Are We There Yet?

I am really thinking now, due to the market reaction over the past month or so and the fine result by Goldman Sachs and JP Morgan that we have reached a real bottom. Forgive me for saying otherwise over the past few weeks or months. I was totally off-base and had no basis for what I was saying. I am now Mr. Bull and expecting a fine recovery in short order.

Then again, that last paragraph is total BS. I am not a convert just yet. Yes, I am definitely seeing some possibly positive signs in terms of housing perhaps finding a bottom in some markets and the rate of unemployment perhaps slowing, but my view of certain fundamentals is not saying we are there yet. We have a ways to go from what I am looking at and from what the IMF is looking at. The IMF is now saying this will be long and nasty. Go figure.

http://www.nakedcapitalism.com/2009/04/imf-warns-downturn-will-be-prolonged.html

Sorry for the short post but I bowled this evening. Over the next few days I am going to a funeral and will not be posting.

Disclosures: None.

Consumers Hunkering Down

I gave a hypothetical example a couple of days ago about a baby boomer losing nearly half his or her retirement and virtually all home equity feeling the need to hunker down and start saving. As fate would have it, a survey was released today showing sentiment among future retirees is at a record low in terms of expecting a comfortable retirement - just 13%.

http://latimesblogs.latimes.com/shopping_blog/2009/04/worker-expectations-for-comfortable-retirement-plunge-ebri-survey.html

Now let's do 2+2 with this stat. 87% of the people do not have confidence that they will be comfortable in retirement. Now some of these are not that close to retirement so they probably do not count much. Nonetheless, the front end of the baby boom generation just started retiring, and this is a very large crowd. They do not by-and-large feel comfortable with what they have saved for retirement (I am at the tail end of that group and am not comfortable either), so what does this tell you about consumer spending? Consumer spending, after all, is roughly 70% of our GDP. What do you expect to come of this?

Giving money to banks so they can lend to consumers is only going to work if (1) the consumers qualify for credit - which is increasingly doubtful and (2) these debt laden consumers are seeking more credit. I suspect on (2) for the most part only those in desperate need for cash will seek credit and most of these will not qualify under (1). Go figure. At the end of the day, consumers are in a sink hole and will have a very hard time climbing out.

Now this 2+2 discussion did not include any review of Alt-A and Prime loan foreclosures, which now in $ figures are exceeding the subprime problems. It is not including new unemployment, which continues to worsen. And it does not include many other realities. I am trying to live in reality. Politicians should try to do so too.

Market Down

I read a blog noting that any climb or fall of 1-2% in the market is just business as usual in our current market. I agree. You could even raise the upper end of that range and be correct. Accordingly, I am not reading too much into today's drop. Nonetheless, let me note that the market has since March 9 had a meteroric rise - the best in many decades. A drop today - or any day - is to be expected. Given the rise, more could indeed happen. I have been predicting more doom and gloom but I am not attributing today's drop to that prediction - though the news that led to the drop was not a surprise to me. The next couple of weeks will be telling. You know my slant that the worst is yet to come.

Disclosures: None

"This is not good."

The quote above is something my wife just said as she is having problems with her computer. Nonetheless it equates equally well with the following link. Let me begin by noting it is positive in terms of short term market prospects. I guess throwing trillions at the problem may very well cause a nice bouce reaction or even a year or two of advance in the market. After all, Greenspan keeping rates around 1% for too long is one of the inspirations for our current doom and gloom. He helped build one of the biggest bubbles ever. Building another bubble to solve this one is not, in my book, a good thing.

Spending trillions to fix the problem is one heck of a lot of money. I don't think it is going where it needs to go to have the beneficial effect needed. Nonetheless, the bigger point is not the short term gains but the longer term consequences that this link discusses:

http://www.nakedcapitalism.com/2009/04/guest-post-fake-recovery.html

If he is right, we are simply spending a lot of taxpayer dollars to build a relatively short term fake recovery. That is a worst case scenario. We need to get this mess behind us and not kick the can down the road. Hopefully sanity will prevail in due course, but, then again, I have been here too long to believe that it will.


Disclosures: None.

