THE NEW REALITY

One of the folks that commented on my Seeking Alpha piece last week suggested that we should give the fiscal stimulus plan time to take effect before being critical of it. Sounds logical, but let's digress for a moment.

If the plan looks wrong, smells wrong, and sounds wrong, why hold back? I know this is an area where no one has the right answer, or at least an answer they know to be right, but there are certain things that we should by all rights have a good sense about being wrong. Then again, I am talking about the government here, so I should know better. Nonetheless, what is wrong with the "current" plan? - let me count the (many) ways:

1. Well I am not really sure what the current plan is, for one thing. It seems to shift daily. Now I will give Obama some time to figure out what he is going to do, but we should not be getting reports daily on what is being considered. It just adds to the public belief that the administration has no idea what it is doing. From Bush, we expected it, but from Obama, we need leadership, we need confidence, we need conviction and we do not need a plan that shifts constantly.
2. Buying toxic assets from banks seems pretty stupid. Okay, let's shift a lot of junk from their balance sheets to ours. First of all, if we pay what this is really worth, the financial institutions are confessing insolvency right away. So we have to pay more than fair value, which inflates the value of toxic assets we do not buy, thereby adding more doubt to investors (not to mention we are paying too much). If a bank has a lot of over-valued bad debts on their books, why invest in them or trust them. So I do not see this working out well. But let's say it works in terms of removing toxic assets off the books, then what?
3. So we give them all this money. And then we let them do whatever in the world they want to do with the money. No, you say, we are putting strings on it this time. Okay, so we will put some restrictions on executive pay and bonuses and make them tell us how they are lending, but where does that get us? Why would we just give them this money and trust them to do the right thing? These are, after all, the companies that by-and-large got us into this mess. Can we trust them to lend to good companies that need the money to conduct business as usual or might they just use it to do what they think will make them the most money. WAKE UP PEOPLE!!!! These directors and officers are legally required to do what is best for their companies, not what is best for the U.S. taxpayers. And I suspect our interests are still not aligned just yet. Thus, I say we nationalize those "too big to fail" types that are technically insolvent so we can make the decisions on who needs and deserves the money. We can re-privatize later, but for now, we have the money, we call the shots. Cut out the middleman who has proven himself unworthy.
4. There is a serious problem I have noted here both recently and historically about whether our trading partners will support our debt-laden ways. We seem to have this big assumption that China, Japan, the Middle-East and so many other countries will support us incurring trillions of dollars of deficit spending. Yes they are supporting it, by the way, so far, but we cannot do this deficit spending without them, and soon, if we continue on this path, they will stop lending us the money. They already have major doubts and that is starting to be a big issue. It will, in my opinion, be a bigger problem for us in the years ahead. Perhaps even a bigger problem than the financial mess we face today.
5. Even if other countries support our deficit spending to support this plan, there is a major issue on whether we should incur this debt. I personally do not want to leave my daughter or grandchildren with having to pay off this massive deficit we are considering. I, for one, do not think we should be incurring trillions in debt for an ill-conceived or even a properly conceived plan. We cannot spend that much. OUR PROBLEM WAS SPENDING MORE THAN WE MADE SO THE ANSWER CANNOT BE THE GOVERNMENT ALLOWING US TO SPEND MORE THAN WE MAKE. Joseph Stiglitz, a Nobel laureate, can tell you better than me, and he thinks we are asking for major problems. http://www.bloomberg.com/apps/news?pid=20601087&sid=a.GJvNfWtCX0&refer=home
6. We will not get out of this until housing hits bottom, and I am talking a true bottom. The government and everyone else seems hell bent on propping up the market so it does not hit bottom. Well, false support leads to delayed pain. Right now, absent the government doing something stupid, I think the market should hit bottom early 2010 and perhaps late 2009. Just a guess, but it is based on what I have been reading about Alt-A loans resetting, where we are in the cycle and how markets tend to overshoot the mean. When we do reach bottom, it will allow banks to finally value their toxic assets to a certain degree. We will get there and the government needs to focus on us to surviving until then.
7. Last but not least - the new reality. This is probably my key comment here and perhaps one of the most significant I have ever noted on this blog. We have a new reality. The economy, at least in the U.S., was supported for the last five to ten years by consumers and home buyers spending more than we can afford. We were not living within our means. The fact that we are spending a lot less and that our houses are reverting to a proper price structure leads the government to think all is terrible. My take is that we are reverting to mean, we are correcting, we are arriving at price discovery, and our economy it reaching a stable level, a sustainable level. We may overshoot, but we are returning to mean. That is a very good thing. We need normalcy in our markets and pricing. This, to me, is not a recession, it is a correction. Let the economy correct, don't spend trillions to stop it. Yes, we need to spend money to control the pain and maintain companies that should be maintained, but otherwise, let us correct. As certain studies have shown, this new reality in some respects may be a better reality, at least for some.

