It is good to have company!

I mentioned Mr. Gross from PIMCO, the world's largest bond fund, having some issues with our current recovery. He is not alone, now Paul Krugman, a Nobel Prize winning economists, and others are seeing other problems in our future. Now, I must say I do not wholly agree with Mr. Krugman's mantra about throwing massive amounts of more money at the situation, but I do agree with his view that we are in a world of hurt. The fundamentals simply do not indicate any other alternative.

http://www.nakedcapitalism.com/2010/01/guest-post-krugman-says-american-economy-will-not-recover-for-a-long-time.html

And This Folks Makes Me Sick

Geitner, probably Obama's key financial operative, was head of the New York Fed when it allegedly required AIG to hide the fact that it was paying 100 cents on the dollars (with our taxpayer money) to entities on swaps. Entities like Goldman, another entity tightly tied to an Obama operative, got much more than they ever dreamed of and the NY Fed apparently tried to push AIG to illegally hide it all from the SEC - and us. Now I put a lot of allegedlys and other qualifiers in this because I have no personal knowledge of this. But if it is true, I am truly sick. The rules apparently never have and never will apply to the A-holes that got us here.

http://www.nakedcapitalism.com/2010/01/ny-fed-told-aig-to-hide-details-of-swaps-payouts-to-banks.html

Disclosures: None.

This is Gross.

I do not have a long post tonight. I am merely posting the monthly newsletter from Bill Gross of PIMCO, the world's largest bond fund. Now I think he is a very smart guy. I certainly hope so as I have good chunk of my retirement in his hands. In any event, Mr. Gross seems to think that all the fiscal stimulus this year and quantitative easing will come home to roost in 2010. He also has some bad news for the carry trade folks (it is mostly just about playing big dollars and leverage to take advantage of interest rate differentials between countries - but don't tell anyone), which if you do not understand, join the club. Hopefully it has little impact on the regular folks like us. [Okay, I say hopefully, but if the carry trade bets go bad, which I think they will this year or next, it will have an impact, probably significant, on anyone invested in the market. So perhaps you do need to worry about it and should worry about it, but my point really is that individuals have little they can do to stop it and it is a very difficult market to understand.]

I also like Bill's prose and his understanding of some things not so financial, like literature. Enjoy the read of his newsletter. I did.

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Let’s+Get+Fisical+January+2010.htm

Disclosures: None.

It will come. . .

Okay, I have been predicting doom and gloom for a long time but to be honest I have for some time been saying it can take a long long time for the obvious flaws in our system to come home to rest. So let me start with a disclosure. I bought more put options on December 31, which is in keeping with my statements on this blog. Obviously today I lost money. Quite a bit actually as I have a lot of put options, but the point today is that I bought 2012 options last week as I am firmly believing, as Keynes warned, that irrational exubereance can last longer than my solvency. It will happen, I just do not know when.

And now I present you with Ambrose Evans-Pritchard. I have linked his articles before. He writes for the Telegraph in England. He is, if anything, more doom and gloom than me and he does so for a major news outlet. And so I refer you to his piece, which I think is more pessimitic than reality, but it sells newspapers:

http://www.nakedcapitalism.com/2010/01/ambrose-evans-pritchard-apocalypse-2010.html

I am not going to say anything about this article otherwise but I have to point out one FACT contained within it:

"Household debt as a share of GDP sits near record levels in two-fifths of the world economy."

This is one of my two plus two facts. I cannot see how we can get over this without debt repayment big time. Go figure.

Disclosures: None.

2010, Do I Dare Predict?

For 2009 I did predictions that I labeled as items I hoped would not occur. They were all pretty much doom and gloom predictions, though some, like unemployment topping 8% ,were a bit too optimistic. Still, my predictions on the stock market being down significantly were not right for the year (but would have been had the year ended March 9). So with the new year coming, is the gloom passing? Is the doom behind us? Am I an idiot?

Let's start with me simply posting here the first six headlines as they appear at this very moment at Bloomberg:

•China Manufacturing Grows at Fastest Pace in 20 Months, Cementing Recovery
•U.S. Jobless Claims Unexpectedly Decline to Lowest Level Since July 2008
•South Korea's Exports Rise at Fastest Pace in 17 Months as Demand Revives
•Commodities Post Biggest Annual Gain in Four Decades as China's Use Surges
• Hatoyama Says He'll Focus on Deflation, Jobs as `Honeymoon Period' Ends
•AT&T Biggest Winner With $15 Billion Savings From Lowest Yields Since 2005

Wow!! Those are some incredible stories!! Everything is absolutely fantastic!! And so, it is with heavy heart that I am still a pessimistic sod.

