Where is the Market Going?!

Obviously I have been wrong on the market direction for some time. Daily I scratch my head and elsewhere and wonder how in the world can people be buying stocks and believing we are in a rebound. I will admit we may be at or near the bottom of the recession, but there is a stark difference between bottom and recovery and the markets of late are apparently predicting a fairly significant recovery back to our spending ways of yesteryear. I view that as an impossibility, literally. The math simply does not add up and won't for some time. And so I will stay on the sidelines kicking myself and waiting.

So why am I saying impossibility, let me count the ways:

1. While U.S. consumers have in fact been paying down debt, it is still near record levels and I suspect much of the debt reduction has either been from government stimulus or defaulting on the debt (which results in it being eliminated);
2. We had the destruction of over $13 trillion in wealth in this country during this recession and outside of government stimulus little of this has returned;
3. Median incomes are down over 3% this month YOY so we do not have more money to spend absent government stimulus, which is the government borrowing money for us to repay later;
4. Housing is nearing a bottom generally but still sluggish;
5. Commercial real estate is just starting to get to its lowest point and will not likely get there until 2010 or well beyond;
6. Mortgage foreclosure issues will continue to be an issue as Alt-A mortgages, especially Option ARMs, and prime mortgage defaults continue to rise and will not likely peak until 2010 or 2011;
7. We have major shadow inventory on the real estate market, which is homes that are not officially for sale but belong to people wanting to sell. Reportedly, a lot of banks have held off on foreclosures as they do not want to deal with the costs of foreclosure (shadow inventory) and 24% of homeowners would like to put their homes up for sale if the market were better (shadow inventory). That is enough shadow inventory to keep home prices depressed for years to come;
8. The retail space in the U.S. is roughly 50% overbuilt compared to any other country in the world; and
9. Unemployment may have stabilized a bit but there is not likely to be a big bounce off the bottom.

I have more, but this can get depressing, so let's take this a few steps at a time. Any hoot, do you see my point? And one last point here, I do not like at all the Administration response to this crisis. I voted for the guy but he has surrounded himself with idiots and he listens to them way too much. Actually, I am not sure they are idiots. I just think they are answering to the big banks and not the people they are sworn to serve - the taxpayers. I would like to hang them high, very high. They are bending over backwards to please the AHs that got us into this mess. And that keeps me up at night wishing I had voted for the other guy.

Here is an important piece on what the Administration is doing about banks too big to fail. It starts by noting many very prominent economists who think they should be dismantled, which is what I favor and have touted for months, but then it notes what Geithner, Summers and the like are still kissing A with the big banks, who have treated them well in the past. Makes me a bit ill to read it.

http://www.nakedcapitalism.com/2009/09/guest-post-top-economists-say-we-must-break-up-the-insolvent-banks-government-says-lets-make-them-bigger.html

Disclosures: None.

Debt, Debt and More Debt

I have little time today for anything in depth, so I am mostly going to provide a few interesting links I have read worthy of a read, in my opinion. Let us start with a post detailing information from some scholarly folks as at University of Chicago, a well respected institute of higher learning. They are talking about debt and make pretty much the unsurprising deduction that people in areas with the most leverage off of homes are doing the worst in this downturn.

http://www.calculatedriskblog.com/2009/05/mew-consumption-and-personal-saving.html

Incomes down! Yep, that spells good news for consumer spending and for GDP, which is two thirds consumer spending. Median income off 3.6% should spell roughly a 1-2% decline in GDP.

http://www.calculatedriskblog.com/2009/09/census-bureau-real-median-household.html

Disclosures: None.

Are Consumers Paying Down Debt?

Click on image for larger graphic.

