Saturday, August 22, 2009

New Reality

I posted many months ago on something I called the new reality. The new reality is, sorry, here and it is here to stay. The economy seems to be reaching a bottom on several fronts. I personally am worried that this is not the true bottom and more pain is in the future, but let us assume we are reaching a bottom. A bottom on unemployment, housing, stock declines and the like. Where do we go from here? Here is my take on this economy. It is V shaped, U shaped W shaped or some other shape. Personally, I think it is \_ shaped. Down and out. We went down and are staying down as far as I can see.

Let's say I am wrong. We already have a nice recovery in the market. How much further can we go without a true recovery in the economy. You decide. Right now I suspect the economy in the U.S. will be like Japan for the past decade or two. Lost decade? Lost two decades?

I say this because we had a large run up in the economy and it was all fueled by debt. Easy credit and a housing bubble coupled to create trillions in spending on debt. Time now to pay that debt off. Call it a debt hangover. This headache is going to be around for a very long time. We have of late been replacing personal debt with public debt. Short term gain for long term pain in my book.

Disclosures: None.

Rich NOT Getting Richer

This would seem obvious, but the rich are by-and-large getting poorer. Apparently nearly everyone else is too, but the rich are facing the great equalizer - the worst recession since the Great Depression. The guy who developed McAfee antivirus software went from over $100 million to $4 million in a couple of years. Apparently not smart enough to use antivirus on his investments. If you have that much money, stick it in Treasuries and enjoy life. Unless you are a total fool, you will not outlive your money. Leaving it in the stock market, apparently you might out live it. Then again, I would like to have the $4 million he has left. And then again again, he seems to be living life quite well with a lot of traveling and life experiences.

By the way, this link has another interesting tidbit of info. The top ten thousand money-wise in the U.S. apparently used to be in the $2 million and up range in the 1970s (adjusted for inflation) and in the $11.5 million and up range in 2007. Now they are down to $6-8 million range and up today. A few more years like this and I can make the top 100 million. Still, these stats demonstrate the inequalities that arose in large part (not exclusively) during the Bush administration. For the filthy rich to experience a five-fold increase in wealth over 40 years while those in the lower and middle class actually saw an inflation adjusted decrease in wages is horrendous and, I might add, not sustainable. Better income distribution leads to a better sustainable economy.

http://pensionpulse.blogspot.com/2009/08/end-of-30-year-wealth-bubble.html

http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf

A second tidbit worth noting in this story is that the stock market, before the recent decline, was on pretty much a 20 year tear (Nasdaq aside). Now it is torn and the holes are showing. Nonetheless, it has climbed quickly and significantly from its March 9 low. Where will it go from here? I am short (and that is not a comment on my height).

We are just so fantastic at stopping a recession!! How can I slap myself on the back even harder!!!

The world banker's lovefest in Jackson Hole, Wyoming is something I ask you to burn in your memory and remember for the next year. It seems all the central bankers are climbing over each other to claim credit for this recession being put behind us. How brilliant we all are!!

http://www.nytimes.com/2009/08/22/business/economy/22fed.html?_r=1&hp

Yep, recession ended, housing up and the market reacts accordingly. One speaker quoted in the linked piece is Frederic Mishkin of Columbia University. As Dean Baker points out, Mishkin had some timely remarks on Iceland a couple of years ago. Seems the now defunct country was thriving at the time and Mishkin saw continuing roses on its horizon. So, I ask, why does anyone quote him or pay attention to him anymore? Then again, why does anyone listen to central bankers anymore? Then again, why ask why?

http://www.vi.is/files/555877819Financial%20Stability%20in%20Iceland%20Screen%20Version.pdf

And why does anyone believe the folks in Jackson A-Hole about where the economy is heading. Apparently main street is not buying it.

http://www.financialarmageddon.com/2009/08/economic-no-spin-zone.html

But main street needs to get real too. Those on main street need to wake up and smell the mocha. If you believe the U.S. government is going to spend us out of this decline and China will finance the effort by buying Treasuries, you better think again. Maybe China is not so much behind the effort:

http://www.nytimes.com/2009/08/22/business/economy/22charts.html?ref=business

Fox to Sheep: "No I don't know where the lost sheep went."

Geithner is telling us that government officials dealt properly with Goldman Sachs and did nothing improper to support them. Yep, from his lips to my . . ..

http://online.wsj.com/article/SB125088307063549883.html

Disclosures: None.

Friday, August 21, 2009

Tooth Ferry

My five year old daughter has her first loose tooth and she is looking forward to a visit from the tooth ferry. Apparently those investing in the stock market are also waiting for this ferry to visit. They seem to be betting that this will happen soon. I, for one, am betting this market ferry lost its wings and is going to be floundering for some time to come. In English, I am now shorting the market and have zero, and I mean zero, equity positions. We will see what strategy works.

As a wise, very experienced, pilot once said, "I would rather be on the ground wishing I were up there than to be up there wishing I were on the ground." I am right where I want to be at the moment. I see very little possibility of the market going up significantly from here and I see a lot of possibility in the other direction.

Existing Home Sales UP

Yep, that is going to last. If you did not read my earlier posts this week on option ARMs and the like, now is a good time to do so. Please also visit Calculated Risk as this site will set you straight on real estate. If you think real estate is at a bottom, you are drinking more than me. As Calculated Risk has reported on a regular basis, there is a fairly hefty shadow inventory of homes out there, i.e. homes that banks or homeowners are waiting to list when the market recovers, so official inventory numbers are a tad low.

http://www.calculatedriskblog.com/2009/08/more-on-existing-home-inventory.html

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

And Another One Down, Another One Bites the Dust . . .

