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!!



















11

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.

The New Reality!

Back in February, before the market bottomed in March, before we knew there was a floor to our pain, I did a post that I still firmly believe is as accurate today, after a major recovery in the market, as it was then. And so I am posting it again. I said it then that it was one of the most important things I would ever tell you and these words are still true. We cannot, should not, return to where we were a few years ago and we need to adjust to the new reality of the future. So here it is:

"The article I am linking here compares our present economic demise to what happened in Japan in the 1990s. Japan suffered 15 years of real estate declines and over a decade of stock losses. It just started to recover a few years ago when the current recession hit it as well.
Here is one key paragraph in the article which comes early in the read:
Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

I hate beating this nationalization drum so much but at some point someone important may pay attention. The second paragraph of this article to get my attention is that the U.S. seems to be in a similar situation:

More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States.
And as big as you think the current plan is in the U.S., those who studied Japan think it is "timid." We cannot, however, afford anything else.
And here are a couple of key paragraphs. Japan tried what we are trying and it worked so (not) well. Oh well, go figure?

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.

Overall, what Japan tried and we are trying is too comparable for comfort.

Here folks I will say again what I have been saying for a long time: we are
in a very serious correction. I say correction as I truly believe we are righting ourselves. I say correction also because, as sure as hell, things were not right in 2007, so where we are going is a better place. We, as a people, were spending well beyond our means, and I mean WELL beyond our means. Our major financial institutions developed instruments that generate great wealth - for them - that allowed us to spend beyond our means. This period was doomed to failure and unfortunately got so severe that it is incredibly difficult for us to face.

My take is that we should do as little as reasonably possible and let the economy correct itself. I am not traditionally an extreme free market type of person. In a period of economic growth, especially great growth like we had leading up to 2007-2008, I am highly suspect that the market it operating properly. Moreover, I am a firm believer that capitalism and Karl Marx, in his Communist Manifesto, share the same delusion, which is believing in the ultimate good in human nature; some (many) people, including some in power, irrationally seek short term personal gain over long term rationality.

Despite not being the biggest fan of a "free" market economy (because some prudent level of government checks and balances is needed), I am a big fan of the economy correcting itself mostly on its own. We need backstops to help the victims of the correction, but in the end trying to stop it is foolish. Property and other assets will revert, and probably overshoot, the mean (the reality) on their values. We at best can prolong this happening but cannot prevent it, so in my book it is best just to let it happen, put it behind us and get on with it.

The same is true with other businesses. U.S. consumers for quite a while have been spending well more than they make and can afford. Their homes were their piggy-banks (I am among them) and their consumption seemed nearly limitless. American businesses added new retailers, outlets, malls, etc. to meet this increasing (false) demand. Now the demand is gone, so it is no surprise that so many businesses are closing down.

And here my friends is the most important thing I will ever tell you! Way too many people think the demand has just been reduced for a period of time. They believe this is a recession and things will eventually, if not soon, return to normal and the consumption will resume. Politicians are at the top of this list. What they fail to realize is that the last five to ten years were not normal. They were abnormal. Spending beyond our means is not the historic mean or sustainable. And so we face a new reality. A reality that is - hopefully - here to stay. It is in a way painful, but the sooner we realize it and embrace it the better.

We have house prices returning to reality. We have consumption returning to reality. We have many sectors returning to reality. Some would call it mean, but for this post I am calling it reality. And reality is undoubtedly an economy somewhat poorer and more deprived than we are used to. Less pay, fewer benefits, fewer jobs, fewer services and the like. We face a society with less and fewer on many fronts. What the government really needs to do is pare down and adjust for this and not try to artificially get us back to our foolish ways.

I posted a week or two ago on how families are coping in many respects for the better. Shopping trips, dinners out and movies are being replaced by dinners at home, game nights with neighbors and conservation. Buying is being replaced by barter. Families are moving in together. People are helping other people as best they can. The reality to which this recession/depression is forcing us is in some respects a better reality. This is not to say that my heart does not go out to those without jobs, benefits, food, heat or the like. It is upon those that I think the billions of government support needs to be spent; not the financial clueless that brought us here. I for one hope for a better, simpler tomorrow. My biggest fear at the moment is that the government will do so many stupid things in trying to stop a correction - stopping an adjustment to reality - that we will be totally screwed for a decade or two. Let's hope not.

Disclosures: None.

Obubblomics

Okay, I admit that it is hard to pronounce by I view the current "recovery" as Obubblomics, i.e. Obama stimulus causes improved numbers in the economy and builds a new bigger bubble destined to pop in incredible fashion. Even though it is a bit hard to pronounce at first, you have to admit that the word looks pretty cool. The truth is, however, that if you kick a dead dog it will move and if you kick harder it will move more, but that does not change the fact that the dog is dead. And so far I have seen nothing to suggest this dog ain't dead.

