Bad economic news feeds upon itself and in time it builds into a spiral. Home foreclosures cause banking losses, banking losses cause tight credit, thight credit causes more housing losses, more housing losses cause more underwater homes and more underwater homes lead to more home foreclosures. Repeat cycle. This is just a small example of the massive spirals that are building on several levels. They are building on country levels, company levels and individual levels.
Here is a spiral to watch. Unemployment up now to 8.1%, a bit more than expected. Unemployed people are not buying cars, furniture, clothing or anything else other than food. They also cannot pay their mortgage on their underwater home, which leads to more foreclosures, more business losses, and more unemployment. These spirals have the government worried, and they should.
We now have to break these spirals, which is difficult at best. The government has to take on some links in the chain and make sure they do not break, that the spiral does not continue. Otherwise it continues until there is so little left to lose that the spiral simply implodes as there is no place left to spiral. That is not a good way to end it.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2sWlnEIj58U&refer=home
Disclosures: None
Saturday, March 7, 2009
Thursday, March 5, 2009
Bankruptcies-R-Us
I wanted to add a bit of P.S. to my last post. I think the government is finally ready to allow a few major belly-ups. For better-or-worse, probably a good development. The dead wood has to go. I think it should start with the financial sector but suspect it will not. So who goes next, perhaps a car manufacturer or two, a bank or two, who knows, but we need to start taking down once stellar companies for people to realize we have reached bottom.
What China Giveth China Taketh Away
On Wednesday the market was up 3% on word that China had a new stimulus package. Today it came out there is no such package and the market went down 4%. Now I am not sure why world markets would react much one way or the other to a China stimulus package, as it is more the victim than the cause, but I think the market was simply looking for an excuse to bounce. Unfortunately the market picked one that did not exist. Oh well, the bounce was doomed to fail eventually in any event.
http://www.nakedcapitalism.com/2009/03/is-chinas-wen-whistling-in-dark.html
Why doomed to fail? Most reading undoubtedly already know the answer but perhaps you will read on out of morbid curiosity. Things still really stink out there on many fronts and not a lot of promising signs of an uptick. Sure maybe a dead cat bounce here and there, but the market is sucking wind. The best we can hope for is that we find a bottom for now and stay in the range where we are for a while.
The good news is that McDonald's has a new item on its dollar menu, a Citigroup stock certificate (okay I heard that one elsewhere). Yes Citigroup traded under a dollar a share briefly today and closed at $1.02. It has gone from a market cap of over a quarter of a trillion dollars all the way down to under $6 billion today. Now that nicely beats AIG, which is now down to under a billion in market cap, but still not promising. AIG, by the way, went from a stock price of well over $70 a share in mid-2007 to 35 cents today. This is what happens when those seeking quick profits rule over risk management.
Here is another factor keeping us down; there are over 8 million homeowners underwater on their mortgages, mostly in California, Florida, Nevada and Arizona. But under the Treasury's baseline stress test model, by the end of 2010, that will increase to 17 million and under the more severe assumptions, 23 million. Yes, nearly a three-fold increase off current levels. Combine that with job losses and figure for yourself where mortgage foreclosures will be going.
http://www.calculatedriskblog.com/2009/03/more-on-negative-equity.html
Wait, before you take your socks off and start the math, let me give you a base from where you can calculate. Let's look at where we stand at the moment:
Here is a non-surprise for you, bankruptcy filings up 31% last year. But for the bankruptcy law changes in 2005 we would likely be off the charts. Then again, Congress is looking to change the bankruptcy laws again to let judges change (cram-down) mortgages, so expect these numbers to rise. By the way, these cram-down features in bankruptcy are not likely to ease mortgage credit any, just the opposite.
http://www.calculatedriskblog.com/2009/03/bankruptcy-filings-up-31-in-2008.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=aoyMWtlsj27A&refer=home
So, you have to be wondering, are we heading for a full-blown depression? The difference between a "d" and a "r" is just the level of pain. We are very close to the "d" level already, especially in certain states. I personally think we are heading for a small "d" but not a big "D." Let us consider where the markets went in the Great Depression. In the Great Depression the Dow drop from peak was 89%. The markets now are down roughly 56%, depending on the market you watch. So we need another 33%.
