October 9, 2009
Here is a link to 'Can We Trust the Leading Economic Indicators?', by Mike Mish Shedlock of Minyanville.Com.
The Orange Section sends the following commentary. I give it to you whole.
I haven't sent you a book in while. Enjoy.
I am seeing a consistent theme to this recession, reduced Aggregate Demand due to debt burdens stemming from a depressed Housing Sector. This has exasperated capacity issues due to enhanced productivity gains from the IT revolution. That is the driver of the Jobs issue. Here is my top down view based on Supply and Demand in the Housing Market. A few assumptions:
US Economy is Consumption Driven
Housing in the last decade through Refi Mortgage was fueling a large portion of Consumption
In order for the US Economy to grow again, Consumption must return
.......
I really think all of this goes back to classic Supply and Demand. So lets look at the housing mess in that light. In this decade we saw the traditional methods of getting a mortgage essentially reach maximum capacity, virtually everyone that bought a house did, essentially the Mortgage Industry was at 100% Utilization. In other words, everyone with good credit was in the market. At this point, FANNIE MAE and it's ilk came on the scene and started backing lower quality mortgages through Government Guarantees. At the same time the Financial Sector got drunk on fee income and Securitization, but they needed a new way to create AAA debt of High Risk Loans besides the Politically driven stuff being pushed by Fannie and Friends. Enter what Gross dubbed the Shadow Banking System or the Credit Derivatives Market. During this time Gross was writing about how the US had transitioned from a Service based economy to a Finance based economy. Indeed, during this last decade the Credit Derivative Market grew from a few billion dollars in notional to something like $50 trillion dollars in notional. (rough estimates here) Where traditionally lending would say no, the shadow system would say yes.
In other words the market had peaked. Low quality borrowers, even first time borrowers could not easily afford entry level property. Without the external influences outlined above the market would have receded as supply and demand normalized and a new market price was reached. Instead FANNIE and the Shadow System sent the game to proverbial extra innings and backed those that could not afford the loans.
Lets model this out:
Say the peak normalized Market is valued at M. The Now in excess of M, FANNIE and the shadow system created additional value of X.
So at the peak in 2007/2008 we were not at M, but M+X.
I think people under estimate all that X contains. So lets go down that tangent for a moment. M for the sake of this simplification is the normal market. All the normal buyers of homes how qualified for a Loan under traditional lending practices. By the standards of the Mortgage Industry as late as 2007 that is a very conservative estimate. So what is X?
All Borrowers who could only afford their homes under the relaxed credit of recent years, Borrowers who needed the following special loans in addition to the relaxed standards:
ARMs to afford their homes
Balloons to afford their homes
Interest Only Payment Loans
Interest Only with Principle Reset (and other insanity)
The key to understand here is that all those questionable mortgages were issued AFTER they relaxed the lending practices at the big banks.
So for our Model above, that means that M is actually M*Y where Y is a modifier based on credit standards. Sort of like this:
Y = 1 = Normal Standards
Y = 1.25 = Relaxed Standards
Y = 0.75 = Tight Standards
(note these are arbitrary numbers to help make the argument, they do not represent any real value)
Our peak housing valuation is then M*Y+X where Y is in the Relaxed State. Now lets look at this in terms of the current recession. Loans issued under the category X have vanished. X isn't even zero, X no longer exists. Y has gone from enhancing the size of the pie to shrinking the pie. So we went from Relaxed M*Y+X to Strict M*Y. The difference between these two numbers is the demand that has been wiped out in Housing. We didn't move up and down the Demand Curve. At Relaxed M*Y+X the Entire Demand Curve was Higher than Normal M*Y. At Strict M*Y that same curve is not just back at Normal M*Y, it is now lower. Thus there is major downward pressure on the housing market.
So where are we at today? Today we are in a market where our buyers are trapped. Mortgages are underwater and the buyers with good credit are the people who are stuck in them. Think about that. The administration passed an $8000 tax credit for first time home buyers. Who are those buyers? This basically helps the new qualified buyers that are finally ready to make a first purchase, it does nothing to alleviate the majority of the market that is still trapped in homes that were bought at peak prices.