This is Promising

Goldman Sachs and HSBC are finally doing something laudable. Goldman is selling shares and HSBC is selling assets, both to avoid or reduce government debt. Now I suspect they are both doing it to avoid government control and restrictions on pay, bonuses and the like, but I am all for it. I heard someone speculate that Obama was making government aid so onerous and painful that financial insititutions will do everything they can to avoid needing to go there. I can only hope that is the case and that this is a sign it is working.



http://www.bloomberg.com/apps/news?pid=20601087&sid=a3v8O6IgHva4&refer=home



http://www.bloomberg.com/apps/news?pid=20601087&sid=aBucQ1Prv8E4&refer=home



Unfortunately, not all the financial institutions have the ability or assets to save themselves. Think about the tens, even hundreds, of billions some fiancial institutions are now or in the future going to owe to us taxpayers. Assuming they survive, how many years, decades, centuries . . . do you think it will take them to pay it all back? Silly question of course because I am sure we will forgive the debt and let them off the hook when all is said and done. After all, if Lawrence Summers has anything to say, we will let them all off the hook so he can maintain his speaking fees. He made millions in speaking fees from Goldman and Citigroup on top of his $5.2 million in pay for a one day a week job for a hedge fund. Clearly we hired the right guy for the job. If you doubt me on Summers, read the following from Frank Rich at the NYT:



"We discovered, for instance, that Lawrence Summers, the president’s chief economic adviser, made $5.2 million in 2008 from a hedge fund, D. E. Shaw, for a one-day-a-week job. He also earned $2.7 million in speaking fees from the likes of Citigroup and Goldman Sachs. Those institutions are not merely the beneficiaries of taxpayers’ bailouts since the crash. They also benefited during the boom from government favors: the Wall Street deregulation that both Summers and Robert Rubin, his mentor and predecessor as Treasury secretary, championed in the Clinton administration. This dynamic duo’s innovative gift to their country was banks “too big to fail.”"

Krugman Ain't Linkin' it Either

I am the first to admit I do not always agree with Paul Krugman, but as of late I am seeing eye-to-eye with him. Here is a nice piece from Calculated Risk on his take on the "Stress Test" and the IMF $4 trillion surprise I reported the other day.

http://www.calculatedriskblog.com/2009/04/krugman-on-economy-and-stress-tests.html

Overall, things are just rosy out there. But let me return to to my recent topic of the new reality. Here is another tidbit to chew on. Let's take an example that in my mind is likely multipied perhaps millions of times across this country. You have a baby boomer who is, let's say, 57 years old. Before the recession lets say he had $750,000 in retirement and a home worth $400,000 - half of which was equity. He was looking pretty good by most comparisons. Actually, compared to the average American this dude was dong mighty well. But let us assume he kept his money in equities despite the market downturn. Too late to take it out and too afraid to miss the recovery. He is frozen by fear and the unknown.

So now his retirement is worth, let's say $450,000 and his house is worth $225,000. He is lucky that he still has equity in his house - barely - but his retirement is no where close to where it needs to be. So what does this guy hoping to retire in under a decade do?

• Buy a new car
• Buy a vacation home
• Replace the old furniture
• Finish the basement
• Save everything he can and hope it is enough.

I am not going to answer this question for you. Multiply this example by millions, most of whom were probably in much worse shape than the boomer in this example, both before and after the recession. Yep, we are looking at a V shaped recovery. No doubt about it!

There are plenty more examples of workers in the country that have less financially sound stories than the example I just gave. We will see what this new world has to offer, but I do not see a massive rebound in spending any time soon.

Disclosures: None.

Highly Disappointed

One of my greatest dissapointments with Obama has been his failure to utilize one of his greatest assets - Paul Volcker.

http://online.wsj.com/article/SB123940537361509771.html

Volcker has been dead on accurate in his take on our present economic situation. Moreover, he is one of the very few individuals who can say that he stayed true to his principles and did what he knew was right when everyone else was saying otherwise. He took interest rates to the roof and took some serious grief for same but he kept true to himself and it worked. He did what he had to do and that, my friends, is what is lacking in this Adninistration (and do not even get me started on the last one, though I did vote for Obama, which is why I am ranting). We are not yet willing to do what is politically incorrect. We are not willing to do moves considered socialistic - as in nationalizing banks. Screw the politics in my opinion, we are in all out economic war here and we need to pull out the stops. If some major financial institutions need to go down, so be it. Get it over with and spend taxpayer money cleaning up the mess.

I read yesterday that Obama was telling people that in the short term we need to spend some money to help the economy. Like buy a car or some other big expenditure. He noted that we need to pay down debt but nonetheless the everyone needs us to spend some money to stabilize the economy.