Mind you, this is not 33% off present levels, this is another 33% off the peak. So what does that mean? The Dow would need to drop to a bit over 1400, from its close today of 6594, the S&P 500 would need to be at around 150, versus its close of 682 today. That is some serious pain, life-changing pain, that I do not think we will face. We have seen the worst of it in my opinion. Sure we can see, and I think will see, a further drop from here. Especially if the government does not start doing the right things we will see a significant drop from here. And unfortunately I continue to be quite disappointed in the government efforts under the new Administration. I don't have a crystal ball so I am not about to give you percentages here, but I do see the overall direction to continue to be down for a while. Even if I am wrong, I do not see a quick recovery even when we do bottom. I agree with those predicting an L shaped recession or depression. If that is correct, I do not have to be right on the short term direction. I do not need to guess the bottom, just wait for it. In an L shaped recession or depression, we will be there for a while and will have time to figure this out and react. So if you agree that we will likely have an L shaped recession or depression, you have a good bit of freedom here to sit and wait for us to hit bottom, which obviously no one can say we have yet.
Why an L shape. Well, if others and I are right that the economy, housing and such, are just returning to where they should be, if I am right that financial institutions will not return to their past profits -ever, if I am right that consumers living off credit from their homes is gone for perhaps a generation, then I think it will be an L shape. We are returning to reality and will be there, hopefully, for a very long time when we get there. Which means what we return to will be where we stay. Look at charts of the Great Depression. It took decades for the market to return to where it did before the crash. Not because the economy did not recover sooner. More because the market was at unsupportable highs before the collapse in 1929, just as it was in 2007. So there is no V in this type of correction. Look at the NASDAQ. It reached an unsupportable high of over 5000 in 2000. Here we are nine years later at about a fourth of that. Part of this is the recession and part of it is the fact that the market was not at a natural, sustainable, level.
I have talked a lot about what I consider our new reality. I will not repeat it here as you can easily check my past articles/posts. The point is that where we were in 2007 is not where we belong, whether you like it or not.
Now let me qualify a bit on the L shaped market. The market will likely overshoot during this recession. So if you assume the Dow needs to go down 65% to reach natural, real, sustainable levels, it may actually go down 70-75% or more. So from the very bottom of this we may see a 10-20% bounce before we level off for a while before what I view as a long slow recovery beyond that. This is what I am seeing. Again, no crystal ball - just looking at the reality of it all.
You may disagree, which is fine. I expect I have one friend who has been following my thoughts more than anyone else for many months and he might comment on how wrong or right I have been to date.
Disclosures: None.
http://www.nakedcapitalism.com/2009/03/is-chinas-wen-whistling-in-dark.html
Why doomed to fail? Most reading undoubtedly already know the answer but perhaps you will read on out of morbid curiosity. Things still really stink out there on many fronts and not a lot of promising signs of an uptick. Sure maybe a dead cat bounce here and there, but the market is sucking wind. The best we can hope for is that we find a bottom for now and stay in the range where we are for a while.
The good news is that McDonald's has a new item on its dollar menu, a Citigroup stock certificate (okay I heard that one elsewhere). Yes Citigroup traded under a dollar a share briefly today and closed at $1.02. It has gone from a market cap of over a quarter of a trillion dollars all the way down to under $6 billion today. Now that nicely beats AIG, which is now down to under a billion in market cap, but still not promising. AIG, by the way, went from a stock price of well over $70 a share in mid-2007 to 35 cents today. This is what happens when those seeking quick profits rule over risk management.
Here is another factor keeping us down; there are over 8 million homeowners underwater on their mortgages, mostly in California, Florida, Nevada and Arizona. But under the Treasury's baseline stress test model, by the end of 2010, that will increase to 17 million and under the more severe assumptions, 23 million. Yes, nearly a three-fold increase off current levels. Combine that with job losses and figure for yourself where mortgage foreclosures will be going.
http://www.calculatedriskblog.com/2009/03/more-on-negative-equity.html
Wait, before you take your socks off and start the math, let me give you a base from where you can calculate. Let's look at where we stand at the moment:
- The delinquency rate on mortgages for 1-4 unit residential properties is at 7.88%, a record;
- The combined percentage of loans at least a month delinquent and those in foreclosure was well over 11%, another record; and
- 48% (60% in Florida) of subprime ARMs are at least a month delinquent.
