...How strong can the economy be when bank lending is contracting, and
with this situation how can they predict that there will be a gradual
return to higher levels of resource utilization in a context of price
stability? With gasoline prices higher than all of 2009, with defaults
and foreclosures rising, the Fed is turning its back to Main Street USA.
If the Fed believed that the US economy is coming out of recession, why
do they feel compelled to keep the federal funds at 0 to 0.25% when we
know that this giveaway is the fuel Wall Street is using to keep their
proprietary desks in a speculative mode? A 3% funds rate can help Main
Street and the Fed would still be accommodating. The Fed continues to
lack confidence that their policy will work."
Bender,
I may be wrong, but to my knowledge the idea of a government
seriously dabbling in and attempting to manipulate the economy
of a country is a very new idea which has it's roots in Marxism
and the idea of class warfare. Up until 1900 or so it was
Laissez-faire as long as the sovereign got it's cut. How the
money was made was left to business.
Sovereigns of the past really had no interest in economies except
as they impacted their ability to conduct foreign policy, that is
to finance and wage wars. It wasn't until the Russian revolution
that governments started making serious attempts to manipulate
economies for political purposes, which is what we are seeing
here in the U.S. now.
I read the GDP article you posted and it came to me that we are
living in the middle of a big experiment. No one knows how it
will come out and the result may not be understood for many many
years. Social and economic engineering are new kids on the block.
Those in control of the handles of power are tweaking every screw
and knob, including especially the information knob, trying to
figure out how to make the most politically from the economy.
Que sera sera."
And here is a note from the Orange Section.
Bender,
I read your comments. I am out of the market aside from a few shares
in GLD, but what really frightens me is the cost that our political
leadership has imposed on cash. With current interest rates being at
0.25% holding cash is essentially a losing proposition when you take
into account inflation. This is the real insult to private savings,
our leadership has made it cost money to be prudent. I think this is
part of what is driving the market. If it costs money to be conservative
it creates incentive to take risks in the market. Obvious one could
question the wisdom of that relationship, but it is an influence.
Bernanke is only part of the problem. The real issue, IMO is Washington
DC. The Fed is a juicy target for investors given the past 30 years of
conditioning with regards to interest rates and their impact on financial
markets. However, a lot of what the FED is doing is financial engineering
to allow the Obama administration to do things like quadruple the deficit
and vastly increase the Federal Debt. We are now at risk of something
called seinorage, which I have to admit to not fully understanding. From
what I recall it has to do with the Central Bank essentially creating money
to loan to the Central Government. Functionally that is what happened in 2008.
The only reason that we haven't seen a massive spike in inflation is because
in the grand scheme of the world economy, the US is still "special" and doesn't
have to play by the rules. Bernanke's gambit was to "promise" the markets that
the Fed would deflate their balance sheet to prevent inflation. Currently Wall
Street has bought the promise.
There are a lot of rumblings that the Fed is going to unwind their balance
sheet in March. My guess is that a lot of this has to do with Politics. This
time last year it was all about being with Obama. Now after a year of Tea
Parties, protest, and the Massachusetts Miracle Obama's circle is no longer
some place you want to be. I think this will represent the most significant
market event of 2010, but I am not sure how to play it. A risky move would be
to buy some April and May puts. A conservative move would be to stay in cash
and buy at the bottom. I'll be taking the latter option in my 401K since I do
not have a means to play the short side in that account.
At the end of the day though this is about our national leadership. Most people
who know anything about business or economics can tell you what is wrong and
what needs to be fixed. Yet we keep electing candidates who are functionally
inept in these areas. I don't mean to be harsh, but in a democracy this is the
fault of the voter. We need to start sending better people to represent us and
to start expecting higher quality leadership."
January 27, 2010
Here is a link to
'The Truth Behind GDP', by James Anderson of Minyanville.Com.
I quote it below.
"As you can see, the birth/death model created jobs every month in
2009 except January. During that time frame, the unemployment rate
went from 7.4% at the end of 2008 to 10.0% at the end of 2009. If
you find that small businesses managed to create net jobs all
those months hard to believe, welcome to the club."
Here is a link to
'What I Would Do as Fed Chairman', by Richard Suttmeier of Minyanville.Com.
