A February To Forget

That was a very ugly month, a very ugly month indeed. The DOW was down close to 12% and the S&P close to 11%, back to 1996 levels. The S&P is now lower than when Greenspan gave his famous "irrational exuberance" speech (I took this fact from Calculated Risk). But that is just the symptom, not the cause. What is the cause? Well, there are a host of candidates and unlike some news media organizations I will not tell you which one is to blame because all of them and thousands, even millions, more are to blame. Here is a compilation of a few prime candidtates:

1. Doubts over the new Administration's plans are top on my list. I don't like the way we are spending the money designed to turn things around and I have a large set of people, some very smart, who agree with me. Paul Krugman, a Nobel laureate in economics is among them. http://krugman.blogs.nytimes.com/2009/02/26/feelings-of-despair/ And others have observed that what Obama is doing is not that different than the prior Administration. Whatever happened to the candidate for "change"? http://globaleconomicanalysis.blogspot.com/2009/02/dear-mr-president-with-all-due-respect.html
2. The GDP dropped at a revised 6.2% rate in the fourth quarter. That rate of decline happening for the rest of this year will push us very close to the common definition of a "depression," which is a 10% decline in GDP. I fear we have accelerated that pace in 2009, so we could get to the big "D" this year. http://www.bloomberg.com/apps/news?pid=20601087&sid=a4hGytIkgj.U&refer=home
3. Citigroup is being partially "pre-privatized" (this is nationalization by a different name). Stock down about 40% today. The government is converting part of its preferred holdings to common, reducing current shareholders' interest by 79%. And the bondholders are nervous (and should be).
4. Real estate still in a slump and contributing a good bit to 2 above. Moreover, non-residential is on the verge of adding to the problem big time. http://www.calculatedriskblog.com/2009/02/investment-contributions-to-gdp.html
5. The government stress tests have begun and the standards for a worst case are secret as are the results of the test. Nonetheless, some possible leaks on the "worst" scenario for real estate suggests the "worst" is well within many mainstream predictions on reality. Whether these leaks are true or not, the secrecy around the base-line for the tests is creating market uncertainty.
6. Some liquidated CDO results are coming in and the results are in a word - terrible. Even the super-senior tranches are only recovering 32 cents on the dollar. Admittedly, the worst may be the first to liquidate, but this does not bode well. http://www.nakedcapitalism.com/2009/02/more-on-simply-dreadful-performance-of.html This may explain why Bank of America's loans are valued at $44 billion (that's with a B) less than they are carried on their books. Go figure. http://www.bloomberg.com/apps/news?pid=20601087&sid=aax9SfdVNbiE&refer=home
7. The length of this list is pushing up against my need to sleep. The list could go on a very long time but let me finish with another high note. We are deleveraging and we are a long way from the bottom in this process. When housing reaches a bottom AND deleveraging reaches an acceptable point, we might start to recover. Unfortunately, if you look at my housing bottom post earlier this week you will see we are no where close to the former and we are also no where close to the latter. http://globaleconomicanalysis.blogspot.com/2009/02/dear-mr-president-with-all-due-respect.html
8. The real reason for the market decline this month and year is that reality is setting in and we are returning to another reality. It is time to get ready for a new level of living. A sustainable level. Unfortunately, that level is well below what we have grown used to living. Well, get used to it. Hunker down.

Disclosures: None.