Okay, you can start.
http://www.mbaa.org/NewsandMedia/PressCenter/68008.htm
http://www.calculatedriskblog.com/2009/03/report-record-54-million-us-homeowners.htmlHere is a non-surprise for you, bankruptcy filings up 31% last year. But for the bankruptcy law changes in 2005 we would likely be off the charts. Then again, Congress is looking to change the bankruptcy laws again to let judges change (cram-down) mortgages, so expect these numbers to rise. By the way, these cram-down features in bankruptcy are not likely to ease mortgage credit any, just the opposite.
http://www.calculatedriskblog.com/2009/03/bankruptcy-filings-up-31-in-2008.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=aoyMWtlsj27A&refer=home
So, you have to be wondering, are we heading for a full-blown depression? The difference between a "d" and a "r" is just the level of pain. We are very close to the "d" level already, especially in certain states. I personally think we are heading for a small "d" but not a big "D." Let us consider where the markets went in the Great Depression. In the Great Depression the Dow drop from peak was 89%. The markets now are down roughly 56%, depending on the market you watch. So we need another 33%.
Mind you, this is not 33% off present levels, this is another 33% off the peak. So what does that mean? The Dow would need to drop to a bit over 1400, from its close today of 6594, the S&P 500 would need to be at around 150, versus its close of 682 today. That is some serious pain, life-changing pain, that I do not think we will face. We have seen the worst of it in my opinion. Sure we can see, and I think will see, a further drop from here. Especially if the government does not start doing the right things we will see a significant drop from here. And unfortunately I continue to be quite disappointed in the government efforts under the new Administration. I don't have a crystal ball so I am not about to give you percentages here, but I do see the overall direction to continue to be down for a while. Even if I am wrong, I do not see a quick recovery even when we do bottom. I agree with those predicting an L shaped recession or depression. If that is correct, I do not have to be right on the short term direction. I do not need to guess the bottom, just wait for it. In an L shaped recession or depression, we will be there for a while and will have time to figure this out and react. So if you agree that we will likely have an L shaped recession or depression, you have a good bit of freedom here to sit and wait for us to hit bottom, which obviously no one can say we have yet.
Why an L shape. Well, if others and I are right that the economy, housing and such, are just returning to where they should be, if I am right that financial institutions will not return to their past profits -ever, if I am right that consumers living off credit from their homes is gone for perhaps a generation, then I think it will be an L shape. We are returning to reality and will be there, hopefully, for a very long time when we get there. Which means what we return to will be where we stay. Look at charts of the Great Depression. It took decades for the market to return to where it did before the crash. Not because the economy did not recover sooner. More because the market was at unsupportable highs before the collapse in 1929, just as it was in 2007. So there is no V in this type of correction. Look at the NASDAQ. It reached an unsupportable high of over 5000 in 2000. Here we are nine years later at about a fourth of that. Part of this is the recession and part of it is the fact that the market was not at a natural, sustainable, level.
I have talked a lot about what I consider our new reality. I will not repeat it here as you can easily check my past articles/posts. The point is that where we were in 2007 is not where we belong, whether you like it or not.
Now let me qualify a bit on the L shaped market. The market will likely overshoot during this recession. So if you assume the Dow needs to go down 65% to reach natural, real, sustainable levels, it may actually go down 70-75% or more. So from the very bottom of this we may see a 10-20% bounce before we level off for a while before what I view as a long slow recovery beyond that. This is what I am seeing. Again, no crystal ball - just looking at the reality of it all.
You may disagree, which is fine. I expect I have one friend who has been following my thoughts more than anyone else for many months and he might comment on how wrong or right I have been to date.
Disclosures: None.