I quote it below.
"As an outsider with no ties to Congress, a political party, or to
any member of the FOMC Board of Governors, my first step is to admit
the Fed mistakes and raise the federal funds rate to 3%. I want to
support the dollar, flatten the yield curve, and preemptively cut
the risk of inflation.
I want to give Americans on Main Street higher interest rates on
savings and money markets. I have always opined that in the US a
federal funds rate below 3% was never a prudent monetary policy
choice. This might finally provide an incentive for increased
consumer spending.
...The Jobless Rate Rose in 43 States in December -- Forty-three
states reported higher unemployment rates in December, which to
me is a resounding warning that the US economy lacks traction.
With 600,000 leaving the work force in December the unemployment
rate is worse than reported.
Barney Frank, a champion of Fannie Mae (FNM) and Freddie Mac (FRE),
now wants to abolish them. As readers know, I favored the
liquidation of Fannie and Freddie months before the US Treasury
took them over in Conservatorship. I suggested beefing up the
government-backed Ginnie Mae mortgage program, while gradually
liquidating Fannie and Freddie debt and mortgages. Instead, US
taxpayers are on the hook for $111 billion and counting and will
be covering all GSE losses through 2012, leaving a lifeline
that could be double the current $400 billion."
Here is a link to
'We Can't Spend Our Way Out of a Debt Bubble', by Mike Mish Shedlock of Minyanville.Com.
I quote it below.
"This idea of Keynesian 'priming the pump' has never worked and it never will.
Japan and its national debt to the extent of 200% of GDP should be proof enough.
The only thing that can possibly work is the write off of bad debts --
something both the administration and the Fed are reluctant to do. We can
either do this now, or drag it out for two decades like Japan, only to end
up deeper in debt.
What ended the Great Depression -- and let's hope it doesn't come to that
again -- was WWII and the destruction of capacity everywhere but the US.
Spending $5 trillion dollars wouldn't do a thing now, other than wreck the
dollar and create another bubble. Repeat after me: It's impossible to spend
one's way out of a debt bubble.
Given that it's impossible, it's pointless to try. Thus the real lesson of
1937 is 'don't blow debt bubbles in the first place.'
January 24, 2010
Here is a link to
'If Bills Fail, a Quandary for Insurers', by Reed Abelson of NYTimes.Com.
I quote it below.
"'People are still being crowded out of the market because they can't afford it,'
said Sheryl R. Skolnick, a health care analyst for Pali Capital in New York.
If the health overhaul is indeed dead, she said, the critical question becomes
'how do you grow these businesses?'
The insurers say they understand the need for change in their business,
particularly so they can offer more affordable coverage to people who must
buy insurance on their own and are in poor health.
'There are legitimate, real issues that aren't going away that we need to
address,' said Ronald A. Williams, the chief executive of Aetna, one of
the big for-profit insurers."
Here is a link to
'Three Faces of Market Danger', by Paul J. Lim of NYTimes.Com.
....................
I was out for coffee with the boys yesterday. The subject turned to the enormous
U.S. debt. Lar reminded us of a sobering fact: Of all the capital in the world right
now, the U.S. has borrowed 80 percent of it. How willing will the holders of the remaining
20 percent be to lend us the other 20 percent? We think there will be great reluctance,
long term, for foreigners to buy U.S. bonds. And the FED can not keep being the only
buyer at the auction. So, how does our government solve the debt problem?
There are only Four Ways Out.
1. Default on the Debt - This is the worst solution, and it would plunge the world into
financial chaos.
2. Raise Taxes - This is the worst way to revive a struggling economy. Long-term, it
might sober both government and citizens enough to get both off the credit wagon. For this
solution to succeed we would have to substitute increased productivity for increased borrowing.
Business, particularly big business would have to cooperate by ceasing to export jobs.
3. Borrow More - Really? From whom?
4. Print Money - Dillute the Value of the Dollar - This is the option most favored by Congress.
Old debts can be repaid with newly printed 'funny money'. This, of course, wipes out savings.
Saving are something the FED has been urgently trying to kill anyway. Low interest rates are
inflationary/reinflationary and a hammer blow against savings.