Karl Denninger provides us with the chart above. It does not include the past few months of consumer debt reduction, but otherwise it tells the story. It is especially telling in terms of debt versus income. Does this debt level look sustainable? Here is a link to the entire post, which is somewhat enlightening.

http://market-ticker.denninger.net/archives/1414-2009-Labor-Day-Ponderings.....html

And so now we hear that consumer debt fell at a 10.4% annual rate in July. That folks is six straight months of decline and 11 straight months of credit card debt decline. Five times the debt reduction economists expected.

http://www.marketwatch.com/story/us-consumer-credit-down-record-amount-in-july-2009-09-08

Whether this is good news or bad depends (a) on your perspective and (b) on the reason for the reduction. Let me start with (b). According to the following link to Bloomberg, while debt was reduced the past couple of months, incomes declined slightly and spending went up slightly.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAYZpSNGocVM

Now I am no math major, but how can debt go down if incomes went down and spending went up? The only answer I can think of is the fact that debt can be reduced in two ways. Number one, it is being paid off. Given lower incomes and higher spending, paying down debt seems unlikely in general. Number two, debt can go away by being written off, as in credit card defaults, bankruptcy filings and the like. I have seen no official stats on what caused the reductions but I suspect some reduction through defaults is a big factor here. Oh, and there is a third way, government stimulus is used to pay down debt, which is not to be underestimated in the present environment. Government debt replacing individual debt is not, however, a debt reduction. It may move debt to a lower rate and put off to another day the payoff, but it is not reduction.

Now the prospect that some, perhaps a significant, part of this reduction is people defaulting on debt is not good news from any perspective. Yet some of it may be due to people actually paying off debts and whether this is good also depends on your perspective. Some of it is likely due to tightening credit standards, leading to less credit with which we can grown debt and which leads to a forced reduction in debt. Reading between the lines on the Bloomberg link, the mainstream press, and undoubtedly the Administration, view this reduction in consumer debt as a negative. Low spending and more savings does not spell recovery for the economy in the short term.

Yet there are those of us who view the short, even medium, term as pretty much a lost cause. We have way too much debt and the only cure (correction) to our situation is to gradually reduce it. It took us an entire generation to build the debt to record levels and it may take longer to bring it back down as it was built by baby boomers who increasingly cannot afford to pay it off. If you question me on our debt load, this link may wake you up a bit. The graphic at the beginning of this post comes from it.

http://market-ticker.denninger.net/archives/1414-2009-Labor-Day-Ponderings.....html

Sorry friends but until the debt situation is under control we have no recovery. We may stabilize at a bottom but we will stagnate there. I prefer to take the pain for a few years and do what we can to reduce debt so less is pushed off on generations to come, but that does not seem to be the Administration game plan. They seem hell bent on getting people back to their spending ways and on supporting the financial companies that got us into this mess. I am done for now standing on my soap box, but I am starting to percolate with anger on what is happening, so watch for more. The market being up is fool's gold in my opinion. There is nothing other than government stimulus around the world keeping us there.

Disclosures: None.

Underemployment is the Problem!

It was a crazy week in the market - especially in my portfolio. I was up around 20% in just two days earlier in the week only to lose most of that gain the last two days of the week. My one equity holding flucuated over 100% in a single day, i.e. from $2.01 to $1.00 a share. Just a crazy week. But the craziest thing to me is that the market rebounded from an early week sell-off. Crazy in that I see no basis for it.

Underemployment setting new highs!

I am wrong you say on the rebound in the market being crazy! Unemployment was not as bad as expected, you say! Well, as with everything, it depends on how you read the numbers. Robert Reich does not view the unemployment numbers as the least bit a green shoot. It would seem a lot of job/wage loss is being hidden in companies cutting back hours, workers forced to go part time, unpaid furloughs and the like. Workers who have jobs are working less and being paid less. It is not officially unemployment, but you can call it underemployment. It still hurts the economy.

http://robertreich.blogspot.com/2009/09/real-news-about-jobs-and-wages-ode-to.html

And as I said recently, the best place to look when unemployment numbers come out is Mish's Global Economic Trend Analysis. Mike there gives you the skinny on unemployment numbers and I highly recommend a visit. The numbers are not a green shoot. As he explains, the government likes to play with the "official" numbers with things like the birth/death model. I will not explain here as the link to Mish tells all.

http://globaleconomicanalysis.blogspot.com/2009/09/jobs-contract-20th-straight-month.html

Heck, even Bloomberg is acknowlegding that the employed are, as I have said, underemployed. The average work week is now 33.1 hours, which if you are paid by the hour means you are being paid a lot less that a 40 hour work week - unless you live in France.

http://www.bloomberg.com/apps/news?pid=20601087&sid=adK82ggZxaL8

And if you do not believe all these sources, Calculated Risk - the just the facts site - also is casting some doubts on unemployment being so rosy. Go figure.

http://www.calculatedriskblog.com/2009/09/employment-population-ratio-part-time.html

And For the Most Staggering Unemployment Figure of All!!!