Tuesday, March 3, 2009
We Will Get There, But We Have a Long Way to Go
Let me apologize for the light posts lately. Work is very busy. Nonetheless, there has been less need for me to post lately as I think people are getting the message. The market is certainly showing that reality is setting in and everyone is now a doom-and-gloomer, so less need for me to add to the chorus. What I have tried to focus on lately is finding glimmers of light, good news. Not yet a lot to report here but I will report what I find. Meanwhile I guess I will still pass on the doom-and-gloom I find of interest.
Let me give you one good bit of news. In certain California markets the real estate prices, down 41%, seem to be stabilizing and the inventory levels are down significantly, from roughly 16 months to 6. California was one of the leading markets in the demise and the prospect it is perhaps at or close to bottom is promising. A lot of other markets to go, but we will get there one-by-one.
Another promising stat I read is that U.S. saving rates are up to 5% from basically zero or even negative. I think they need to go to 8-10%, but we are getting there. Now a lot of people are lamenting the fact that the savings rate is increasing because they want people to spend and spur the economy back to life. I disagree. Individuals need to deleverage big time. It will be short term pain but for long term gain. And the sooner our economy gets used to a leaner spending pattern, i.e. one we can afford and still save for the future, the better. Corporate America needs to wake up and realize that if you build it they may come but that does not mean they can afford it for a sustained period. In other words, we built businesses to cater to U.S. consumers on a feeding frenzy and the frenzy is over. The consumers now must return to normal and probably overshoot, so some (many) businesses need to fail and others need to get used to much lower levels of activity. What I call, the new reality.
Oh, here is another piece of good news. Bernanke is very mad at the AIG bailout. Get in line!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHx9vZa0IJAo&refer=home
Since taxpayers are getting the short end of this stick, who would not be mad.
http://www.nakedcapitalism.com/2009/03/aig-restructuring-leaving-best-bits-to.html
Buffett Flat
Here is an interesting piece I saw today. Based upon what Berkshire Hathaway reported as the cost basis of its equity holdings year end 2008, they are back to no gains (and probably a loss) on the overall portfolio. Even the buy-and-hold thingy is not working in what is now the worst recession in the past 100 years. Not as bad as the Depression, but that begins with a D.
http://www.businessinsider.com/buffetts-stock-picks-are-flat-2009-3
Go to the Four Bad Bears chart on Calculated Risk and you will see quite visually how bad this one is playing out. We are basically down percentage wise about the same this far along (time wise) as we were during the big one.
http://www.calculatedriskblog.com/2009/03/stock-market-s-100-points-from-1995.html
Disclosures: None.
Let me give you one good bit of news. In certain California markets the real estate prices, down 41%, seem to be stabilizing and the inventory levels are down significantly, from roughly 16 months to 6. California was one of the leading markets in the demise and the prospect it is perhaps at or close to bottom is promising. A lot of other markets to go, but we will get there one-by-one.
Another promising stat I read is that U.S. saving rates are up to 5% from basically zero or even negative. I think they need to go to 8-10%, but we are getting there. Now a lot of people are lamenting the fact that the savings rate is increasing because they want people to spend and spur the economy back to life. I disagree. Individuals need to deleverage big time. It will be short term pain but for long term gain. And the sooner our economy gets used to a leaner spending pattern, i.e. one we can afford and still save for the future, the better. Corporate America needs to wake up and realize that if you build it they may come but that does not mean they can afford it for a sustained period. In other words, we built businesses to cater to U.S. consumers on a feeding frenzy and the frenzy is over. The consumers now must return to normal and probably overshoot, so some (many) businesses need to fail and others need to get used to much lower levels of activity. What I call, the new reality.
Oh, here is another piece of good news. Bernanke is very mad at the AIG bailout. Get in line!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHx9vZa0IJAo&refer=home
Since taxpayers are getting the short end of this stick, who would not be mad.
http://www.nakedcapitalism.com/2009/03/aig-restructuring-leaving-best-bits-to.html
Buffett Flat
Here is an interesting piece I saw today. Based upon what Berkshire Hathaway reported as the cost basis of its equity holdings year end 2008, they are back to no gains (and probably a loss) on the overall portfolio. Even the buy-and-hold thingy is not working in what is now the worst recession in the past 100 years. Not as bad as the Depression, but that begins with a D.
http://www.businessinsider.com/buffetts-stock-picks-are-flat-2009-3
Go to the Four Bad Bears chart on Calculated Risk and you will see quite visually how bad this one is playing out. We are basically down percentage wise about the same this far along (time wise) as we were during the big one.
http://www.calculatedriskblog.com/2009/03/stock-market-s-100-points-from-1995.html
Disclosures: None.
