Still in my Cave

I am still off living in my cave until the markets show some semblance of rationality. Not happening just yet. Fortunately this cave has wireless and I can connect. And there is some stuff out there worth reporting. Let's start with banks going down. It is, after all, Friday, and 93 and 94 are going down this week. I am only surprised there are not more. There will be in future Fridays.

http://www.calculatedriskblog.com/2009/09/bank-failures-93-94-irwin-union-bank.html

I say that there will be many more going forward as commercial real estate is starting to cause some major issues on bank balance sheets, in addition to residential subprime, Alt-A, credit card, auto and other loans. Basically, any loan out there taken out in the past few years is causing banks some pain and, as the linked article notes, some banks have bent over backwards to keep these non-performing loans from hitting their books. Nonetheless, in time reality will set in and people will realize that we are not out of the woods yet. Alt-A and commercial loans especially will be problematic over the next year or two.

http://www.nakedcapitalism.com/2009/09/wells-commercial-real-estate-ticking-time-bomb-and-coming-cre-woes.html

I link the next post because it includes a lot of links to blogs by top economists.

http://www.nakedcapitalism.com/2009/09/guest-post-are-financial-blogs-trustworthy.html

I am not thereby agreeing with these economists, but as the link notes, it may be better to read what is written by the experts than to read what is written by the mainstream press. Let me give you an example. My wife recently sent me a link to a video on the swine flu vaccine. The video was of some reporter interviewing another reporter for three minutes on the safety of the vaccine out for the swine flu. I am familiar with some of the science here and knew right away this guy was a quack. In any event, having one reporter interview another reporter is not news or reliable. I quickly did some research and was able to respond to my wife that her video was worthless, which I knew from my own knowledge to begin with. Still, many people probably bought the load of bull this guy had to sell and, unfortunately, some kids may die because their parents saw this video and will not get their kids vaccinated. Following mainstream press has some severe consequences. Bottom line, you have to do your homework and not believe what the mainstream press tells you. By the way, do not get your kids vaccinated on my say, do your own research. I am just saying this guy was not well informed and selling a bunch of bull without any good support.

Disclosures: None.

Off To Live In a Cave!

The markets are crazy. The government is crazy. Everything is crazy right now. I simply cannot figure out a rational way that the stock market is where it is today. And so I am giving up. I have bet with put options that we are irrational and probably will some more, but I am truly amazed at our ability to perservere in our inept investing ways. We have continued this rally much longer than it deserves. It will end, but I am giving up on when that will happen.

Then there are the conspiracy theories on the subject. A lot of thoughts about how certain companies or even the government may be painting the tape. On how there are ways the market can be manipulated. I did not initially buy into these but I am beginning to wonder. The current market behavior is simply irrational, in a word.

Disclosures: None.

Hats Off to Jed

Years ago when I was in private practice I had a very contentious patent infringement case before Judge Jed Rakoff. It took a while but he finally recognized the the parties on the other side were, well, sleazy. And their attorney was not much better. He is a no nonsense type of judge and in due course the other side paid the price for their underhanded tatics. Seems the officers at Bank of America are learning first had that Judge Rakoff means business. I liked the guy back then and I love him now. Rather than making shareholders of Bank of America pay a $33 million fine for the poor practices of their management, which has already harmed the shareholders, Judge Rakoff is requiring the officers of the company be investigated and possibly fined. You go Jed!!!!!!!! I only wish the Adminstration had the courage to follow your lead. Seriously, who at Bank of America or Goldman has pictures of the Administration in the nude or cross-dressing? Someone must, as supporting the big banks as we have makes minimal logic.

Trade Wars

I posted earlier on the possible development of trade wars between the U.S. and China not being at all good for our future. Here is another piece with further details. I still think neither the U.S. or China is stupid enough to go there, but then again we each made an opening move.

http://www.nakedcapitalism.com/2009/09/murder-suicide-in-chimerica.html

Trade Wars!!

Obama's decision last Friday to impose a 35% tariff on cheap Chinese tires is getting a lot of attention, so what the heck, I might as well join the discussion. The interesting thing to me is that Bloomberg is seeing this as an opening shot across the bow to more open free trade in the future. They note that the last several Presidents before Obama took similar measures only to later promote free trade.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aldOEZ5Sk6P4

I hope they are right. And I hope the Chinese understand this is the case as they seem to be reacting not so favorably, placing auto parts and poultry under review themselves. Do you think it is a coincidence that the sales of Chinese tires in the U.S. are almost identical in $ to the sales of U.S. auto parts and poultry in China?

http://www.nakedcapitalism.com/2009/09/china-reacts-quickly-and-badly-to-tire-tariffs.html

Another interesting point here is that this move by Obama is strictly union driven. The tire companies in the U.S. did not support it and Cooper Tire openly opposed it. Obama obviously has to show his support for unions, as weak as they have become, but he also needs to consider the consequences. Auto part manufacturers and poultry farmers are no doubt not happy with their sales to China perhaps being cut off to save some jobs at U.S. tire plants. There is no easy answer here but I suspect Obama is looking to have some discourse with his counterparts in China to reach an acceptable resolution. Let's hope he succeeds, as those before him seem to have done. Not everyone thinks this will happen and sadly the alternative, as in protectionist trade wars, is not going to serve anyone.

http://globaleconomicanalysis.blogspot.com/2009/09/obama-risks-global-trade-war-with.html

Disclosures: None.

OECD Talks and I Walk!

The Organisation for Economic Co-Operation and Development says we are out of the woods on this recession. Whew, I am glad that is over. Yes, there are clear signs of recovery in all seven of the leading Western economies. Of course ifyou look at different factors, there are clear signs of continuing recession in all seven, but I guess I am looking at the wrong signals.

http://www.calculatedriskblog.com/2009/09/oecd-global-recession-over.html

Seriously folks, these people are smoking something. And apparently Stigi agrees:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7UTn7JFw1qk

He says things are worse now in the too-big-to-fail banks than they were in 2007, before Lehman failed. He would know. His bigger point seems to be that the government is not being tough enough on the big banks. Amen brother!!!

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7UTn7JFw1qk

And when in doubt, blame it on Greenspan. I agree.

http://globaleconomicanalysis.blogspot.com/2009/09/greenspanism-root-cause-of-this.html

Disclosures: None.

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.