Congratulations DOW!!

The DOW has now erased its earlier 25% decline for 2009, which it reached on March 9, just over two months ago. Bravo!! Bravo!!



http://www.bloomberg.com/apps/news?pid=20601087&sid=aXT58pDbyVa8



It is the last major average to erase its declines for 2009. Obviously we are now off to the races!! What with the S&P trading at an average PE of 33 on projected 2009 earnings, job losses still increasing (though at perhaps a slower rate), housing still in the dumps, commercial real estate falling off a cliff, overall US debt still at record highs (both nominally and as a percentage of GDP), the World Bank worsening its prediction for economic decline this year and financial institutions being allowed to hide toxic assets on (or off) their books, I am thinking of putting all my retirement into equities. Then again, perhaps I will just wait a tad.

The single biggest factor that in my mind still spells trouble for this economy for a long time is overall US debt. Even if you ignore Social Security and Medicare issues, US debt is massive. And wages, on average, adjusted for inflation, have been declining for decades in the US. This is why we have been building debt to maintain our standard of living. We have also gone from the one spouse working model to both working (some two jobs) to survive.

During the same time, a significant part of our GDP, roughly 30%, became tied to the financial sector. But - let me tell you a secret - despite government support, that sector is toast. It is not just toast because of past bad bets. Yes, trillions in derivatives still hang over their heads, but I suspect at the moment the government will help this sector overcome those issues. The real problem is that they have no good game plan going forward. They made money on derivatives but that horse has left the barn. They are not likely to make a lot on mortgages with the housing market down and rates low. They are not likely to make much on anything else for a while. Long story short, there are way too many large financial institutions trying to share what is now a very small pie. We got into this mess largely because they created increasing sophisticated (as in stupid) means to make money out of thin air. Surprise, this does not work. Now that they need to make money the old fashion way, they are truly screwed. You tell me how they are going to all make money, repay their debt to the government and still provide 30% of GDP. Go ahead, I am all ears. When you have the answer, I will reconsider my stance on this rebound, but right now I am just sitting here shaking my head.

http://blogs.ft.com/maverecon/2009/06/the-fiscal-black-hole-in-the-us/

I have not seen a lot else out there worth noting, though it does seem that a trend is building on tearing down old cities, like Flint, and this is getting some press.

http://www.calculatedriskblog.com/2009/06/cities-downsize-to-survive.html

http://www.nakedcapitalism.com/2009/06/low-interest-rates-lead-to-overbuilding.html

Did I mention the median home price in Detroit is $6,000. No, I did not leave off any zeros. Homes there cost just a bit more than my 1995 Explorer, and it has 175,000 miles on it.

Disclosures: None

Deleveraging? - Not!

This post from OptionARMageddon has some rather sobering charts. While individuals are deleveraging, the first chart shows that we as a nation are still increasing overall debt. Now before you start talking about how we can handle it because it is all relative, check out the second chart on debt as a percentage of GDP. Yes it is all relative and right now it is looking relatively terrible compared to where we were in the not too distant past. As a percent of GDP, U.S. debt is well over twice as much as it was when I graduated high school. I won't tell you when that was but you can make a good guess from the chart. Let's just say I had never seen a computer in person before my high school graduation. More disturbing, it is up - as a percentage of GDP - more than a third this millennium alone. This is not a good sign for those that think we are on the road to recovery. We are, my friends, on the road to a stark new reality.

http://www.nakedcapitalism.com/2009/06/guest-post-what-de-leveraging.html

OptionARMageddon is not the only site to notice the debt load. Sudden Debt has a nice piece on it today. As this site also observes, a true economic recovery will need us to reduce this debt load but so far the government has not figured out (or accepted) this painful fact. The government probably realizes this but hopes it is not true as the reality is it will take many years, perhaps over a decade, for deleveraging to get us to where we need to be and no politician (facing reelection in the not to distant future) wants to tell his or her constituents this reality.

Yet hey, what do I know. The stock market seems to have a perpetual upward movement and daily I scratch my head (and other parts) trying to figure out why.

http://suddendebt.blogspot.com/2009/06/deflation-v-inflation.html

Defining Irony

I love to go and listen to presentations by financial planners. They pretty much all say the same thing on asset allocation and the like and they all try to pretend the last two years did not happen. Yes they will pay lip-service to it, but they will not address how their out-of-the-book recommendations are tied to models that ignore fat tails like we have just been through. Indeed, I read a couple of months ago a nice piece on how according to many of these models certain financial market changes were so extreme that the models would not have predicted them happening in the entire history of the planet Earth, yet they happened three times in a single month last year. Yet we still depend on these same old approaches because historically they "usually" work. I guess at the moment you could say the past two years are behind us so the models should work better now going forward.