Now my quandry here is that I believe we are in a major bubble building process and I have no idea how long this process will last. I suspect it will pop in 2010 or 2011, but it could last longer. Still, I am going out on a limb and predicting the "POP" in late 2010 or early 2011. Too much air in too little time and too little balloon to handle it, in my opinion. So here are my predictions for 2010 (I am just guessing here so do not invest based upon them):

1. The U.S. is going to start to run into some serious issues in getting other countries to buy its debt and finance stimulus spending. I am not expecting a massive sell-off by sovereigns, primarily China and Japan, who hold our debt but they will be net sellers, not net buyers in 2010, and their purchases will be hard to replace.
2. As I did last year I am predicting the S&P will be down 10-20% by year end from where it ended today. Hey, the prediction did not work for 2009 so if I keep predicting it every year eventually I will be right. In truth, I do believe the market is well over bought and we have no where else to go but down as stimulus dollars wear off and the government runs out of stimulus dollars to throw at this mess. I really think we will be more than 30% off our current highs but am being a bit conservative in my prediction.
3. The Euro will have some major hits as countries, like Greece, suffer some major ratings downgrades. Do not look to the Euro to replace the dollar any time soon.
4. Interest rates in the U.S. will end the year roughly 2% above where they are currently. Mortgage rates have already increased steadily for the past four weeks. The Fed is running out of ammo to keep them down.
5. Housing will remain stable but will not climb off the bottom it is at. Adjustable rate/Alt-A loans will peak in defaults and this will keep the banks on the sidelines. Fannie Mae and Freddie Mac will continue to provide most loans, with government support, and their books will continue to look worse and worse. Commercial real estate will continue to decline in the U.S. We are so overbuilt in this area that we could go a decade with no construction and still not catch up. Bottom line, real estate on the residential level is probably at its low or near there but do not expect any big increases.
6. Tiger Woods will find the 19th Ho.

Disclosures: None.

When Will We Learn? ... Apparently no time soon

Let me start by apologizing for not blogging in quite some time. I know one of the regular rules of being a successful blogger is doing regular entries. Nonetheless, I have been in a state of disbelief for some time and have not felt like speaking out. To be honest, I have questioned dearly whether my pessimistic predictions are totally off base. After all, the stock market since the March 9 lows has been rather consistently skyrocketing, sales this holiday season seem decent, manufacturing indicators seem on the rise and housing seems to have stabilized, if not improved, in most regions, so what is there to be down about? Well, let's talk.

I will begin again by saying I am not a perma-bear. I love a good bull market and love to do trading into them. But I want a true bull, which means things are improving fundamentally over the mid-to-long term. Still, I admit to some day trading during the dot.com bubble and making some profits there. It was a fun ride while it lasted. If you rode that ride I ask you to look back and see where the Nasdaq was then versus today. Almost a decade exactly ago it was around 5000, whereas today it is a little over half of that. So you say, this is but a small blip in the market history and we will return to normal soon. So let us look at Japan a moment.

I recall in the early 80s being highly disturbed about how the Japanese were taking over the U.S., buying up all our landmarks and quickly becoming the number one economy. The U.S. was in a mild state of shock/awe that we could be taken over economically so easily, but Japan beat us at our own game. And then their bubble burst as well. The Nikkei 20 years ago was roughly four times as high as it is today. And this is not for a lack of trying. The Japan government has been spending excessively to revive the economy there. So much so that predictions are the debt will reach 246% of the GDP in the years to come. To put that in economists' terms, they have a whole world of hurt ahead of them.

http://www.calculatedriskblog.com/2009/12/japan-twenty-years-later.html

Undoubtedly the U.S. can never go that far into an economic abyss - - right? Well, I hope so, but in my view our reaction to this recession has been very poor, even disastrous. Why do I say this?

You do not need a doctorate in economics or finance to understand that when you have too much debt the answer is the cut back, spend less and pay down the debt. Not fun, but necessary. Yet the Administration has been hell bent on getting us to spend and do so while increasing debt. I have no idea why other than a political desire to create the short-term appearance of a recovery. That is absolutely all it will do as in the mid to long term it is highly problematic.

It does also not take a degree to understand that a country cannot survive by simply buying things. We need some productive, fruitful endeavors. Spending money to buy stuff is not a productive endeavor. Yet 70% of our GDP has been just that, buying stuff. Moreover, we have bought this stuff with credit, increasing our enormous debt load.

So let's return to some basic math. Tax receipts from individuals are down just under 30% YOY. Now there are several variables here but I am going to assume that a 30% reduction in tax receipts equates roughly with a 30% reduction in income. This is on an individual basis as on a corporate level there are no tax receipts at all as they are generally losing money. So if income is down, be it 30%, 20% or even 10%, how can the stock market and economists be signaling a grand recovery? If consumer spending is 70% of GDP and consumer incomes are down around 30%, how can the GDP be sustained?

http://seekingalpha.com/article/180174-the-coming-economic-nightmare-part-1

There are only two possible answers. First, we are incurring more debt to buy stuff. With mortgage rates low and a lot of refinancing taking place this is possible, though certainly not sustainable. Second, we are purely doing this off of government stimulus, which is what the stimulus is meant to do. So I have to ask, is spending built on government stimulus a good thing? Well, I suppose if it works to restart the economy, yes. But I tend to think with the record levels of private debt load in this country and others, stimulus spending cannot stimulate what does not and cannot exist. Just like Japan is learning, we have spent our wad and need to hunker down, pay down debt and perhaps do something called saving. This will take many years and the government throwing money at it only makes the situation worse, not better.