The approach to this crisis, taken by both administrations and 'Bubble Boy' Bernanke, has been
trying to reinflate the bubble - kind of a 'I want my bubble back' mentality. Every month Bubble Boy
keeps hammering away at savings, trying to eliminate them altogether.
January 22, 2010
Here is a link to
'Confidence Sliding on Main Street', by Richard Suttmeier of Minyanville.Com.
I quote it below.
"The National Association of Home Builders Housing Market Index slumped to 15 in
January on continued concerns about the weak jobs market and the increasing number
of foreclosure sales. Community banks are reluctant to lend to builders and
developers as nearly 3,000 banks are overexposed to C&D and CRE loans. Because
of this, homebuilders have thinned inventories and slowed new construction.
Remember that a reading of 50 is neutral for this index and at 15 it's a sign
of a housing depression. [Bolding is by the Bender]
The ABC News Consumer Comfort Index fell to -49 last week, down eight points
since the beginning of 2010. This index is approaching the recession and record
low reading of -54, set a year ago. 45% of Americans say their personal
finances are positive, which is below 50% for 75 of the past 78 weeks, another
record by far. Only 33% say it's a good time to spend, which is 14 points below
average, and only 9% rate the economy positively, 29 points below average.
...The Federal Housing Administration is making it tougher for homeowners to get
a mortgage by raising fees and tightening lending standards. The FHA is losing
money as the foreclosure rate rises. As a result, its reserves have fallen below
the minimum required by Congress. This should cause yet another drag on housing
as they insure 30% of all new loans, and the FHA is the largest backer of
mortgages for first-time buyers. The FHA only requires a 3.5% down payment,
but now requires an upfront mortgage insurance premium of 2.25% from 1.75%,
which can be a deal breaker. Borrowers with a credit score below 580 must put
10% down. More than 18% of FHA borrowers are at least one payment behind or
in foreclosure compared to 14% for all mortgage loans."
Here is a link to
'From the Relationship Era to the Breakup Age', by Peter Atwaterr of Minyanville.Com.
I quote it below.
"As I measure it, though, the Relationship Era peaked back in 2007 -- for as
the markets topped, risk reduction was easily seen in the record profit margins
of most corporations and banks.
But I think Peggy Noonan is right, we're now on the other side. We're living
in the Breakup Age. She sees it in the political arena. I see it in the
deteriorating relationships between consumer borrowers and the banks.
But if strong global relationships manifested themselves in high margin/low
risk earnings, I think it reasonable to expect far lower margins and much
greater risk as we morph from 'We are the world' to 'Breaking up is hard to do.'"
This is important. I will add this to my list of General Trends. It will become: #15 Easy and existing
relationships, between retailer and consumer, banker and customer, lender and
borrower, debtor nation and creditor nation, etc. will be under greater and greater
strain as those relationships strain and break.
Here is a link to
'Obama Calls for Limiting Size, Risk-Taking of Financial Firms', by Nicholas Johnston
and Julianna Goldman on Bloomberg.Com. I quote it below.
"Volcker initially had trouble getting traction for his views within the administration.
He visited nine cities in five countries between October and mid-December of 2009 as
he advocated changes.
Obama signed onto the concept in mid-December, according to a White House aide.
Volcker attended a White House meeting Dec. 23 with Geithner and Summers to discuss
details. Prior to the meeting, Obama had already approved of separating proprietary
trading and banking. Geithner and Summers expressed concern that this would be a
diversion from other regulatory proposals, the aide said."
........................
Here are three notes from regulars to this site.
This first note is actually two notes sent by Rich Kolon recently.
"Bender,
Money supply continues to fall off a cliff, thanks to banks trying to wipe out
as many homeowner borrowers as possible, with the government aiding and abetting
the bankers."
http://www.nowandfutures.com/key_stats.html
And from another note:
"Now that I am at a 2+ year high in my major stock accounts, this tilts me towards
the idea of selling some stocks, and just being grateful for the ride these last nine
months since I got laid off.
Even my latest purchase of CIWT.OB early this week is up over +24% already.
My experience tells me that when the accounts start zooming up, you likely have
no more than a month before a correction hits. [Bolding is by the
Bender]
Rich"
Indeed, Rich, one thing traders/investors should be looking at all the time is how
their overall portfolio is doing. When it seems to be at an extreme high, major selling
may be in order.