Drumroll please!! As this link explains, from August 1999 to August 2009 we have lost 223,000 jobs. Now that may not seem that big a number, especially when spread over an entire decade. After all, it averages less than 2000 jobs lost a month over the past decade. No big deal - right? No big deal, that is, until you consider the fact that the nation's population has grown by over 33 million people over that decade. That folks is staggering!!

http://www.calculatedriskblog.com/2009/09/naught-for-naughts-update.html

Gettin' Stigi Widit

If you follow things financial a bit, the name Joseph Stiglitz is no stranger. He gets quoted a lot and, even though he is not always right, he seems to have a bit of a following. That is what happens to you when you win some stupid award, like the Nobel prize in economics. I like Stiglitz personally as I agree with him much more than I disagree. Then again, I have only followed him for a few years, so I may change my mind eventually. Nonetheless, I have to agree with him now. We are either going to have a W shaped recovery where we see another big dip from where we are right now, or we are going to be stuck near the bottom and bounce along for years. In other words, whether we stay where we are or go down from here, there is no long term up for a very long time. Call it the coming lost decade or as Ambrose Evans-Pritchard suggested earlier this week, the lost 25 years.

http://www.nakedcapitalism.com/2009/09/stiglitz-doubts-recovery-can-be-sustained.html

And Another One (Five) Down!

Five more banks down today. Hard to recall a couple of years back when we went a couple of years with no failures the entire year. Things certainly have changed a bit from those easy/loose credit days.

http://www.calculatedriskblog.com/2009/09/bank-failure-85-first-bank-of-kansas.html
http://www.calculatedriskblog.com/2009/09/bank-failures-86-87-inbank-oak-forest.html
http://www.calculatedriskblog.com/2009/09/bank-failure-88-community-bank-rolling.html
http://www.calculatedriskblog.com/2009/09/bank-failure-89-first-state-bank.html

I read a prediction recently that 500 banks would fail in this recession. We are still under 100, barely, but at the rate they have been falling lately we could reach the 500 mark in less than two years.

Disclosures: None.

What Will Replace the Home Piggy Bank After Stimulus is Gone??!!

Pessimism in the market is on the rise and the S&P is now down four days in a row. Not too shocking if you keep up with things. I am only shocked on how long it took the investment community to catch up to the reality of the situation. Yet given the years and years our bubbles have lasted in the past, I should not be surprised that people remain optimistic much longer than they should.

http://www.bloomberg.com/apps/news?pid=20601087&sid=abJhH4AMX4F0

Unemployment, Is it good or bad?

According to this linked post at Naked Capitalism, unemployment is much worse than the government would have you believe.

http://www.nakedcapitalism.com/2009/09/unemployment-the-harder-you-look-the-uglier-it-appears.html

This is common fodder among those that follow the issue. Frankly, my favorite site when it comes to exposing the fallacy in unemployment numbers is Mish's Global Economic Trend Analysis. When the unemployment numbers come out each month this site gives you the truth on what they mean. I am not saying I agree with all the anti-government discussion on this site, but on unemployment stats it is the place to visit.

http://globaleconomicanalysis.blogspot.com/

And while I am talking about good blog spots to visit, if you are interested in resenditial or commercial real estate, no one provides the quality of information you will find at Calculated Risk. I highly recommend it.

http://www.calculatedriskblog.com/

As Calculated Risk explains, Wilbur Ross now expects 500 bank failures. Go figure.

http://www.calculatedriskblog.com/2009/09/wilbur-ross-500-more-banks-to-fail-by.html

At the end of the day, I must beg you to read good blogs, educate yourself, understand the basics, the reality, and act accordingly. I try to pass on reality here, but I do not have the street cred that will lead to most to believe me. Don't believe me. Test what I say or pass on and see whether, in time, it proves correct. That is how I test those I follow. That and common sense. A lot of this is what I call 2-plus-2. For example, the U.S. still being swallowed in debt is a fact that many seem to be ignoring. After stimulus is over, how can we resume our spending ways when our Home piggy bank is still gone? If you have an answer, I am all ears. And that is just one of my 2-plus-2 questions that you must confront before I believe we have turned the corner - though I admit it is one of the best questions to be answered.