http://www.nytimes.com/2009/02/01/business/01view.html?ref=business

Disclosures: None

The Bad News Continues

Keep those pencils sharpened as the records continue to be set.

Worst January in S&P History

You may have noticed stocks off a tad this month. Well, a tad is a tad of an understatement. S&P off 8.6% this month and that is a January record. And the Dow had that beat with an 8.8% drop, another January record, which is saying a lot because that beats a lot of terrible economic situations over the 113 year career of the Dow. I expected an Obama bounce and was sadly disappointed.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4DYRS8nD4gM&refer=home

The linked Bloomberg article talks about the January barometer, which is based upon January setting the tone for the year. Apparently it is right over 80% of the time. I do not consider this necessarily accurate on a scientific basis, but for this year I think it is accurate.

Now at the start of the month I predicted the markets would be down 10-20% for the year versus year end 2008. I am standing by that but am now thinking it could be a larger decrease. Let's hope not.

You may be reading this and thinking I am just another doom-and-gloomer, but you would be wrong. I have no predisposition. I am, however, not seeing any news that suggests that the worst is behind us. I am solid doom-and-gloom when the data suggests same and right now it is hard to read it otherwise. Some do, but they have been giving some less than credible predictions.

Not a Record, But Three More Banks Down

I have said repeatedly that my prediction of massive bank failures in 2009 was a no brainer, as in it took no crystal ball. Well, that continues to be the case. Another three down today.

http://www.bloomberg.com/apps/news?pid=20601110&sid=avXyR82JeMP4

Second Best to a Record

London luxury homes had their second worst decline in January (I know, who cares). I expect worse ahead. London is following the U.S. in its decline but unfortunately for them I anticipate their problems are significantly worse than ours. We will see, but I would move to Canada before the U.K.

http://www.bloomberg.com/apps/news?pid=20601110&sid=aM9uEAUYNgvI

Probably Not So Bad

I noted yesterday that Goldman Sachs predicted $4 trillion (with a T) in financial institution losses. I did not agree with it - I just reported it. Not good news from Paulson's old firm

Naked Capitailism makes a good point that this is more negative than Nouriel Roubini, a constant -yet usually accurate of late - doom-and-gloomer. He predicts U.S. financial problems of $1.9 trillion, less than 50% of Goldman. I only hope they are both wrong, yet I fear that Nouriel may still be calling things correctly. If so . . . I have no idea how bad this might get.

http://www.nakedcapitalism.com/2009/01/goldman-bank-rescue-may-reach-4.html

Disclosures: None

Record Setting Times

Record Bailout: If you think it is bad now - and we are already at fiscal stimulus record levels - it could be much worse. Folks at Goldman Sachs - you know Paulson's former employer - predict the bank bailout could run $4 trillion. Guess what, we do not have it and according to an article in the NY Times, the world is not likely to give it to us. Go figure. They need the money for themselves and with all this deficit spending, the U.S. is not quite the safe haven it used to be.

http://www.cnbc.com/id/28918543

Declining Economic Activity In, Well, Every Single State

We have been holding on for a while with a few states improving and one staying even but December marked the first time ever that all 50 states, yep every single one, showed a decline in activity. Yes the Fed Philly shows the coincident index down in a royal flush of bad news. Now that truly is impressive. It leads to a one month diffusion index of -100. What does that mean? Basically we got a perfect score in the wrong direction.

http://www.philadelphiafed.org/research-and-data/regional-economy/indexes/coincident/2008/CoincidentIndexes1208.pdf

New Home Sales

Yep, another record. Seasonally adjusted rate of new home sales of 331K. Now the records started on this in 1966, so certainly at some point in time it was worse, but hey, it is all relative.

http://www.calculatedriskblog.com/2009/01/record-low-new-homes-sales-in-december.html

Check out the Calculated Risk site for some pretty awesome cliff diving graphics.