Monday, March 2, 2009
Survival of the Weakest
Steve Waldman at Interfluidity makes a very good point on how we are spending trillions of dollars to make life worse for the good companies. Yes, we are literally throwing money at institutions like AIG and Citibank allowing them to keep competing with other companies that perhaps acted more prudently. We are providing good companies with a built in disadvantage, an uneven playing field.
http://interfluidity.powerblogs.com/posts/1235945541.shtml
There is a solid argument to be made that government support led to the subprime mess in the first place. Freddie Mac and Fannie Mae had the implicit government support that gave them a distinct advantage over the competition. To address this, other financial institutions got creative with subprime mortgages and securitization. They made a lot of money doing what Fannie Mae's lending standards would not allow it to do. And these financial institutions are now finding out why relaxing credit standards to pretty much nothing is not a good business model. Government support to some is a disadvantage to others.
What the current plans fail to realize is that in this new economy we simply will not need as many financial institutions. A good bit of what they were doing with toxic derivatives is business that is simply not returning and the business that remains is that boring old banking stuff. What should be happening is liquidation. Yes, let the FDIC do its job even with the big boys. The sooner these institutions are allowed to close their doors, the sooner their competitors will get some relief by getting the remaining business.
But these institutions are too big to fail, right? Perhaps they are too big to save.
http://www.nakedcapitalism.com/2009/03/jim-baker-first-lets-kill-all-zombies.html
Disclosures: None
http://interfluidity.powerblogs.com/posts/1235945541.shtml
There is a solid argument to be made that government support led to the subprime mess in the first place. Freddie Mac and Fannie Mae had the implicit government support that gave them a distinct advantage over the competition. To address this, other financial institutions got creative with subprime mortgages and securitization. They made a lot of money doing what Fannie Mae's lending standards would not allow it to do. And these financial institutions are now finding out why relaxing credit standards to pretty much nothing is not a good business model. Government support to some is a disadvantage to others.
What the current plans fail to realize is that in this new economy we simply will not need as many financial institutions. A good bit of what they were doing with toxic derivatives is business that is simply not returning and the business that remains is that boring old banking stuff. What should be happening is liquidation. Yes, let the FDIC do its job even with the big boys. The sooner these institutions are allowed to close their doors, the sooner their competitors will get some relief by getting the remaining business.
But these institutions are too big to fail, right? Perhaps they are too big to save.
http://www.nakedcapitalism.com/2009/03/jim-baker-first-lets-kill-all-zombies.html
Disclosures: None
Sunday, March 1, 2009
When Will It End??????
Not soon, I am afraid. Okay, I have been doom-and-gloom for a long time. I am just the messenger here, so do not shoot me. Yet now I look at what many economists are saying in terms of where we are and where we are going and I think, generally, they are right. Nonetheless folks, this is a very important piece for you to be reading. You will not like it or want it, but it is time to face reality. We are down for the 10 count. By many predictions we have 3-5 years of recession (despair) ahead. Personally I am now worried about a 5-10 year scenario. The news gets worse daily and the odds of a severe long-term depression grow better daily. Don't believe me, do your own study. The stats are out there.
Meanwhile, here is what some prominent economists told the NY Times when asked to predict the future. Not too far off from where I am.
IF YOU BELIEVE ANYTHING I HAVE EVER TOLD YOU (SERIOUSLY), BELIEVE THIS. IT IS TIME TO HUNKER DOWN. PAY DOWN ANY DEBTS AT HIGH RATES AND PRESERVE CAPITAL OTHERWISE AT ALL COSTS. UNTIL YOU KNOW THIS HAS TURNED, THE MORE CASH YOU HAVE ON HAND THE BETTER. CASH IS KING. PLEASE, PLEASE HUNKER DOWN. YOU WILL THANK ME LATER.