From the Orange Section comes these comments.
"Bender,
I've been reading your recent commentary. From a market point of view I wonder if
we are not setting up for a crash. I know that is a risky position to take, but it
strikes me that the table is being set. I am tempted to buy a bunch of out of the money puts...
From a more economic point of view. I really think there are two core issues that
must be addressed before recovery can occur:
1.) Reduce Uncertainty
2.) Resolve Slack Demand
I think the first item is pretty obvious. If business has additional reason to shun
risk, then it will be more risk adverse. Government needs to stop propagating the
myth of evil corporations and start taking a stance that is more business friendly.
The second one is I think critical, especially on the jobs front. One might argue
that by fixing the jobs issue you would resolve the demand problem, but I think
that is overly simplistic. A major reason we have double digit unemployment is
because demand is down. So yes adding jobs would add consumption, but if
consumption itself is down, then this solution would seem to ignore parts of the
problem. I have long advocated tax cuts and I think there has never been a better
time for them. If we want to get American Enterprise going, ie if we want to
stimulate the economy, then we need to find a way to give it more money.
Since Roosevelt much of our public policy has been geared towards the idea
stimulating the economy spending more money, but it has come via the Government
checkbook not the consumer. I think this view needs to be discarded. The Cobb-Douglas
function states Y-C+I+G+(X-M) and thus implies that G is just as good as C.
However as any layperson knows, government spending or "G" is horribly inefficient.
I think Cobb-Douglas function should have a factor for efficiency. Consumers
produce GDP on a dollar for dollar basis. I would content that Government might
produce $1 dollar of effective output for ever $10 or $20 it spends. Maybe even
less. (One could argue that the I or Interest Income might be a partial offset to
G and C due to debt. As I have said before, Macroeconomics does not effectively
account for Debt in its models.)
There has never been a better time to cut taxes. Give consumers more money to
spend and don't expect results right away. People have debt to pay down. Give
them more money to pay it down and then you will see money start flow back into
the economy as debt burdens are reduced. This will lead to growth in demand and more jobs.
Right now Washington DC seems to think it fix our problems for us. I would argue
that every dollar they confiscate makes things worse, not better."
Yes, Orange Section, cutting taxes would make a lot of sense right now. But that
would be a measure that would help the broadest number of Americans. Neither party
seems to be thrilled with doing that. It's the special interests that line their
pockets, not you and me.
Methinks your second point (Resolve Slack Demand) will be a very tough nut for
this government to crack.
Your comment about a possible down market is in line with my own thinking. I am
not sure about a crash, but a serious dip is possible here. We know, or think we
know, that the FED is going to stop priming the pump in March. If you are going
to take advantage of that, here is what you should do...and particularly this is
aimed at Red and White D...
1. Sell portions of your holdings to free up cash. Do that now and next week. Keep
doing that if the markets keep falling through February.
2. Start nibbling at the short funds, no more than 1 percent of your cash on any
day. The short funds are at nearly historic lows and the FED move is looming on
the horizons. Eventually even the big traders will catch on. When they do, the
move down will be on in a big way. Keep nibbling at those short funds through February.
Have at least 5 percent to 25 percent of all your cash in them by the end of February.
That is what I am thinking should be done by the prudent trader/investor. The important
thing is to do it in small, palatable bites over a period of time - time that we
definitely have right now. And do not be a piggy. Don't move too much money into
the shorts. If a serious dip happens you need to have kept at least 75 percent of
all your cash on the sidelines to buy bargains.
If, in February or March, the markets seem to be stampeding down the hill, don't ride
them down. Get out!
Here is a note from Red and White D.
January 19, 2010
Here is a link sent by Keith to
'Can both the economists and strategists be right?', by David Rosenberg of
TheGlobeAndMail.Com. I quote it below.
"Forget all the calculations off the 'artificial' March lows. Forget the
25-per-cent market slide in the first 10 weeks of the year to that awful
trough. Here is the reality: The S&P 500, from point to point, rallied 23
per cent in 2009 even though earnings per share for the year as a whole
came in at a whopping $21 less than first estimated.
Now that is remarkable. It almost wants to make you believe in the tooth fairy.