I headed this topic in terms of irony as I was sitting today listening to a representative from Merrill Lynch tell me how to invest for my retirement. All I could think of while I sat there was how Merrill Lynch almost bit the big one (and would have if BofA and not bought it) and how Lewis has this week been testifying how he got strong-armed a bit into buying Merrill Lynch. Yet here I was having them explain to me how to diversify and allocate among different retirement investments. Basically they said they would look at my age, my savings, my savings rate, my income, my target retirement age and a few other factors to properly allocate my retirement dollars between equities, bonds, fixed income, etc. What they were not saying was that this was based on a computer model that invests on historical norms and that does not adjust at all based upon current economic conditions or fundamentals. It only adjusts for the most part based on my age. Maybe this works for most people but I still prefer to control my fate and base it at least in part on what I see to be economic conditions and fundamentals. My retirement account presently is larger than it was two years ago so I do not think I am totally off base with this philosophy because I am pretty sure the woman presenting today has significantly less in her retirement than two years ago. My approach is obviously not for everyone, but if you spend 2-5 hours a day or more reading up on financial matters, you may be better off to at least in part call your own shots.

http://www.nakedcapitalism.com/2009/06/ken-lewis-points-finger-at-bernanke-and.html

Mortgage Madness

Mish provides in the linked post some additional details on how mortgage rates have skyrocket in the past few weeks, and, as a consequence, new mortgages and refinancings are frozen. I noted yesterday my own experience with rates up 1% in a month. My lock at 5% was good for 30 days and the appraisal, which came in close to 15% lower than I thought it would, did not come in until a few days before the lock expired. The mortgage company probably would not have done the deal had I not had cash available to pay down my existing mortgage so that I could reduce the principal needed for the refi loan and keep my LTV at an acceptable level. The lender also add a quarter point to my closing costs, but given that I was shaving over a full percentage point off my rate, it was still a deal. Not everyone can do this and a lot of refinancings in the works are tanking, after folks have already incurred the cost of an appraisal.

http://globaleconomicanalysis.blogspot.com/2009/06/mortgage-market-remains-solidly-frozen.html

I wrote a few weeks ago on how I suspect a lot of banks are going to take it on the chin with the low rates that existed here for the past few months. Looking at Treasury auction action, more than a few players are betting on inflationary times ahead - despite current deflationary pressures. If inflation goes to seven or eight percent, my new mortgage company will be paying me to borrow money. And if this apparent recovery does take hold (I don't think it will for a couple of years, but who knows) then the record breaking stimulus dollars globally could lead to high inflation rates. Either way, those institutions giving 4.5-5.0% loans that are fixed for 25-30 years are truly taking a big risk. My first mortgage in 1991 was at 10.5% and that was an ARM. I considered it a good rate as rates had been over 15% not too many years before then. I am not saying rates will go there again any time soon, but they do not have to go up too much from where they are today for some institutions to be kicking themselves on the low rates of the past few months, which is undoubtedly why many institutions are looking for any excuse to get out of locked in rates.

Disclosures: None

"Beige Shoots"

I would like to say the title is my original thought but I borrowed it from Calculated Risk, which is why I put it in quotations. The Fed came out with its Beige Book today and according to some mainstream press it showed that the downturn is "moderating." Now you really need to carefully consider the words chosen and what they mean. One thing is for sure, everything will not go to zero. Housing will not become worth zero, employment will not go to zero, GDP will not fall to zero and so forth and so on. So the pace of decline has no choice but to eventually moderate. This is not a positive sign, just a less pessimistic one.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqcOKnqxzW5E

Not all the information in the report terrible but it is hard to describe any of it as rosy. Commercial real estate in particular is rather ugly. As the folks at Calculated Risk (an excellent site on real estate) have repeatedly noted, CRE cliff diving commonly follows residential real estate cliff diving and this time is no exception.

http://www.calculatedriskblog.com/2009/06/feds-beige-book-econditions-remained.html

Calculated Risk has some other data that is not too rosy worth consideration. First, California is simply running out of money - very quickly. What happens when it cannot pay its bills? I guess we may all find out soon.

http://www.calculatedriskblog.com/2009/06/california-state-controller-out-of-cash.html

More disturbingly, mortgage rates are back up again. A good friend of mine owns a title company, does real estate closings and, in fact, I just closed on refinancing with her tonight. Last month I locked in my rate at 5% and just missed getting 4.75% because an error on my credit report delayed my lock in on the rate. In any event I am quite pleased at 5%. My friend - let's just call her Ann - told me rates on 30 year mortgages hit 6% today, just a month after I locked in 5%. Did I mention I am very happy with 5%?