I have not heard worse horse s*&^ in quite a while. U.S. households, despite losses in home values and massive job losses, are now saving about 5%, which is a major improvement over spending more than we make, which we were doing before this recession. It is a low savings rate compared to where we should be but it is a major improvement over where we were. AND HERE IS THE BIG POINT TO UNDERSTAND!!! We are now returning to a sustainable spending pattern. We are not going back to our old spending ways and, even if we wanted to, cannot do so. Our old spending ways were tied to rising home values - and the ability to tap into them for credit - and the willingness of banks to extend cheap credit to anyone who could fog a mirror. Guess what - those days are done. The new reality will be quite different. Quite different indeed.

So what commentators are discussing as a recession is in my view the new reality. We have returned to where we need to be. Actually, in my view we have a bit further to fall, but either way we are close to where we belong. Unless some miracle happens and millions of jobs are created next week for buyers that do not exist, the U.S. economy is returning to where it needs to be.

This is painful. We have way too many banks, restraurants, retail establishments and the like. We built up for an economy that simply does not exist. We now have to adjust down to reality. We are getting there but the real question is whether we have downsized enough yet. Personally, I think not. Yet, let's assumed we have. If we have returned to reality - to where we need to be - why would the economy take off from here? Why would the stock market continue its meteroic climb? Why?

When you figure out the answers you will understand where I am coming from.

Consider this very carefully. People in the U.S. were spending more than they were making. This was possible because of easy credit and rising home prices. Both those enablers are gone, so the consumers are, without choice, retrenching. Consumer spending was roughly 70% of our GDP. So what happens when 70% of GDP retrenches - you are seeing it.

So the question is whether (a) the retrenchment is done and (b) what happens even if it is done. I doubt it is done but let's assume it is. I still do not see the spending returning to where it was. People now have a new attitude, which is good. People want to live within their means and save for the future. After all, they just saw their retirement accounts roughly cut in half, so the baby boomers are desperately trying to save and make up for lost ground. I for one am maximizing my retirement take and I am turning 50 this year so I am taking advantage of the catch up withholding.

So the question is, do you agree with my view?.

Disclosures: None.

Danger, Danger, Danger, Will Robinson

Well don't blame me when it happens. I am reading a lot of articles on how this is a bear market rally and it is over done. I have been saying this for weeks and I am bored with my repetition, so let me tell you how some other people are saying the same. You can start with the WSJ. It had a piece today on how corporate bond rates are generally a good predictor of the economy. And you guessed it, corporate bond rates are still in a maj0r funk.

http://online.wsj.com/article_email/SB123929216724105401-lMyQjAxMDI5MzA5OTIwOTkyWj.html

I separately subscribe the RGE Monitor. It is a free site and it is headed up by Nouriel Roubini, who to date has largely been dead on in this recession. I started actively tracking our current economic woes in January of 2008 and one of the key pieces I forwarded to my fellow investors at that point was Nouriel's testimony to Congress in about January 2008. At the time I told my colleagues that I hoped he was wrong but I suspected he was right. Guess what - so far he is right.

Another person I follow is saying the same thing. Barry Ritholtz, posts at RGE, but he also is a frequent speaker on financial related channels and he has his own blog that I follow at the Big Picture:

http://www.ritholtz.com/blog/

http://www.rgemonitor.com/us-monitor/256306/rally_too_flashy_for_our_liking

He is saying, accurately I believe, that we are oversold in a dead cat bounce and things will go back to normal and perhaps beyond,

http://www.rgemonitor.com/us-monitor/256298/earnings_season_is_crunch_time

Tell Us the Stess Test Results - Or Not?
Either way Transparency is Gone!

First you have the NY Times reporting that all is fine and well on the stress tests without - of course - any support for this proposition.

http://www.nakedcapitalism.com/2009/04/quelle-surprise-bank-stress-tests.html

Okay, they did say some banks will fail but overall a positive report. So what are the actual results of the stess tests? No one knows - or at least we do not know - because the Treasury is banning banks from revealing the results. So much for transperancy. Between that and the FSAB neutering the mark-to-market rule no one will have any freakin' idea how well banks are doing. To me, this is a signal to anyone thinking of buying these toxic assets or investing in banks to run as far away as fast as they can. By the way, another bank failed today. That makes 23 this year. Without the false government support for banks I have no doubt we would be over 100 and many would be some very big names.

http://www.calculatedriskblog.com/2009/04/bank-failure-23-new-frontier-bank.html



Disclosures: None.

Nice Day

I got home late due to bowling night - don't ask - but no time for a lengthy post. Good night at bowling and good day in the markets. No doom and gloom from me today. The news from Wells Fargo and other fronts was pretty good. I still have doubts but am gaining some belief that the March 9 bottom is the support level. We will see.

Okay, forget that crap, I am still expecting worse to come. Do the stats lie? We will see.

Disclosures: None.