We are sure that if we told you on Dec. 31, 2008, that the market was
looking for $77 on operating EPS for 2009, but $56 is all we would muster,
you wouldn't have told us that your forecast for the S&P 500 at year-end
would be 1,115 points. And here we are today, and the same consensus crew
is calling for just about the same level of earnings again - this time
for 2010."
Here is a link to
'When the Fed Stops the Music', by John Mauldin of Minyanville.Com. I
quote it below.
"There's just so much that's uncertain, and all we can do is wait to see how it
unfolds. My best guess is that we see a solid GDP number posted for the fourth
quarter (which will get revised down over time), due mostly to stimulus and
inventory rebuilding. By the middle of the year, the stimulus will be far less.
And while inventories are rebuilding and that's good for the GDP numbers, the
sales-to-inventories number hasn't risen. And final demand is what drives
inventory rebuilding.
The latter half of the year looks to be weaker, and then we hit what right now
looks like the largest tax increase in history, much of it on the small
businesses that are the drivers of job creation. The National Federation of
Independent Businesses just released their latest survey. It was brutal.
There's little optimism in it.
The Fed is going to stop the music in March. There will be a scramble for the
chairs. This is a huge experiment with no precedent. The entire developed world
is the test subject. Risk assets will be subject to uncertainty. And markets
hate uncertainty.
Hopefully, we can muddle through this year before a relapse into recession in 2011
(because of the tax increase). I wish I could see it like Larry Kudlow, but I don't.
I would be very cautious about being long the stock market. It's now a trader's
market. I wouldn't be buying long-duration bonds. It's still an absolute-return world."
.............................
Here is a link to my new page on General Trends
I have been spotting. I am going to keep adding to this page, as time allows.
Below are two of the General Trends I have already
spotted.
1.Financial Companies have been making their primary profits by feeding upon their customers, thus devouring the gooses that layed the golden eggs.
10. Buy and hold is dead.
When one looks at both trends together, they paint an ugly picture of the future. If buy and hold
is dead, and everyone who wants to retire someday is going to have to start gaming the system, then
these individuals, quite often unprepared to play the markets, will have to elbow their way to the
crap tables and bet against the likes of their own retirement funds and real pros like Goldman. That
will be a daunting task. Most will fail at it. Retirement, for most Americans, has just become
unaffordable, whether they realize it or not.
January 15, 2010
Here are links to several articles on Minyanville.Com:
'The Three-Pronged Attack on the Fed', by Mike Mish Shedlock. I quote it
below.
"The problem is, Bernanke places his complete faith in such gibberish, so much
so that he's lost all sense of real-world action by real people. The result is,
he can't see a housing bubble that was obvious to anyone using common sense."
'Everything You Need to Know About the Financial Crisis Inquiry Commission', by Kevin Depew. I quote it below.
We like our stories told linearly because that corresponds with how we
experience the world. But reality doesn't care for how we prefer our
stories to unfold. The debt crisis, the collapse of real estate prices,
the embrace, and subsequent rejection of seemingly complex and highly
engineered finance products all emerged from a peak positive trend in
social mood.
A positive social mood trend causes businessmen to become more optimistic,
causes the public to embrace risk, speculate more, and overestimate the
amount of debt they can service, and ultimately foments the creation and
availability of derivatives that make perfect sense at the time. Only
after the social mood trend peaks do derivatives and speculation seem
outrageously complex and dangerous."
'Quietly, a Top Seems to Be Forming', by James Kostohryz.
'Where Have All the Jobs Gone?', by Richard Suttmeier.
I quote it below. The bolding is my own.
"According to the Labor Department, there are 6.4 unemployed workers for each
available job opening. That’s up from 6.1 in October and a record high for
this statistic. Job openings fell to 2.42 million in November from 2.57
million in October. Put into perspective, the peak in job openings was 4.8
million in June 2007. This is an additional woe for Main Street. Layoffs
may be declining, but hiring doesn't pick up. So where are the jobs created
or saved?"
Here is a link to 'Inflation in Check, but Spending Power Wanes', by Javier C. Hernandez on NYTimes.Com. I quote it below.