I have not seen stats on this but have to believe that rates being quite low for the past few months have had a major economic benefit on main street. Certainly the people who can refinance is a limited crowd due to homeowners under water, unemployment and other factors, but for each household that was able to refinance, it probably means hundreds a month in more disposable cash, which is a major benefit that is (a) where it needs to be to stimulate our economy, (b) long term and (c) not coming out of taxpayer dollars. This was one of the better things I have seen for the economy this year and it now seems to be coming to a close rather quickly. And this is not just a refinancing issue, of course. The Beige Book noted that housing sales seemed to be stabilizing in many regions but that was in part due to low rates, which are now disappearing. Other factors are at play but the influence of low rates is at least for now going or gone.

http://www.calculatedriskblog.com/2009/06/mortgage-rates-and-ten-year-yield.html

Another worrisome factor is the quickly rising price of gasoline. I do not see the rise as sustainable and, from what I have read, it has some suspect origins, yet the price has been rising and that is not a favorable factor - at least in the short term - for any economic recovery.

Overall, the green shoots seem limited, the brown shoots are still there and now we have a lot of beige shoots. I still do not see a lot of cause to celebrate. Nonetheless, the market rebounded well today from some significant drops mid-day. I have read some posts about some suspicions on perhaps some entities painting the tape. Volume has been light so it is something that could happen. We will see if these conspiracy theories play out.

Thank You for 100

Lest my editor at Seeking Alpha consider this post not worthy, this should be my 100th article for Seeking Alpha. I do greatly appreciate being able to contribute and hope I have added to the overall equation. For those that have read me, thank you. I especially have appreciated all the thoughtful commentary (and even some of the less thoughtful commentary).

Disclosures: None.

That Jet Lag Thingy

My last time to China I recovered rather quickly from the flight. This time I did well on the way over but coming back the recovery has been very slow. I have been back six days and still woke up at 4:30 and am now feeling the best I have all day - just as I need to think about going to bed. Still, with my day-long zombie haze lifting, I thought I would sneak in a short post.

Yves at Naked Capitalism, likely in the interest of a balanced approach, today presented some competing posts; one that sees a recovery in place and one that questions the green shoots we are seeing. I link them both here:

http://pensionpulse.blogspot.com/2009/06/full-steam-ahead.html

http://www.nakedcapitalism.com/2009/06/more-data-casting-doubts-on-green.html

Both are well written and worth the read. What strikes me is the divergence in focus, which I am noticing a lot these days. Those seeing the recovery in place and the worst behind us tend to look at "indicators." They see the market up as a good sign, commodities rebounding as a good sign, Paul Krugman more upbeat as a good sign and so forth and so on. What many of these articles and posts lack are analysis of data - the fundamentals. The anecdotal "indicators" can be manipulated and misread. Moreover, they might just tell you what people want to hear versus reality. If you look at the less optimistic piece posted above, it focuses on data; data on unemployment, commodities and the like. It looks at why the indicators are misleading. To me, it focuses on reality. I could be all wrong (it won't be the first time) but I prefer the data focus. In the long run, data should win.

So here is more data:

• Surveys, including a fairly reliable Manpower survey, show employers are still not planning on hiring any time soon, so they are either not buying into the green shoots theory or - as in most recessions recently - waiting until the proof is absolutely clear before hiring;http://www.calculatedriskblog.com/2009/06/weak-hiring-and-jobless-recovery.html
• Commercial real estate loans are suffering big time, which will have a significant impact on regional and local banks. Some suspect the government stress tests did not adequately allow for this;http://www.calculatedriskblog.com/2009/06/commercial-mortgage-defaults-seen.html
• While the TARP panel chair is recommending rerunning the stress tests, no way, no how. We all knew they were bogus to begin with so why repeat the sham; http://www.calculatedriskblog.com/2009/06/tarp-panel-chair-suggests-running.html
• It is hardly surprising that a lot of banks are wanting to repay the TARP funds to get the government off their backs on compensation and bonuses - especially when they can get just as much government support through PIPP and government guarantees: http://www.calculatedriskblog.com/2009/06/treasury-ten-large-banks-can-repay-68.html
• Has anyone noticed the massive debt the goverment is running up - not to mention others around the world. If you have not noticed, we also have massive health care and retiring baby boomer issues to consider. Yep, everything alright here.

Disclosures: None.

