Here's the deal, I used to blog pretty much daily as I believed it made a difference. People were listening. I did and still believe I was reporting accurately on fundamentals but I am now convinced that government stimulus and other factors can mask the fundamentals for a very long time. How long - years easily, and I fear perhaps much longer. And I am also convinced our government and others are hell bent on building a new bubble. I am not saying their intent is to build a bubble, just that this is what they are doing whether they realize or not. And so here we are left looking at tea leaves on (a) what the fundamentals say and (b) how does all the noise from government stimulus and actions by other interested players affect the outcome. I can only speak to (a) and note that eventually - in time - (a) always wins out. How long only time will tell.

So on (a) I still see nasty fundamentals. Housing still in a slump,with foreclosures still high, commercial real estate still in the slumps, unemployment still high, mortgage rates rising, and few fundamental reasons for short term optimism. And with government stimulus slowly being taken away, you guess what is about to happen.

Disclosures: None.

Just Checking In

Nothing much to post other than some idle thoughts. From what I can see we have avoided financial armageddon (hats off to Michael Panzner). The big financial institutions have built up capital big time. Now they are not lending it, which tells you a lot. They should be able to repay TARP and other funds in time and gradually survive the bad crap on their books. Nothing like Uncle Sam giving out money with virtually no interest to get you through the tough times.

Yet with the worst avoided, folks seem to be ignoring the big picture. China is in a major bubble, Japan is -well - still where it has been for 20 years, the PIIGS aren't flying and we are inflating a new bubble here at home. The fundamentals still suck big time and will for some time and we are not focused on the fundamentals. In my humble opinion we are entering into a very long phase of economic stagnation, both in the U.S. and Europe, which means those that sell us stuff are not going to do much better. NO market predictions here, just expecting that we are in for many years of no fun.

Disclosures: None.

Not Greecing the Wheels

Bloomberg reports that the bailout package for Greece, which is an EU and IMF package, has not convinced investors as it is still just a backup and only kicks in if Greece runs out of other options. Apparently investors believe, as I do, that Greece will soon run out of other options. It is certainly a problem for the EU. They are on the edge of violating some of their basic rules/premises. They do not want IMF involvement as that is a sign of EU failure. And they certainly do not want an EU country bankruptcy, though their very structure could lead to it.

Greece by any analysis is a problem child of the EU, though not the only one. They are the leading chin of the PIIGS. More will come if/after Greece fails. Yet Greece is a poster child of what went wrong in the bubble days. Their debt versus GDP went through the roof, real estate prices were sky high based on buyers with bubble financing, the economy has very little left to sustain it in the long term, tax evasion is rampant and the populace is not likely to be willing to go through the pain they need to in order to repair all this damage (few countries are today). Don't believe me, click on this link to Sudden Debt where the author has covered Greece in good detail.

http://suddendebt.blogspot.com/2010/03/greek-experiment.html

At the end of the day, I do not see Greece being able to do what it needs to do to address its problems. It did a number of financial tricks to kick its debt problems down the road and those will be showing up for years to come, and the citizens there are simply not going to put up with the necessary pain when they take the punch bowl away. Then again, I do not see the EU or IMF providing enough support to avoid that punch bowl leaving. So soveriegn bankruptcy is certainly in the cards in my book. Sure, if this were the only problem country for the EU it is small enough to figure something out, but it is not and those citizens footing the bill in other EU countries will not put up with saving all the PIIGS.

For countries around the world with problems, and I definitely include the U.S., it is time to get our house in order and stimulus spending is only making the long term picture worse, not better. Time to take our medicine.

Disclosures: None.

Option ARMs and Commercial Real Estate

A friend recently sent me an article from the WSJ about how option ARM resets this year and next may not be as bad as expected. Two basic reasons for it are (a) interest rates are very low so the resets will not be terribly bad for most and (b) a lot of underwater homeowners have already defaulted on their option ARMs even before the resets so there are not that many left there to default. A third possible reason is loan mods but we all know these are not really happening too often or working when they do (the percentages are small on this having an impact), so I will dismiss that one out of hand.

For the first point, let me note that these ARMs are either resetting to adjustable rate mortgages or eventually will go there and interest rates will not stay this low forever, so this is another kicking the can down the road success story. Moreover, a lot of these loans had homeowners simply paying interest only, so even with rates low the new payments that will include principal will still be higher. But, in any event, the low rates do give some people time to get back on their feet and perhaps refinance if their homes are not underwater, which is a good thing.

The second reason, a lot of defaults have already occurred, I do buy, especially in California where the option ARMs were all the rage.

Does this mean banks are out of the woods? In a word - no. Especially smaller local and regional banks still have a load of commercial loans that are continuing to sour and the pain is not done yet on the commercial side, though I would agree the worst is behind us on residential side. On the commercial side most commercial mortgages are expected to be underwater by the end of this year:

http://bubblemeter.blogspot.com/2010/03/elizabeth-warren-half-of-commercial-re.html

I really think we are in for a world of commercial real estate hurt this year and next. I read a stat earlier this year that the U.S. has significantly more, as in around 50% more, commercial real estate than any other country. For a country where consumers are still over their heads in way too much debt, I do not see commercial real estate rebounding any time soon. Obama can spend as much stimulus as he wants but I do not see many businesses walking out the plank and taking on new leases or real estate any time soon in this economy. This will lead to some massive commercial loan losses this year and next, which is simply the next step in this economy.