Disclosures: None.

September Has Arrived!!

Let me start with an apology. Yesterday I said I have no equity positions. That is not 100% accurate. I have two. One is my employer through an ESOP. I forget about it as the stock is not sitting in my brokerage account. The other is Valcent Technologies, a company focused on vertical crop growing systems and use of algae for biodiesel. I do not have much money in it but it was up 52% today so it did catch my attention in looking at my portfolio. Other than these, though, I have no equity positions at the moment - not even in my retirement. By the way, I lost my initial investment in Valcent when it recently did an 18-to-1 reverse split, so this is not a recommendation, though I do like the company. Call it my green investment.

Disclosures aside, it looks like the September curse if upon us. As I reported previously, Fall in general and September specifically have historically had bad market performance. One day in and it is not disappointing expectations. And looking at Asian stocks this evening, tomorrow will continue with same. Right now the Nikkei is down 2.6% and the Hang Seng is down 1.6%. Personally I do not believe the month has much to do with it, but I do believe the market is very, very over sold at the moment, so no surprises here.

The downturn in the market today was hardly an earth shattering event. Everyone and their brother was writing about how the market had climbed too far too fast, how it usually takes much longer for the market to recover this far from a recession bottom, how the P/E had climbed to levels higher than average even in good times, and so forth and so on. A correction from these lofty gains is hardly a surprise. It probably only rose so much as everyone on the sidelines kept having non-buyers remorse and eventually could no longer avoid the temptation to get back into the action. Maybe after the market 2% drop today they have a bit more strength to use and avoid the temptation. We will see. Personally, I think on fundamentals the market has much farther to go south. I am not expecting a retest of the March 9 lows any time soon (thanks to all the stimulus) but we have really ignored reality way too much in the market and it is healthy for us to come back to a healthier level.

Focus on the Problem, Not the Symptoms

My biggest problem with the Administration's response to our economic plight has been its unwavering focus on the symptoms (save the failed banks) and virtually no regard for the underlying problem (massive debt loads, unsustainable consumer spending, over inflated housing prices, over built commercial real estate and the like). We have a lot of significant fundamental problems with our economy and the government is doing next to nothing to fix them. Instead, from what I can see, they are making them worse. They are promoting more debt, giving moral hazard to the financial institutions that got us here, promoting consumer spending and pretty much doing whatever they can to avoid us reducing debt or returning to sustainable ways. I find this truly upsetting. I am not sure McClain would have done much different, but I have to wonder. Sudden Debt agrees we are not on the right path.

http://suddendebt.blogspot.com/2009/08/household-debt-gdp-and-mr-obama.html

Are we entering the lost quarter century?

Okay, I am a bit down on the economy but I truly hope Ambrose Evans-Pritchard at the Telegraph is off a bit on his predictions. He suggests we are in for a score plus five of pain. Sure, I think we have long term pain ahead and are not returning any time soon to the unsustainable economy we just had, but I am hoping we come out of it in my life time. Ambrose is known for being a bit over the top in his doom-and-gloom, though not totally off base.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6110621/Our-quarter-century-penance-is-just-starting.html

Disclosures: None.

China Sneezes

I have been reading a good bit on how China encouraged (as in told) lending institutions to lend, and lend they did - at least until recently. Funny thing about those debt induced feeding frenzies, they are debt induced. And the frenzy was likely spent on nothing particularly sustainable. You had their stock market go mad, real estate prices up (despite the government owning the actual land) and commodity speculation when no one was really in need of the commodities. Humpty Dumpty is now starting to rock a bit.

The Chinese banks are going to learn a lessen in how one can reduce debt. There are two principal means. One, pay it off. Two, default on it. We here in the U.S. have been learning all about number two for some time (and will continue to do so as delinquencies in residential and commercial loans continue to escalate). Not so much on number one.