"Though prices are not rising rapidly, many Americans are seeing their spending
power wane: weekly paychecks, adjusted for inflation, fell 1.6 percent last year
- the largest decline since 1990 - as employers cut back on hours and reduced
salaries, the government said."
Ben Smith sends this link to
'Marc Faber's 2010 Investment Outlook: Bullish Sentiment Too High For His Liking', by
Peter Gorenstein on Yahoo.Com.
Finally, Rich Kolon sends this note.
"At the link below click on the 2-Years choice for the Investors Intelligence survey chart
http://www.schaeffersresearch.com/streetools/market_tools/investors_intelligence.aspx
The Bull-Bear split is near two year highs now. While I have seen higher numbers of Bulls
in my times, the Bears percentage is very low.
The current readings are 48.3% Bulls and 16.9% Bears. This article briefly discusses
recent extremes in the I.I. survey.
http://ca.us.biz.yahoo.com/etfguide/091229/484_id.html?.v=1
Note that I.I. survey is better at timing bottoms rather than tops, so I would not
use this indicator in isolation.
Some people use the ratio between the Bull_bear numbers as an indicator. Last week,
the ratio was 3.28. This is historically high and is another indicator that stocks are
overbought.
For a 2004 discussion of this indicator, you can read this:
http://web.streetauthority.com/terms/i/investorsintelligence.asp
Bull market highs tend to be in the mid 50s, but I have seen over 60% Bulls on
rare occasions.
L
I am inserting this link I just found, though I do not know if this page changes
content often. So if you want to keep it, print it.
http://www.bearishnews.com/post/category/bear
It points out that "Only 15.6% of financial newsletters are currently bearish on
equities. Last time the bearish indicator was this low was April 1987. A few months
later (Black Monday) the DJIA dropped 21% in a single day".
That day was in October, 1987.
From a contrarian view, and this is one of those types of indicators, it appears the
stock market is well overbought short term.
Today I also noticed that the ratio of equity puts over equity calls went down
to a rather low number. 891,442 / 1,830,998 = 0.4868. That's more than two calls
being purchased for every put purchased.
Looking at historic data :
http://www.cboe.com/publish/ScheduledTask/MktData/datahouse/equityPC.csv
This is the lowest ratio since October 14-15, 2009. That time period was just
before the last minor correction in the stock market, as you can see in the SPY chart.
http://stockcharts.com/h-sc/ui?s=spy&p=D&yr=0&mn=6&dy=0&id=p91058887254
This suggests to me that option expiration week will see a drop in the stock market,
to make those calls worthless. That is the week of Jan 11-15, 2010, this coming week.
Now that I am at a 2+ year high in my major stock accounts, this tilts me towards
the idea of selling some stocks, and just being grateful for the ride these last
nine months since I got laid off.
Even my latest purchase of CIWT.OB early this week is up over +24% already. My
experience tells me that when the accounts start zooming up, you likely have no
more than a month before a correction hits.
Rich"
January 15, 2010
I want to ask for my readers' patience. I have been through an extremely busy time in my life.
My job keeps me physically active. I have lost 60 pounds in the past year. The past 10 days
have been busier than ever at work, and that leaves me pretty tired. In the meantime, I have
completed all the chapters on the book I have been writing for two years and am now 75% done on
the illustrations I am doing for it. I try to keep up on my reading and email. I try to keep
up on my two online sites. Thanks for coming back here for enlightenment. I will try to provide
more in the future.
Links to older commentary:
News 89, 12-16-09 to ?
News 89, 10-18-09 to 12-04-09
News 89, 08-10-09 to 10-09-09
News 88, 06-01-09 to 08-05-09
News 87, 03-22-09 to 05-21-09
News 86, 02-23-09 to 03-19-09
News 85, 12-16-08 to 02-14-09
News 84, 09-30-08 to 12-15-08
News 83, 09-30-08 to 10-22-08
News 82, 08-08-08 to 09-29-08,
News 81, 06-18-08 to 08-03-08
News 80, 03-27-08 to 06-16-08
News 79, 02-03-08 to 03-24-08
News 78, 12-23-07 to 02-02-08
News 77, 11-16-07 to 12-20-07
News 76, 10-14-07 to 11-12-07
News 75, 08-19-07 to 10-10-07
Email
the
