The one that optimistically has my attention at the moment is the three month LIBOR, which is down significantly off its peak. Still a bit high, but down nicely. Between that and three month treasuries at 0%, you will have many adjustable rate mortgages that could reset lower over the next 12-18 months. Not all of them mind you. Some homeowners, for example, have option ARMs that allowed them to pick among payment options. They could have picked an interest only option such that they have paid no principal for a few years and now must amortize it all over shorter period. There were even even loans that allowed you to pay even less and increase the principal. So while the low rates are promising and they might help us reach a bottom sooner, they will be little help the most foolish of the fools, who will likely still see increased payments..

Even those who are helped by lower payments are well advised to find refinancing and lock in a fixed rate if the can. If the flooding of the economy with fiscal stimulus does have the desired effect over the short or medium term and that results in inflation, do not expect these rates to stay low forever. Over the short term deflation may drive them even lower (below 0%, however, is going to be tough), but eventually (like yesterday) you will wish you had locked in a rate sooner.

http://www.calculatedriskblog.com/2008/12/credit-crisis-indicators_22.html

Wait, look, it seems people are already looking to lock in those new lower rates and refinance. Refinancing applications are up sharply. Now all these applicants have to do is pray their homes appraise above water, their credit is not too low and their employer does not confess to the bank how shaky their job situation truly is at this point in time. Maybe, just maybe, some of these refinancings will be approved and housing starts to reach a bottom. The problem for me if I am a lender, I know fiscal stimulus can, and eventually probably will, lead to vicious inflation, so how many really low rate loans am I looking to lock in and who am I interested in lending to? The answers - not many and only to those with the best credit, i.e. those that probably really do not need to refinance. Those on the edge needing to refinance before their rate resets may not get what they are looking for. If they do, I will be pleasantly surprised.

http://www.minyanville.com/articles/bac-Fed-Federal-Reserve-tbt/index/a/20419

Disclosures: None

On Balance - We Need Balance

Here is a genuine fear heading into the times ahead - overregulation. The pendulum most definitely swang too far to the deregulation side of things (though some that I follow say our problems are still due to too much regulation, which I will discuss at the end of this piece), so the natural counter is to swing it back the other way, with a vengence. I certainly agree that deregulation was taken too far. Corporations were given far too much say in how to value their books, the nature and amount of debt they took on, and how they were allowed to report things. Aided, mind you, by ratings agencies willing to give a AAA rating to me securitizing a loan from my dog - she is good for it, honest. And now when the house of cards caves, it is time to fix the problem. My concern is that we may over fix the problem.

One problem may show its head in trade protectionist activities. Bailing the auto companies might be viewed as such. Another problem, and one likely more imminent, is replacing lax to no regulation and oversight to overly burdensome regulation and oversight. Moreover, government risks throwing the baby out with the bath water. Not every American corporation was a bad player here. Indeed, a good case can be made that the vast majority of American corporations were trying to do the right thing for their shareholders but have now been caught up in a recession and credit crunch not of their own making. Many may have gotten a bit addicted to credit, but it can be hard to resist when banks are throwing it at you with low rates. Still, most bear little blame for our current mess, and Congress needs to do what it can not to overburden them, especially when they are on the edge already, with costly over regulaiton.

The balance we need to achieve going forward will be quite difficult in this environment but someone (hopefully Obama) needs to keep a cool head and push for more, yet moderate, regulation. I am a big fan for doing enough but not too much. Keep the process simple and inexpensive as you can, but some regulation and oversight is absolutely necessary. Let's do away with some things that are welcoming trouble, like 40-1 debt to equity ratios, Level 3 assets, CDSs and the like and force corporations to be a bit more boring. You know, like cockroaches. Profits will not soar absent a truly great innovation or product - such as an efficient and economical alternative energy source, but that is a good thing. As it turns out, few (other than over-paid CEOs) benefit from make-believe profits. Yet to get there, we need government to work toward the right balance. With the social unrest building, pressure will be on to do more, but we need to move cautiously and deliberately in these times. Time will tell if we achieve the right balance.

http://www.bloomberg.com/apps/news?pid=20601087&sid=avJ43XHySeVs&refer=home

I mentioned that some still think that we have too much regulation, and government in general, and that is the problem, not the lack of regulation. One of them is Mish, who I follow. He can make a convincing case for doing away with the Fed, with Fannie Mae and Freddie Mac, with the alphabet soup of Fed facilities and with a lot of other government programs, much of which I agree with. I have ranted here against what the Fed is doing, the TARP, about pushing Fannie and Freddie to take on more junk, but there is a world of difference in my opinion between doing the wrong thing and doing nothing at all. The SEC did virtually nothing and we have the collapse of Lehman, Merrill Lynch and Bear Stearns to thank for it, not to mention Madoff. We do need to carefully consider our moves before doing them. That has been one of the major problems with the TARP; it was not well thought out to begin with and it keeps changing approaches, which does not inspire confidence. So Mish, I must disagree with you on being totally free-market oriented, though I agree with you on a lot.