There are 3 ways out of the mess:
1.) Increase the buyers in the market
2.) Increase the ability of current home owners to reduce the amount they owe
3.) General Inflation
Also, it is important to not forget what I said about the Refi Mortgage Market fuelling major purchases. Home values appreciated, people took out equity and bought new kitchens, Harley Davidsons, bigger cars, boats, cabins, etc. That spigot is now turned off. So in addition to effecting Demand in the housing sector, this mess has also had a negative affect on Aggregate Demand in the US Economy.
So what is the solution?
My view is that the best choice is reduced Government spending combined with Tax Cuts across the board. Give people more money to pay down what they owe and help them get out from underwater. Give people on a tight budget some breathing room so they can start saving or spending some more money. Give Entrepreneurs more breathing room to create jobs and commerce. This preserves purchasing power and in my opinion grows a healthier and more productive society. It also fuels consumption which will increase Aggregate Demand. Finally all of this should have a positive impact on Labor Markets. Growing Economies need more Workers to support increasing Demand.
Current Market Implications:
Nothing is being done to address long term demand issues from a policy standpoint. Inflation seems to be the direction of Washington. Government Bailout efforts for Mortgages are targeted almost exclusively on homeowners who have no hope of making another real estate purchase. In short there is no help presently coming from Uncle Sam to alleviate these issues. The wild card here is the national media. They have been and will run cover for this Administration. Despite hard fundamentals providing downward pressure on markets, the media spin is doing it's best to keep things propped up. Just today we had jobs report showing more job losses, yet because it was fewer job losses than expected the media spun it as a positive. This could squeeze short plays. However, I think Q4 could get very ugly if there are any major negative events in October or November. After that, I think Santa will take over. (I think given the media desire to spin positive, that it will be a good year for Santa on Wall Street) If we don't see the break in Q4, then look out in Q1 2010 when the poor numbers start coming in."
Construction (housing and commercial) makes up one of the three legs of our economy. Both housing and commercial construction suck, even though commercial has been bouyed somewhat by stimulus monies. This is going to get worse. ARMs are resetting at a much faster clip this quarter, and will speed up even more in the next two quarters. There is really awful news yet to come out of housing.
Here is a link to 'Mortgage Crisis Shuffles Toward Fancier Neighborhoods?', by Bernard Condon of Forbes.Com. This should give the reader the big hint.
October 8, 2009
Rich Kolon sends this link to 'A jobless recover...or something else?', by Anthony Cherniawski, The Practical Investor, LLC. I quote it below.
...The Association of American Railroads today reported 271,659 carloads for the week ending Sept. 26, 2009, down 17.1 percent compared with the same week in 2008. For the first 38 weeks of 2009, U.S. railroads reported cumulative volume of 10,104,171 carloads, down 18.2 percent from 2008; 7,141,006 trailers or containers, down 16.8 percent, and total volume of an estimated 1.08 trillion ton-miles, down 17.3 percent. Total volume on U.S. railroads for the week ending September 26 was estimated at 28.8 billion ton-miles, off 17.2 percent from the same week last year."
Keith sends along this link to 'The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says', Posted Oct 05, 2009 01:49pm EDT by Aaron Task in Investing, Recession, Banking. I quote it below.
Here is a link to 'Worse Crisis Is Yet to Come', by John Mauldin of Minyanville.Com. This is a long read, but a most excellent one. I quote it below.
'Ah,' we tell ourselves, 'I know why that happened.' With an explanation firmly in hand, we now feel we know something. And the behavioral psychologists note that this state actually releases chemicals in our brain that make us feel good. We become literally addicted to the simple explanation. The fact that what we 'know' (the explanation for the unknowable) is irrelevant, or even wrong, isn't important in achieving the chemical release. And thus we look for reasons."
Here is a link to 'The Credit Crunch Continues', by Meredith Whitney of the Wall Street Journal. I quote it below.
Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends. Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year."
Indeed, if, as Democrats and Republicans agree, real growth in the economy, real job creation, comes from small businesses, why aren't they the first ones to get some help? I'll repeat that. Why aren't small businesses the first to get aid in a financial down turn?
It was the big guys who got the help...with the 'too big to fail' banks first to dine at the Federal trough, followed by the auto makers. What a disgusting display.