Disclosures: None
Meanwhile, here is what some prominent economists told the NY Times when asked to predict the future. Not too far off from where I am.
IF YOU BELIEVE ANYTHING I HAVE EVER TOLD YOU (SERIOUSLY), BELIEVE THIS. IT IS TIME TO HUNKER DOWN. PAY DOWN ANY DEBTS AT HIGH RATES AND PRESERVE CAPITAL OTHERWISE AT ALL COSTS. UNTIL YOU KNOW THIS HAS TURNED, THE MORE CASH YOU HAVE ON HAND THE BETTER. CASH IS KING. PLEASE, PLEASE HUNKER DOWN. YOU WILL THANK ME LATER.
Disclosures: None
China Unrest
It looks pretty certain that I will be traveling to China in May and the increasing unrest there has be a bit concerned. Not for my sake so much as for those in China. About 10 million migrant workers in the country have lost their jobs, commerial and residential real estate is vastly overbuilt and in a nose dive, exports have fallen off the map (as has imports), thousands of factories have closed and there is no quick fix in sight. Fortunately the country has a good reserve built up, but in times like these for a country its size, one has to question whether it is enough.
We in the U.S. are spoiled and have the benefit of a safe haven status. The worse things become, the more money seems to flow to us. And the more it will flow away from countries like China.
China officials themselves in a rare showing of frank discourse are admitting that unemployment there is increasing the odds of increasing social unrest. So much for that decoupling theory some were clinging to as late a last summer. It is global economy. It is a global recession.
http://news.bbc.co.uk/2/hi/business/7915372.stm
http://www.economist.com/finance/displaystory.cfm?story_id=10809267
Disclosures: None.
We in the U.S. are spoiled and have the benefit of a safe haven status. The worse things become, the more money seems to flow to us. And the more it will flow away from countries like China.
China officials themselves in a rare showing of frank discourse are admitting that unemployment there is increasing the odds of increasing social unrest. So much for that decoupling theory some were clinging to as late a last summer. It is global economy. It is a global recession.
http://news.bbc.co.uk/2/hi/business/7915372.stm
http://www.economist.com/finance/displaystory.cfm?story_id=10809267
Disclosures: None.
New Year's Prediction Number 8: No U in EU
At the beginning of the year I made eight predictions. My predictions have to date been my most commented upon article at Seeking Alpha. One of the predictions that got the most negative responses was number eight, as follows:
"EU with no U. The strains on the EU have never been greater and Germany's reluctance to play ball with the rest of the union will, in my opinion, cause a rift that cannot be fixed. I doubt the EU will disband in 2009, but pressures will reach a critical point and it may well happen in 2010."
The comments noted that the EU will never break up and that my prediction was wholly misguided. I have to admit that the EU totally disbanding is indeed a long shot, but Germany's reluctance to play ball and the rift it could cause were not totally off base.
Well, Eastern Eurpean members of the EU are being particularly hard hit with this recession and they are seeking help that the rest of Europe, Germany in particular, are not willing to give. And the signs of protectionism within the "union" are growing. I think I smell a rift.
http://www.bloomberg.com/apps/news?pid=20601087&sid=arVsQ74Xzah0&refer=home
Disclosures: None.
"EU with no U. The strains on the EU have never been greater and Germany's reluctance to play ball with the rest of the union will, in my opinion, cause a rift that cannot be fixed. I doubt the EU will disband in 2009, but pressures will reach a critical point and it may well happen in 2010."
The comments noted that the EU will never break up and that my prediction was wholly misguided. I have to admit that the EU totally disbanding is indeed a long shot, but Germany's reluctance to play ball and the rift it could cause were not totally off base.
Well, Eastern Eurpean members of the EU are being particularly hard hit with this recession and they are seeking help that the rest of Europe, Germany in particular, are not willing to give. And the signs of protectionism within the "union" are growing. I think I smell a rift.
http://www.bloomberg.com/apps/news?pid=20601087&sid=arVsQ74Xzah0&refer=home
Disclosures: None.
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