Record Begets Record

So the low new home sales record leads to another record. This one is painful to see. Months of supply on housing is at an all time high of 12.9 months, as also reported by Calculated Risk above.

Continued Unemployment Record

Continued unemployment claims rose to 4.78 million last week, a new record. Not one in terms of percentage of unemployed, but one in terms of raw numbers.

http://www.workforcesecurity.doleta.gov/press/2009/012909.asp

Biggest Loss in 105 Years For Ford

Not a big surprise, but nonetheless, for a company this old, or any age, it is a record they would rather not set. Ford lost $5.9 billion in the fourth quarter to cap a full year loss of $14.6 billion. Shock - they are tapping their credit lines now before they lose them.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aCT2mR1fO_EY

Just a taste of what is to come. Make sure you write those records in pencil and keep an eraser handy.

Disclosures: None.

Ready To Give Advice

I have had a number of comments either asking for advice or demeaning my posts because they do not give advice. I am not a financial advisor, so take this all in stride. I am an "investor" in my retirement account and a "speculator" in my brokerage. This simply means that I am looking for long-term value on my retirement and short-term gains in my brokerage. I only speculate with what I can afford to lose. So what is my advice?

My advice is to educate yourself on the markets, the economy, financial matters and the like. As they say, knowledge is power and, hopefully, you are reading this because you understand this. I am still constantly educating myself and expect to do so until I am six feet under and I highly recommend it. It has greatly increased my returns, especially on the speculative side of my life. For many years I lost money in my brokerage, with a few good years, but now I am on a pretty good streak. And what I have learned is to absorb as much data as possible and invest/bet accordingly. No single style will fit all circumstances. Last year I did put options on financial stocks to great benefit and this year I have mostly been playing the volatility, for decent gains. And there are a few stocks that have done well last year and this. I am just passing on what I think to be relevant. I regularly say what to do with the information is your choice and I mean that. You decide. I hope to make it an informed decision, but it is your decision. That, folks, is what this site is about. As much as economists try to muck this up, it is not that complicated if you look at the data. Just the facts.

Disclosures: None

And Now Some Cheery Words From The Fed

Finally some reality is setting it among our government officials. We are now past "the economy is strong" and "we have reached a bottom" type statements. Now we get cheery statements like the following from the Fed Open Market Committee (FOMC):

"Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant."

Downside risks are most decidely remaining significant. I could hardly have said it better myself.

http://www.federalreserve.gov/newsevents/press/monetary/20090128a.htm

Disclosures: None

I Second That Thought

I will not spend a lot of time summarizing this piece as it is relatively short and pretty much a must read. Jeffrey Sachs (a somewhat controversial figure) discusses what is wrong with our rush to stimulus. I must say I agree with everything he is saying. From running up debts that will trouble us in the future to spending money without proper regard to where it goes, there are plenty of problems with money spent to date and with the developing plans for how to spend the next $825 billion. Part of this is the usual impacts of the political process. Concessions must be made to get support. But this is a big test for Obama. He needs to push this through with minimal concessions. He needs to keep the support focused on where it can be the most productive. Certain things, i.e. tax cuts, have not worked in the past and will not work again, so we need to change our direction if we want to have any hope.

Yes, the market is up today, but my expectations remain down. The market was up on word that the new plan will buy up toxic debts from the banks that brought us here. We are becoming enablers and we will get what we deserve if we do not wise up quickly.

http://www.ft.com/cms/s/35438c54-ec8a-11dd-a534-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F35438c54-ec8a-11dd-a534-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.nakedcapitalism.com%2F

Disclosures: None

An Alternative, Perhaps Better, Plan

I support this proposition by the author of SuddenDebt. At least someone is thinking outside the box - in a positive way. Give it some thought. We, the taxpayers, build things that need to be built for the public good and then we sell them, perhaps at a loss. Not a bad stimulus package. It focuses the money at productive endeavors.

http://suddendebt.blogspot.com/2009/01/heres-alternative.html

Disclosures: None

The Cram Down Plan

It looks like we may soon have legislation that allows bankruptcy judges to reduce principal amounts on mortgages. This type of cram down powers for bankruptcy judges are not especially unusual but to some are quite welcome in the residential mortgage arena. Yet perhaps not too welcome to banks. Good news, banks will perhaps be more willing to modify loans. Bad news, they may be less willing to give new ones. And by the way, a lot of the problem with loan modifications has not been banks but the securitization process. The entities servicing these loans have limited ability to modify loans as they are contractually controlled in what they can do, so the desired effect on loan mods may be elusive.

