Are We Off The Bottom?

I just had a very fun time (not) traveling for three days and am glad to be back. Judging by the market, I should travel a lot more often. Markets did quite well while I was on the lamb.

I personally have had some nice gains in my equity investments over the past two days. Tuesday especially was a great day. Yet, I have to pose the question, is it sustainable? Let me add that I am among the masses looking for a bottom. I have no bets otherwise and have some equity positions that would benefit from a bottom. Moreover, individually I want this pain to be over. We all want it to be over. Yet, despite certain sucking wind companies announcing that they have made money the first two months of this year, you have to wonder.

Asian stocks are back in a downward direction after a few days of relief.
So those in Asia are not convinced yet.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aGhc55Gci19A&refer=home

And we all know the market, after some significant losses for the past two to three weeks were ready for any excuse for a bounce. The real question revolves around what do the facts reveal? The facts, I fear, are not pointing to a bottom.

Let's start with unemployment. Four states, including California, are now over 10%, and that is using the rather bogus official number that does not properly account for people who have given up for over 60 days, people with hours cut, people working part time who want to work full time and the like. Calculate these in and the number is several percentage points higher.

http://www.calculatedriskblog.com/2009/03/state-unemployment-rates.html

Tax receipts in the U.S. are falling off a cliff so the deficit is heading the opposite way. The falling tax receipts reflect the incomes of those in the U.S. and it is not a pretty picture. It is called an increasing budget deficit. I might add that the hunger for our Treasuries seems to be dampening just a bit, which spells as bit of trouble brewing.

http://www.marketwatch.com/news/story/Budget-deficit-widens-10-receipts/story.aspx?guid=%7BE595148D%2D3756%2D4F39%2DA1A6%2D773ABA0039A8%7D

We may be close to a bottom on subprime (though with underwater properties and job losses there could be more), but we have a long way to go on prime and Alt-A. These losses are increasing. But this wave to me will be small compared to the upcoming losses for commercial real estate, which is taking a major head-dive at the moment. Objectively, I do not see this as a positive.

http://www.calculatedriskblog.com/2009/03/bank-failures-and-c-loans.html

There is more but it is late and I am tired.

Disclosures: None

"off a cliff"

I am on the road this week. Fort Lauderdale today and tomorrow (my plane had to be de-iced in NH before leaving and it was 82 degrees when we landed - nice!) and then to Pittsburgh Wednesday. I will post what I can.

About a year ago I read an interview of Warren Buffet somewhere where he said he would be happy if all his stock holdings went down 50% due to the possibilities it would create. After all, he is not selling them so what does he care if their face value declines. He also likes to compare his stock holdings to his farm - if it goes down by half in value he pays no attention as he has no intention of selling. He is just living there. Well, he has to be one happy guy these days.

Nonetheless, the sage is saying things that sound a bit less rosy these days, after his company had its biggest loss ever (its second ever I believe) last year. He is now talking about the economy falling off a cliff and when we rebound having to deal with rampant inflation. That is one happy guy alright. He does, however, still have billions to invest so he should "eventually" come out of this smelling like a rose.

http://www.bloomberg.com/apps/news?pid=20601087&sid=acmiX_sr8yuc&refer=home

Too Big To Let Live

Here is an important piece from the head of the Federal Reserve Bank of Kansas City. He backs nationalization, or pre-privatization, in an orderly fashion and cites examples of how this has worked historically. Some key points he makes are that the efforts to save us to date have been scatter shot, poorly thought out and less than confidence inspiring. I for one hope the "stress tests" under way are a stealth way of preparing to do organized nationalizations.

I particularly like the quote on page 5 from economist Allan Meltzer who said "capitalism without failure is like religion without sin."

http://www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf

AIG -Still A Pain

AIG has Bernanke steaming and most taxpayers as well. Those in the business always had an extreme dislike for the good folks at AIG. Let's just say they were the 800 pound gorilla and they used their weight to get their way more often than not. If there was a way to game the system, they found it. So I have to say those in the industry are not shedding big tears.

Nonetheless, they have themselves so intertwined financially with so many other entities that they are able to convince the U.S. Government that they are indispensable. And so far, we are biting. Here is a highly confidential document where AIG explains to the government why it has to be saved. This is truly sickening.

http://www.scribd.com/doc/13112282/Aig-Systemic-090309

Disclosures: None

God Help Us All!!

Larry Summers, you know the Obama economic guru, is recommending that we all go out and spend to help the economy. We can save and pay down debt later. This, my friends, is the worst thing I have heard from the new Administration yet. Obama at least said it in logical terms like spend prudently and do not start stuffing cash into a matress foolishly.

http://www.calculatedriskblog.com/2009/03/summers-universal-demand-agenda.html

A quick spending spree is not going to save us from a multi-year recession, perhaps depression. Right now we are entering into a prolonged downturn. I know some are questioning my use of "entering" but I fear we have a ways to go. Either way, the question is what is the best way to deal with it.

Let's say you have had a band-aid on for a week and now you need to remove it. Do you peel it off slowly or rip it off? I am in favor of the latter. This means that individuals drastically reduce spending and increase savings, that our homes are not piggy-banks, that we put off purchases and hunker down a bit. I have been saying hunker down for over a year now and folks are waking up.

Now I do not need to tell people any more to hunker down. With job losses and job uncertainties people are afraid to spend. They need to save and pay off debt and out of fear they are doing it. Nonetheless, we need to get to a place where we spend prudently out of habit, not fear, and this prudent spending will lead us back to an economy unlike what we have built. The economy will be smaller and more efficient.

Yet our government wants us to spend without reason other than supporting an overbuilt economy. They built an economy to cater to a U.S. living off debt and now we will not/cannot do so. The answer is not for people to keep foolishly keep spending beyond their means. The answer is to shrink what we have built, to let businesses go under, to return to what should be reality. The sooner, the better.

All this is a discussion on whether the recession will become a depression and on whether it will last 5-10 years or a generation - and I say this seriously. We are looking at the potential for a generation of pain if we do not tread properly. We need to reduce debt on all levels, including individial, correct our ways and find the new economic reality. Where do we belong?

Disclosures: None.

Oil Price Manipulation

Bloomberg reports that crude oil could return to $50 a barrel as OPEC cuts production. Now I have to mention they were not cranking up production when oil was at $147 a barrel, but they are good at cust on the other end of the spectrum.

Nonetheless, I just read last week that inventories are at almost peak capacities, oil tankers are full and sitting at docks and the glut in the market is incredible. Even with cuts the price should not go up any time soon. It is truly amazing that the prices are as high as they are, but me thinks something stinks. There are various links in the pipeline between the oil coming out of the ground to getting into your car and I suspect there are several places where the pipeline is getting squeezed, like at refineries.

Overall, there seems to be plenty of oil out there at the moment, so why would cuts by OPEC make a big difference anytime soon? If you know, you tell me.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aP2gWI8POYac&refer=home

Disclosures: None.