Why worse? Because the government is running up massive debt and our creditors are not real happy right now. Now we built most of this debt propping up the jerks that caused the problems and that makes me sick, but that aside we have a massive public debt problem building in this country. The sovereigns who have been buying our debt are increasingly less willing to do so and increasingly shifting their investments to short term investments. This enables them to pull the plug faster and from what I can see they are in the process of pulling the plug. If, when, this happens the new bubble we are building will burst. There are plenty of other pins around this bubble that might burst it, but this is one of the sharpest.

So as the new year arrives, all I can say is to be careful out there.

Disclosures: None.

2 + 2 = ?

A friend of mine cornered me in the kichen this week. He knows I follow thngs financial but I suspect he does not read my blog, though he knows I do it. So he asks me, where do I think the market is going. I tell him I have no idea, and that is the truth.

Now if he bothers to read this, he will get a bit more insight. I said no idea, but that was my thought in the short term, which is what I think he was fishing for. Beyond that, however, and I have a belief.

Let me start by saying 67-70% (I have seen this range cited) of the GDP has been consumer spending in the U.S. over the past few years. Before I go on, think a minute about how any economy can support itself off of its citizens buying stuff. Stop --- give yourself time to digest this and--- let me repeat: 67-70% of our GDP over the past several years has been us buying stuff for ourselves. PLEASE STOP AND THINK ABOUT THIS A MINUTE OR TWO!!!! Most of our economy is us buying stuff. And mostly we are buying from China and other coutries. So who exactly is paying us to buy this stuff from other coutries NOW? No one, I suspect!!

And now you know the problem. We are all in big debt. We are paying it down but it is still near record levels. So we have little to spend, especially with unemployment at high levels and housing near a bottom.

But let us look at the solution. Ideally, it would be something that creates more jobs domesticaly so that we could make money to buy all this crap we have been buying to prop up 70% of the GDP. Ideally it would provide long term benefits and wages to support the economy. Well, ideal is apparently not in the cards.

Nope, we are shooting for much less than ideal. We are spending tens of billions to prop up the A-Holes who got us here. We are spending very little so far to build new jobs or support companies that will do so.

Obama was the worst vote of my lifetime. I w0uld give up my card carrying Democrat status but for my repulsion for the other side. I truly hope he wakes up soon. He needs to listen to Volcker soon!!



















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Disclosures: None

Three Words: Stockholer Derivative Suits

Okay, I am attorney but I am not in any way, shape or form intending to hereby give advice (sounds like an attorney -right?). Nor do I work in the field of shareholder's derivative suits, though I do a lot of civil litigation. Still, one thing that has amazed me in all this is that stockholders of these financial behemoths have not been filing suit. The assertions out there of executives making highly risky moves to pump up there bonuses are rampant. This would, one would think, violate their duties to their shareholders. Sure, they are entitled to reasonable compensation, but when their primary objective appears to be to line their own pockets with tens of millions in bonuses at the detriment of stockholders, customers and the like, things seem to have gone a bit awry, morally and legally.

So why then are there no stockholder derivative suits? These are suits a stockholder can launch against the officers and directors of their corporation on behalf of the corporation to accuse these officers and directors of wrongdoing. It was created as the wrong doing directors and officers who control the corporation are not likely to cause the corporation to sue them. Here, where corporations made phony profits on unrealized gains from risky financial instruments and paid themselves a significant portion of those fantasy profits in bonuses, one has to wonder, why aren't the shareholders suing them? Their actions are not exactly a secret, as reported here:

http://www.nakedcapitalism.com/2009/12/former-barclays-chief-points-out-bonuses-were-paid-fruadulently.html

So why aren't the usual suspect law firms bringing suit? I have no idea myself as there could be tens or hundreds of millions in contingent fees to be had, but perhaps it is cost prohibitive as you know these "fat cats" will litigate you to death. Still, it seems like someone should be looking at this. Indeed, you would think some industrious U.S. Attorney looking to make a name for himself or herself would look into it. After all, the U.S. - as in us taxpayers - are now the largest shareholders of many of these institutions. Why can't we file suit? (I would be happy to discuss this with any U.S. Attorney with the guts to go there and do some research on it for free).

Such suits would do a world of good, I believe, in correcting some of the compensation/bonus problems that have infected financial corporations over the past decade. No one is worth the money these guys made, especially looking at the crap they created on the taxpayer backs. One successful suit would give those deciding on compensation and bonuses the leverage to say "Mr. or Mrs. CEO cannot make over X as reasonable compensation or we will be sued." I hope someone takes up this charge. If the government won't make these idiots (I have worse words for them, but this is a family blog) do what is right, it must be up to the rest of us to do so.

If you have some information that would help to support such a suit, let me hear it. As a movie character once said "I am mad as hell and not going to take it any more!!!" (And no, I am not soliciting business as I am in house and cannot take on any private litigation.)

Disclosures: None.