http://online.wsj.com/article/SB123309817136221693.html

Overall, however, this I view as a good thing, as does others.

http://www.calculatedriskblog.com/2009/01/house-panel-approves-cram-downs.html

The rest of the news is not particularly dismal or inspiring, but I do want to leave you with this nice chart on home prices. You decide if we are at a bottom yet:

The interesting thing for me is that I had this chart with a lot of others and I had a hard time finding it as they all seem to have this downward trajectory at the end, also known as cliff diving. It just blended in. I guess, not time just yet to get all warm and fuzzy.

Disclosures: None

I Am Not All Doom and Gloom

Well the market was up today. Three cheers for that!! Then again consumer confidence reached a new record low, go figure. My sense is that we are (finally) on a bit of an Obama bounce. Some companies are actually beating some very dismal expectations, so that is helping a bit too. And there continues to be some promising signs on credit easing a bit. These are all good things. Might I add that the market has some excellent valuations on excellent companies that are likely at or near some of the best valuations or our lifetimes. By many measures, this is the best investment opportunity of a generation, or very close to it.

Mind you, this is not to say all is honky dory. The economy faces some major risks ahead and the market could go down substantially from here, creating even better investment opportunities. Nonetheless, calling a bottom is like catching a falling knife. Predicting a bottom has bankrupt many an individual. If you have a long term horizon, as in ten years plus, then look at good companies that will survive, as in have plenty of capital to make it through, and decide upon an entry point soon. I am reading The Intelligent Investor by Benjamin Graham, one of the best investment minds of modern times. I expect he is about to pop out of his grave to do some investing, given the current environment. The market right now is a once-in-a-lifetime opportunity. Yes, I think, and am predicting, things to get worse from here, but hell, I could be wrong, and even if I am right it makes little difference if you have a long term horizon.

Don’t mistake my doom-and-gloom as a statement that stocks are poorly valued now. A further downturn is built into most stocks, and it would take a real meltdown (which I am worried about still) to make purchases of good companies a bad move if you have a long term horizon. I will continue to call it as I see it, but do not mistake my dour statements as being totally pessimistic. I am still afraid, but with so many good minds working to fix this mess, I have to have hope they will find a way to fix it and the market will have a nice recovery. Mind you, I do not see it going back to where it was at its peak or anywhere close, nor should it. That was a debt driven, unsustainable, peak.

Disclosures: None

Disgusting!!

This will be very short, but I saw this and it is incredibly disgusting. Citigroup just spent $50 million on a new corporate jet. That was our money and I expect heads to roll over this. We should all expect heads to roll. There is no sanity to this.

http://www.nakedcapitalism.com/2009/01/your-tax-dollars-at-work-citi-buys-new.html

Give Them Money And They Will Lend

Okay it is late and I am tired. The punch line is that the promised benefits of TARP were increased lending and, perhaps, lower rates. The proof is that the banks that got the most money are lending less, not more. I am not blaming them. They are in dire straights and doing what they should in their condition. I am blaming Paulson and the bunch for not putting conditions on the money infusions. You may be thinking Paulson is just stupid, but he is a former head of Goldman Sachs and from their perspective he is brilliant. I do think his best interests have always been his old friends at Wall Street. Meanwhile, those of us living or working on Main Street are continuing to be screwed. I have no respect for Paulson, and that is a vast understatement.

http://www.nakedcapitalism.com/2009/01/your-tax-dollars-at-work-citi-buys-new.html

Buy American!!