Unintended Consequences

For every good (or well intentioned) deed there seems to be an unintended consequence. Let me put aside for now my criticism of the focus of government stimulus spending to date and focus instead on some side-effects of it even if it were to work as planned. What happens when the government spends a boat load of our taxpayer dollars supporting companies that probably should fail? Answer: the government weakens the companies that did the right thing and that should survive. Supporting the weakest link creates government supported competition for the companies that did the right thing. Those that did what they should are being punished by government support for the competition. This is one hell of a way to fix an economy in my opinion.

CDS Positions on GM and Chrysler

I have wondered what impact the Chrysler and GM bankruptcies have had on credit default swap positions. Given that the CDS market is still tens of trillions, I have to think the effect is not minimal. Nonetheless, despite the piece I am linking, I have seen very little on the issue. If anyone out there has details on the knock on effects to the CDS market, please chime in.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aibJIxm34kYM

Disclosures: None

Green Shoots Abound

I am reading the mainstream financial press and everything is coming up roses. I mean auto sales are picking up, unemployment numbers are better than expected, the stock markets are climbing around the world and they are giving away free beer at the local car wash. Okay, I made the last bit up but government dollars that will not last forever made up the rest of the story. Seriously folks, how long can we live off borrowed stimulus dollars? Let me put that question a different way, when do we run out of borrowed stimulus dollars and actually have to consider paying down the debt? More debt, even on a government level, does not cure debt on an individual level, especially the way we have been focusing our stimulus dollars.

I am a lawyer, not an economist (please hold the jokes), but I do not think it takes an economist to see what is wrong with this picture. Indeed, it seems to take some who are not economists to see what is going on. Daily I am seeing "economists" citing anecdotal evidence as proof the recession is over. Repeatedly ignoring fundamentals that I assume they had to be taught at some point in time before people started quoting them. I feel like the blind man pointing out that the King has no clothes.

I know I am not the only one in this situation, but I am amazed at the number of people who I follow saying the same thing while the mainstream press has a growing mass of green shoot spotters clamoring daily on this or that seemingly positive news. I like positive news. Ask my friends, I am an optimist generally speaking. Yet I am not willing to stick my head in the sand.

With this being said, let me note that the last three paragraphs were written before I started reading the post I am about to link. Kinda spooky if you ask me as Yves is saying the exact same thing. An important lesson in the linked piece is that confidence is an important piece to a recovery but it cannot substitute for a proper foundation. Another point I hate to add, but must, is that once we pop the bubble on this fake recovery, confidence will be very very hard to restore. It is not wise to build fake confidence.

http://www.nakedcapitalism.com/2009/06/team-obama-con-game-gets-official.html

The fact that Yves at Naked Capitalism is saying the same thing is not surprising to me as I have followed her closely and she knows her stuff. What surprises me is that she links a piece at the NY Times basically saying the same thing. Far too few mainstream media folks have had the courage to do this to date - perhaps toting the "it is all in our heads" mantra. This is an op-ed piece and well worth read. It asks some hard questions that Obama needs to answer. I voted for the guy but am not at all happy yet with his financial moves, which I am sure you have guessed if you have followed me at all.

So you do not believe me or Yves on our less than stellar view of the economy. Who should we trust? Well we know not to trust the media - they have news to sell and will tell us whatever will sell. We know not to trust the government, they have lied to us throughout this process - despite Obama recently noting he would always give us the truth (words I am sure he will have to eat in time). We can, however, trust insiders at businesses to tell us the truth with their actions. Namely, are insiders buying or selling their company's stock? You know the answer without me telling you. They are selling big time and there is very little buying. I guess we have to call that a brown shoot.

http://www.financialarmageddon.com/2009/06/wall-street-still-clueless.html

Okay, this is a bit coincidental. I just went to Mish's Economic Trend Analysis and his lead story is pretty much the same - economists are way too optimistic. He has some good stats to back up the claim. I like the prediction that unemployment would stay under 5% through 2013. Hopefully the economists giving that prediction are now among the unemployed. And as he points out, the "adverse" numbers used for the non-stress tests we did on the banks - you know the worst case scenario - are already proving to be much more optimistic than reality. Some were already blown out of the water before the results were announced, but we still stuck by our original test parameters. Now that is a confidence booster in my book.

Decide for yourself. I did not see the massive market rebound from March 9 coming and certainly do not see it continuing, yet who knows what trillions in stimulus might eventually do. What I can see is that fundamentals of a sustainable economy are still sorely lacking and that has me quite worried for the medium and long term. I am truly frustrated at the short term focus of most governments around the world and truly hope we start working on the disease, not the symptoms.

Disclosures: None.