As I mentioned last Friday, get used to multiple bank failures every Friday. This Friday does not dissapoint. Four more down:

http://www.calculatedriskblog.com/2009/08/bank-failure-81-down-goes-guaranty.html

http://www.calculatedriskblog.com/2009/08/bank-failures-79-80-capitalsouth-bank.html

http://www.calculatedriskblog.com/2009/08/bank-failure-78-ebank-atlanta-georgia.html

Disclosures: None

Thursday, August 20, 2009

AIG Talks The Market Walks - Not!

One thing for sure, if AIG says to go left, I say right. If they say up, I go down. If they things are doing well, I sell left and right. This is a company that spent the better part of a century building up $100 billion only to blow it all in one year. And now, mesteriously, they claim to be able to repay the tens of billions of government support. So, one might ask, how the hell how can they do this?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSLUz5uq_wgY

Seriously, how can they do this? Rumor has it that AIG is drastically cutting premiums and stealing customers to bring in cash. This, if true, brings in cash on the front end and loses money on the back end as losses mount. Insurance companies have this little thing called a loss ratio. If they pay out less in losses than the premium they collected, then their loss ratio is less than 100. If they pay out more in losses than premium, their losse ratio is over 100. Many companies can make some money even if their loss ratio approaches 100 if their investments make money. Obviously, most companies did not make money the past couple of year on investments. Moreover, capital for the insurance market has dissappeared, so in short order insurance premiums should be going up, as in what is called a hard market. Not happening yet due to companies like AIG selling policies at stupid prices to bring in cash, but it will happen. And what happens when a company sells insurance policies a stupid prices? You figure it out.

I will have a lot more to add over the weekend but am rather busy right now. Still, AIG's demise was somewhat celebrated in the industry as they were not viewed as the best company in the country by their peers. In code, they were hated by the other companies in their sector. I will not explain why, but they earned their reputation. Yet, we taxpayers are spending tens of billoins bailing them out. Nice.

Disclosures: My company is in some remote respects in competition with AIG.

Monday, August 17, 2009

Just a Breather or a Change in Direction

People are wondering if today's pronounced global downturn in stocks was a sign of things to come or just a breather from a very, very fast run-up after March 9. Everyone is wondering and no one knows for sure. One thing for sure in my book, in time the fundamentals win out. I call it the two plus two principle. You can convince a lot of people for a while that the answer to this equation is 5 or 3, perhaps even 6 or 2, but in time, the fundamentals win out and you have reversion to 2, otherwise known as mean. Now the markets are never going to have it right. They are like a broken clock that is right twice a day. They hit the right number on the way up and then again on the way down but rarely are where they should be in relation to fundamentals. And now, the fundamentals are saying the market is too high, at least those I follow. Why, you might ask? Let's look at a few fundamentals that I believe cannot be ignored.

Foreclosure Tidal Wave on the Way!

I wrote a bit about Option Adjustable Rate Mortgages last week, but it mostly was in passing. I noted a lot of these that were written over the past few years are resetting and that spells foreclosure trouble. Indeed, many contend that this will make the subprime foreclosures look small fry.

Lest you not believe me, I highly recommend going to this post, which has a lot of nice data and charts showing it all in wonderful detail. Between underwater homeowners and Option ARMs resetting at a increasing pace, foreclosure activity is rising, not falling, and can be expected to go through the roof. This is not good for homeowners, banks or anyone else.

http://www.economicpopulist.org/content/coming-foreclosure-wave

For a similar discussion, I recommend Mike.

http://globaleconomicanalysis.blogspot.com/2009/08/brace-for-wave-of-foreclosures-dam-is.html

And here are some stats on how the delinquecy rates on residential and commercial mortgages soared in Q2.

http://www.calculatedriskblog.com/2009/08/fed-delinquency-rates-surged-in-q2-2009.html

Not good, not good at all.

Consumer, Consumer, Where Art Thou?

Record levels of consumer debt and low savings coupled with a destruction of trillions of dollars of household net worth does not spell economic recovery for a country 70% dependent on consumer spending for GDP. I would summarize more but this is an excellent post with some good charts so I recommend you read it in full.

http://www.nakedcapitalism.com/2009/08/weak-consumer-spending-will-last-for.html

Job Market Actually Not Improving

Some press lately on how job losses are slowing. That stat is a tad misleading. When you have six million less jobs to start with, you have a smaller pool to fire. Losses are in fact continuing and those who have lost jobs are having a very hard time finding new ones. And since job losses typically continue for many months even after a recession ends, this situation is not likely to be corrected any time soon. We need to get to where jobs are added, not lost, each month. As this linked post notes, the picture continues to be rather grim on the job front.

http://suddendebt.blogspot.com/2009/08/jailhouse-diet.html

Eerie Correlation

I noted yesterday that the correlation between a major market bounce during the Great Depression and the bounce since March bears a .8 correlation, which is quite significant. Last Friday and today that eerie correlation continues. Coincidence? Look at the four bears chart here and decide for yourself.

http://www.calculatedriskblog.com/2009/08/report-guaranty-bid-deadline-tomorrow.html

And as noted in the link, more financial institutions are in the FDIC's sights.


Disclosures: None