I have been reading a lot of "buy American" sentiment of late. My wife forwarded on to me an email outlinging how some American male, without a job, went through his day using foreign made products wondering all the while how he could lose his job. While there is a bit of truth in this, there is also truth in the fact that protectionism will lead us down a dangerous path. This happened big time in the Great Depression and we had, well, a Great Depression. It did not serve us well then, and it will not now. So talk of limiting infrastructure spending to use of American steel suppliers is a bit problematic. And the fact that it is getting some traction in Congress is even more worrying.

http://business.timesonline.co.uk/tol/business/industry_sectors/industrials/article5587443.ece

The U.S. needs to realize, as an initial matter, that such protectionist measures are smiting our trading partners, like China, who are buying our Treasuries and supporting our recovery. Intenational trade and supply and demand are truly capitalistic notions. Protectionist measures are anti-capitalistic. In either event, capitalistic or not, it is a terrible idea.

http://business.timesonline.co.uk/tol/business/industry_sectors/industrials/article5587443.ece

Watch Your Fannie

Fannie Mae is asking for $16 billion more in federal support, tapping into a fund of $200 billion set up for it and Freddie Mac. Compared to Freddie, that needed $35 billion, this looks good, but it is more than was expected. Taxpayers, keep those checkbooks open.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aInEyfSmcbQ8&refer=home

http://www.calculatedriskblog.com/2009/01/fannie-to-ask-for-up-to-16-billion.html

Disclosures: My sister works for Fannie Mae.

Profits Down 72% - Stock Price Up 7.2% - Nice Symmetry There

Only in this economy can a company report these dismal results and have a nice bounce. All this while it, American Express, is noting this is the "harshest operating environment in decades." Yes, it is better than the worst predictions. And American Express is cutting 7,000 jobs. Just one of many - and I mean many - job cuts annonced today.

http://www.bloomberg.com/apps/news?pid=20601110&sid=aveoSCEM48_I

CNN reports that over 70,000 job cuts were announced today, and those are just the ones that got some press. Just a staggering number. Let me put this into perspective. Obama has talked about his stimulus spending being aimed at creating three million jobs this year. At today's pace of layoffs, Obama's plan would only offset about six weeks of layoffs. But the good news is that I consider this to be largely a January issue.

It looks like a host of companies tried to hold on as best they could through the end of 2008 but they are now looking at their year end numbers and taking on some necessary painful cuts. Undoubtedly a necessary move, but never one a company wants to take. I say this from two perspectives. Perspective one is the people that are being let go. They will go through a good bit of pain and turmoil and no one wants to put any family through that. The other perspective is as a business that is shedding employees they undoubtedly spent some time, perhaps years, training. There are costs associated with letting them go and more costs in replacing them if the economy rebounds. Not a happy result for employer or employee.

http://money.cnn.com/2009/01/26/news/economy/job_cuts/?postversion=2009012613

And after all this cheery news, I am happy to report tha Asian markets are celebrating.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJMiYkzPS5Yk&refer=home

Part of their celebration is due to U.S. sales of existing homes climbing 6.5% last month. Now that is definitely cause for celebration. Yes, this ox(as in the year of) is raising his head. Though I must note that there is a slightly different, and more problematic, view of housing worth noting.

http://www.calculatedriskblog.com/2009/01/existing-home-sales-nsa.html

Oh, this really looks promising right now.

Disclosures: None.

Happy New Year!

I am about to join my wife and daughter for a Chinese new year "celebration," which consists this year of the three of us eating at a Chinese restaurant. Oh well, not too much to celebrate at the moment. Welcome, anyhow, to the year of the ox.

China Worries

Asia News is reporting that things in China are somewhat worse than the official numbers indicate. Some 670,000 small industries have shut down and 6.7 million "registered" workers have lost their jobs since the peak. Millions more of unregistered workers only add to that number. It is now forecast that China needs to somehow create 33 million jobs in 2009 to have stability, and this ain't going to happen. Accordingly, the state news agency, Xinhua, who you would not expect to overstate the problems, is expecting a "peak period of mass incidents," as in social protests, rioting and the like.

http://www.asianews.it/index.php?l=en&art=14157&size=A

China now has five months of a manufacturing contraction with no end in sight as its trading partners all are sucking wind themselves.

http://globaleconomicanalysis.blogspot.com/2009/01/us-manufacturing-orders-at-60-year-low.html

Hot money outflows from China only add to the problem. During 2007 and early 2008 hot money flowed into China on expectations that China might fare the storm better than other countries. Some of it was based on a decoupling theory, which is now wholly discredited. With China now also on the ropes, that hot money is flowing out just as fast.

http://mpettis.com/2009/01/monetary-conditions-might-exacerbate-the-chinese-adjustment/

All said-and-done, I do not expect many Chinese are going to like ox much after this year is over. I am pretty sure we in the U.S. won't either.

I will try to post more after dinner.

Disclosures: None