Disclosures: None.

A Smidge More Info

I have not been posting lately as there has not been a lot of reality that the world wants to hear. And the world is not there yet. So I am keeping this short and sweet. The bottom line in my opinion continues to be, we are in for a world of hurt. Appropriate to my current slant to not overplay this thought I am just passing on the following items for your consumption. Just think about it:

• Existing housing and new housing are doing poorly, indeed one at historical record lows, and this is despite government subsidies;
• ARM mortgages are reaching a high later this year, late summer, and this will lead to massive foreclosures;
• State and local governments are hemorrhaging and in dire need of cash;
• The Fed is ending certain programs that supported the U.S. Treasuries and, SURPRISE!, Treasuries are having a very bad week;
• Greece is still unsettled on what will happen there;
• Consumers resumed spending the last month or so but their debt levels are still very high, which suggests the spending is not only sh0rt lived but foolish;
• With Treasuries having massive problems there are going to be some big problems supporting our massive deficit;
• China is in a major economic bubble;
• Europe is in significantly worse shape than us between all the PIIGS;
• And the list goes on and on . . .

I am simply not yet seeing the light at the end of this tunnel. Everything I have seen has been government dollars (as in taxpayer dollars) to stimulate spending or to subsidize idiots. Either way it has not led to any sustainable progress. In my opinion, we are in a world of hurt. What I cannot tell you, given all the foolish government spending, is when. I suspect it will come to rest this Fall. We will see. It could be years away.

Disclosures: none








RI

Bridge for Sale!

I have been holding off posting as the markets seem to be in disbelief and I have become convinced they could stay there for a better part of the year. I still believe this could happen as the government is coming out with yet another stimulus package. Yet, I do believe the end is in the cards in the not too distant future, and for this I offer the following observations:

• comsumer debt has begun to climb again, which means more consumer spending but a worsening of fundamentals;
• the government is doing more stimulus spending so they are not yet buying their own story;
• housing and comercial real estate are still in the dumps;
• China and Japan are not buying Treasuries any more and the Fed has ended its program to do same, so who the heck is going to buy them now;
• individual investors pulled out billions from mutual funds last month;
• Germany is making noises about countries who are not keeping their house in order leaving the EU; and
• Greece, lest you have not noticed, is in really, really big trouble. Unless you think otherwise, please read the following very informative link, which leads me to the conclusion that Greece is in the dumpers . . .

http://suddendebt.blogspot.com/2010/03/greek-experiment.html

I really do not see things getting any better soon and it is only a matter of time before reality hits the fan.

Disclosures: None.

Long Time No Post

I apologize for not posting for a long long time. I could say I have been busy at work (which is true) that I had a vacation (also true) or that I have had a lot of family things to attend to (also true), but the real final truth is I am a bit disenfranchised. I still firmly believe the economy is running on fumes, that the fundamentals are not there for a true recovery and that the world is burning off stimulus. A very big foot has kicked a very big can down the road. I am hesitant to talk about it more as to a certain extent our economic condition is what we believe. There is something to be said for public perception or attitude.

That, however, has its limits, as in fundamentals, and they have not changed to the positive. We still have high unemployment (especially if you take out the BLS birth/death adjustments that have been dead wrong for the past couple of years), we still have high debt, both on a personal level (it went up again last month) and overwhelmingly so on a public level (ask Greece, Italy, Ireland or pretty much any other government in the world), and we still have no good business plan. By business plan I mean no real good economic recovery plan. What exactly is this country (the U.S.) going to do to sustain itself for the next 5, 10, 15, 25 or 50 years I ask you?

And so the markets go up and up and up. I have no explanation. George Washington has some ideas (six of them) worth chewing on and I refer you to his discussion of same, but at the end of the day he agrees the market rise is not supported by fundamentals.

http://www.nakedcapitalism.com/2010/03/guest-post-6-theories-on-why-the-stock-market-has-rallied.html

And so my postings have been slim. Largely I have nothing really truly new to say. The damn fundamentals have really had little to no change - at least not in the positive direction - and I cannot explain the markets. So I am hesitant to keep banging the doom-and-gloom drum as for the past year that would have not reflected the market direction of roughly a 70% improvement in the market.

So here I sit waiting to start my three year old son's 529 account. I am with the rest of the crowd. Do I invest now and lose money if the market is inflated or wait and lose money by getting in even more late than I have? Is this hard to understand market still going up from here? Are we going to shoot up when the masses start to grow tired of sitting on the side-lines and pour in? Or are we in for a major correction? No one knows. I certainly do not know.

I take some solace in the fact that the current market rally has not been due much to the masses. To me this means that we - the people - have an understanding that the fundamentals are not there and we are waiting out a false rally. Those driving the market up - which has been driven or inspired largely by low volume after hours trading - have their own agenda (and perhaps a false one). And so I am sitting it out. I am staying on the side-lines for now. I am staying there with my son's 529, my retirement and - for the most part - my brokerage account (though here I look for select opportunities). I have been totally wrong on the market for a year. We will see. I still do not believe I am wrong on the fundamentals.

Disclosure: I have some equity positions and some put options.