For a while - precious short while at that - consumers in the U.S. were focusing on paying down debt and increasing savings. The savings rate was actually up to around 6.2%, but in the most recent stats it is now back down to 4.2%. It seems the government is having some success in luring people back to their spending ways. Between cash for clunker (yes I took advantage of that one) and first time homebuyer specials, Uncle Sam is doing a good job of prying open those tight wallets to get us to buy things that we would be foolish not to buy at these prices. So what happens when the cash for clunkers program and the first time homebuyers program are over? Well the first is already over and the last runs out later this year, so we will see. I suspect we stole future sales to serve our immediate needs and we will simply see even more depressed sales levels in months to come.

When will the government wake up a realize that we can no longer fuel the economic activity we saw in the last half a decade. It was built on debt and the government cannot simply replace private debt with public debt and cure it. At some point the government can no longer afford more debt and must stop. What then replaces the government debt? Nothing!! You just have a bunch of money-strapped taxpayers and their children and grandchildren spending decades now trying to pay down the public debt in addition to their private debt.

Sure, the government needed to spend a few hundred billion or so here and there to prevent Financial Armageddon (a good book to read, by the way), but the key here is to avoid sudden death and then let the economy start its very long slow recovery. It is a correction and it will correct whether we spend a lot of money trying to stop it or not. The more we spend trying to stop a correction, the longer and more painful it will be. Let people save money and pay down debt. Let some institutions, retail outlets, builders, etc. fail. The painful reality is that some must do so for us to reach reality. Our society was at unsustainable levels for many years and reality, i.e. paying down debts and living within our means, now has to take hold. We will spend a decade or so learning from our mistakes, yet the government seems hell-bent on repeating them. Folks, time to say no.

In any event, I am glad I got that off my chest.

I am also glad to see some of the main street media finally not simply toting the government line like all is fine and go out and spend your precious money. The WSJ, for one, had good articles this week on China's problems and the view that the stock market has gone too far too fast. Even Bloomberg is getting in on the act, slowly. Their current on line headlines tell the story:

•Stocks in U.S. Extend Worldwide Drop on Speculation Rally Has Gone Too Far
•Disney to Acquire Marvel for $4 Billion, Gaining Spider-Man, X-Men Series
•AIG's Benmosche Says Cuomo's Retention-Bonus Actions `Unbelievably Wrong'
•Brokerages' Signing Bonuses May Fuel Improper Behavior, SEC Chairman Warns
•China Stocks in `Deep Bubble,' May Fall Further 25%, Economist Xie Says

In fairness, I did not include all the headlines, just those that tell part of the overall picture. We will see.

Also, in fairness, not all the media is being a frank about the situation and some, including me, still have serious doubts about Bloomberg. Fiancial Times and NY Times are both reporting how government, i.e. the U.S. taxpayers, are now making money off the bailouts. Yeah, right! I could summarize this piece from Naked Capitalism but it is short and well worth the full read:

http://www.nakedcapitalism.com/2009/08/more-bogus-bailout-reporting-as-big-banks-repay-bailout-money-us-sees-a-profit.html

I noted above the overall savings rate in the U.S. Let me add in that, according to this post, there is a good argument to be made that for 99% of Americans there is no savings, or at least there have not been of late. No way to know for sure, but however you cut that pie the saving rate has been low and, after a few months of growth, now seems to be in the wrong direction.

http://www.nakedcapitalism.com/2009/08/guest-post-the-savings-rate-has-recoveredif-you-ignore-the-bottom-99.html

And Just When it Seemed Safe to Dive Back in the Housing Pool ...

It would seem that banks may be keeping some foreclosure/delinquent properties off the market. So what happens when they decide to catch up? I read as well today, in the WSJ, how some lenders for commercial real estate have rolled over loans to keep their default (fantasy) rates lower than they should be. This is shocking, just shocking, I had no idea that gambling iss taking place in this establishment. That is a paraphrase from Casa Blanca but close enough. Here is a link to the actual clip:

http://video.google.com/videosearch?q=casablanca+shocked&hl=en&emb=0&aq=0sx&oq=casa+blanca+shocked#

Disclosures: Other than I am heavy on put options and have no equity positions - None.