Debt, public and private, still a big issue. Unemployment, while perhaps reaching a bottom, is still a problem, especially when you consider the hundreds of thousands of jobs we need to create each year to simply support the growing job force. Housing may be at the bottom but there is plenty of fanthom inventory that will keep it down for long to come. And retail sales, though rebounding a bit this holiday season, are undoubtedly simply leading to more debt as the incomes are not there to support a climb. More debt, folks, is the last thing we need. I saw a post blaming it on "frugal fatigue." I like the term and think it may be right but guess what, get used to frugal as with our debt levels it will be with us a very very long time. I am expecting it to be part of our national economy dynamic the rest of my life time, and that is not necessarily a bad thing.

Still, frugal is fighting fiscal stimulus and its attempts to get everyone spending again. Frugal is fighting the new bubble the government is foolishly trying to build. Frugal will win out in time as this bubble will pop, but I am more concerned with the long term consequences of building a new bubble. This is not Lawrence Welk and we cannot keep pumping out bubble after bubble. This one could be our biggest and last.

Now I have to back track on some former doom-and-gloom predictions. I do not at this point think the bubble will necessarily pop in the next few months or, for that matter, the next few years. The ability of government dollars thrown at the situation to mask the issues is greater than I had ever imagined. So I am simply saying we need to hunker down for when it happens and I have given up for when that will be. I know this seems cheap as whenever the economy dumps in the future I can say I told you so, but call me to task on the reason for the future slump. If it is based on the underlying fundamentals I continually note here, I get to say I told you so. If it is based on Obubblomics, I get to say I told you so. So hold on to your seats, the next decade, in my view, will have even more economic problems than the last and the last had the most since the Great Depression.

From their lips to your ears.

A couple of people I respect have some words of advice. First, Paul Volcker. If you have followed me you will see that his involvement in Obama's economic team was one of the reasons I supported Obama. Little did I know that Obama and company would pay no attention to anything Paul had to say. Well, he is still speaking despite the Administration not listening and he still has plenty to say. Bottom line, he says the financial industry has added nothing (and has nothing to add) to the economy other that ATM machines. The elaborate financial products they have developed over the last decade or so add absolutely nothing to a productive economy. I agree!!!

http://www.nakedcapitalism.com/2009/12/volcker-little-evidence-financial-innovation-has-helped-economy.html

Another person deserving of some attention is Meredith Whitney. Now I have to say she turned somewhat bullish a few months ago with Nouriel Roubini and I think they were looking more to protect their reputations than to tell the painful truth, but it is good to see Meredith beginning to grow some bear hair again. She says in this link she was bearish all the past year but I know just a few months ago she was not quite as bearish as she is now, and she is definitely bearish now. Her linked video is well worth the listen and very telling. Some highlights:

• Consumer spending is 70% of GDP and it is still under pressure;
• State and local government spending is 12% of the GDP and it is under pressure;
• Small and medium sized businesses simply are getting no credit to run their businesses and consumers have had credit card debt availability shrink by over a trillion dollars.

She sees 2010 as the year when the "sand", as she says, hits the fan. Now Meredith thinks this turd will come home to roost in the first or second quarter 2010. I think that is certainly possible but I have learned not to underestimate the staying power of government stimulus, which Obama continues to promise is in the pipeline. We will see. Either way, be prepared for things to get worse. If you have equity positions, perhaps it is time to put some hedges in place.

http://www.nakedcapitalism.com/2009/12/meredith-whitney-the-government-is-out-of-bullets.html

Disclosures: None.

Liquidity Ain't Solvency

So Dubai seems to be getting a restructuring of around $26 billion in debt. And all is well in Dubai World. Then again, think about it. Don't just think about the life line and how a major financial event was avoided, think about how in the world (Dubai World if you like) they will turn their financial center with man-made islands, massive sky scrappers and condos to the horizon into a financial success that can pay off $80 billion in debt over the years to come.

While you are chewing on that, imagine you are well-to-do financial institution or corporation (I did say imagine) that is looking to invest a bunch of money in a new HQ or financial center. If you had this financial freedom in today's economy, and I say if, would you go and buy space in Dubai World, which nearly just went belly up. Seriously, who is going to buy this stuff, especially with so many cheap opportunities out there.

And so you can give someone on death row a temporary reprieve while someone considers their appeal but it does not mean the end is any rosier. Dubai World in the end likely has no way to pay off this debt. They built their own demise. I foresee some day, years from now, all those man-made islands being reclaimed by the sea, as they should be. They should know better than to fool with Mother Nature. Don't believe me, go to Sudden Debt to get his read on the situation - liquidity does not equal solvency.

Many would argue we have just been masking our problems hoping that time will allow institutions to financially recover. I guess it is possible for us to outlive our problems but what happens if we run out of time before we run out of money? Do you think we will have the time to outlive our debts? Do you believe in miracles? If you do, I have a man-made island to sell you.

Disclosures: none.