http://globaleconomicanalysis.blogspot.com/

Disclosure: None

Blogging West Virginia Style

I sit here about a mile from any road with no cell service, with my wife pasting our faces onto elf bodies that will soon dance on her blog site. Life doesn't get any better than this! But I do have internet access. Bless my mother-in-law for getting wi-fi. There is a Santa Claus!!

Social Unrest

No, I am not talking about that feeling that sets in after two days cooped up with the in-laws. That does not start until day four of five usually. I am instead talking about on the larger scale. I have discussed some social unrest taking place in China. The people there do not have the channels we have for addressing their outrage. They cannot contact their Congress men and women and rant, only to receive back a standardized email. They cannot take out their feelings by their vote. All they can do is protest, and that is difficult too.

Well, China is not alone in social unrest. Unrest in Greece has been on the news and tied to the police shooting a 15 year old. Well, it could have deeper roots than this. And it could be - and become - far more widespread, as Michael Panzner reports. Could this youthful outrage start up here across the pond? If things get worse and the government continues with bone-head moves, I would think so. For now, however, I believe youth here are happy to see Obama elected and will bite their tongues for a while to see what he is able to accomplish. If he does not readily bring the change he said he would . . . well . . . did I mention Canada is a nice place to live.

http://www.economicroadmap.com/2008/12/spreading-far-and-wide.html

Who Wants To Be A Cockroach

I recommend this piece because, if for no other reason, it is very well written. It likens hedge funds to furu (have to read it to understand) and long term stodgy investors to cockroaches. I especially like the line about how cockroaches never take over the world, they just inherit it. Truly is a good read. Point of the article, or at least one of them, is to point out that many corporations today are also like furu, very specialized. Does not take too much of a change in economics to destroy their business model and their profit.

http://ultimibarbarorum.com/2008/12/18/i-want-to-be-a-cockroach/

The Blame Game

This will go one for decades to come, so it will certainly be worth mentioning every now and then. Who is to blame for our current mess? A lot of people start their list with Greenspan. Some with Clinton. Some with Gramm. But probably most start with a single letter - W. Mind you, there is plenty of blame to pass around and all the people on the list get a their fair share, but I suspect W is as guilty a player as any and guiltier than most.

Barry Ritholtz did a nice piece commenting on the NY Times, which did not do as good a piece, placing the blame on dear old George. I am posting it because I agree with it. I do sometimes post things I do not wholly agree with, but not everyone can be as right as me.

http://www.ritholtz.com/blog/2008/12/nyt-blaming-bush-for-the-wrong-things/

No %$^& Sherlock

Two things about this article get me irked. First they title it "New figures show that recession is deepening," but then all they report on is economists' predictions for the upcoming week. Now part of me says this is the UK, so what do I care, but "news" outlets on both sides of the pond do this regularly, which leads to my second irk; the economist have been wrong and behind the curve on this for a long time, generally speaking. Sure you can point to a few with their heads on straight. Those looking at the two-plus-two facts I discussed the other day. But many of these experts seem to ignore the data and predict rosy seas ahead.

The attached notes that economists, finally, are getting gloomier about the outlook. Boy I wish I had seen that coming. I could have protected my portfolio better with that knowledge.

http://business.timesonline.co.uk/tol/business/economics/article5375480.ece

You Ponzi

Some of us build fame and fortune in different ways. A few, like Madoff, start with fortune (for many), which leads to fame (for him), and then lose fortune (for many), which leads to even more fame (for him). The fame is, unfortunately, especially long lasting when it is based on misconduct.

Well, they keep calling the Madoff scheme a Ponzi scheme, so it would seem that Bernie's ability to get the most fame out of this is preempted. It already has a name thanks to Charles Ponzi. Madoff seems to have perfected it a bit better, making it last an unbelievably long time, but Ponzi still gets his name pinned to it. If you are unfamiliar with Charles Ponzi, here is a nice article on the financial magic he performed in all sorts of investments.

http://timesonline.typepad.com/timesarchive/2008/12/charles-ponzi-a.html#more

As the derivatives market has shown us, we are all Ponzis now!

Disclosures: None