There is real anger out there on Main Street. It should be directed appropriately: toward Congress for helping the big bad guys out first, while neglecting to help the real growth engines in the economy, the small businesses. Congress has been extraordinarily stupid with our money (our borrowed money, that is). We elected a Democratic Congress and the first thing it did was continue the 'trickle-down' methods of the Republicans. At what point will both parties conclude that 'trickle-down' just does not work, never has, never will?
Anger is part of the package of dealing with loss. Here are the steps again:
SHOCK & DENIAL
PAIN & GUILT
ANGER & BARGAINING
'DEPRESSION' - REFLECTION -
LONELINESS
THE UPWARD TURN
RECONSTRUCTION & WORKING THROUGH
ACCEPTANCE & HOPE
What 'trickle-down' does is strenghten large holders of money...the very wealthy and the large corporations. It does nothing to feed the real growth engines of our economy. Indeed, 'trickle-down' strengthens the big guys, making it more difficult, on a relative basis, for the little guys to compete with them. So, the help given to the big guys only served to hurt the little guys.
The banks use a disengenuous arguement for why credit lines to small businessses are drying up. They tell us that fewer borrowers now 'qualify'. What they don't mention is that the banks changed the criteria for loans, thus tightening up credit standards. I don't blame them for doing so. But they shouldn't lie to us like that. After all, it was us - we the people - who came to their rescue and bailed them out.
October 1, 2009
Here is a link to 'Money Can Indeed Perform Vanishing Acts', by Mr. Practical of Minyanville.Com. In some minds there is a blurring of the difference between public and private debt. And, as Mr. Practical demonstrates, money can just disappear. Here is another example.
Joe puts down $20K on a $200K house. He defaults. The bank sells the house, but can only get $100K for the house now. Joe is out his $20K plus any more equity he had built up through monthly payments. The bank is out $80K less any pricipal Joe has paid it. Between the two entities $100K just vanished...disappeared.
This quarter and for the next two after, the numbers of ARM resets will spike to extreme levels. Mortgage defaults will be extememly high as a result.
..........
Rich Kolon sends this note and I thought I would share it.
After reading it, let's delve a little further.
Basically the banking crisis occurred when reserves dived dramatically. Banks would not loan money to each other to meet reserve requirements, which must be legally met every two weeks. Why? They suspected other banks were holding bad assets and they may not get their money back.
To fix the problem, the Fed gave a bunch of money to these banks, supposedly by buying these bad assets. It's like a loan to keep them solvent (able to meet reserve requirements).
Supposedly, one day they need to return that loan to the Fed.
If they lent out the money to individuals or businessses, these same bankers would now fear they would not get their money returned, because of the poor economy. So they issue much less credit. But that leaves them with lots of cash now. What do they do to make a living?
I think that money got channeled into the stock market. That's why the stock market is up dramatically since March. It sure isn't because laid off people are stuffing their last dollars into stocks. The public has learned to start saving.
That torrent of speculative money now in stocks produced some good profits for early speculators. But you need to sell to new bulls to take profits (get yur money back).
Secondaries in bank stocks provided one way out to recapitalize. That's why SKF stopped working. That now seems to have run its course.
Now we have another stock bubble, based on a mythical recovery juiced by money from the Fed and extreme government deficit spending.
As we know, stocks are just digital paper. They are liquid and subject to volatility, with risk to the downside as well.
So how will banks PRESERVE any gains they produce via the stock market?
Unethical bank and insurance CEOs will try to distribute remaining money to themselves and friends and family, and stick it to the stockholders.
I'm thinking the more ethical types may just diversify into foreign bonds or even precious metals.
The problem with diversifying back into real estate is that American CEOS are too greedy and will keep laying off people, the ones that would need loans to purchase real estate.
But what if they took a little bit of that money and started buying gold as a hedge? Gold is as far as you can get from the road to Zimbabwe.
Note that MSD and GTU are two convenient ways to play these angles.
With MSD I not only collect about a 6% annual dividend paid quarterly, I also hold a nice capital gain since I first recommended it at $7+. If the dollar goes down against foreign currencies, the foreign debt bonds should go up in value.
GTU is gold bullion stored in a Canadian bank vault, where auditors must be present to go into the vault. Each bar has a serial number. It's not a potential paper gold scam.
Rich"
..........
If you wanted to find someone from 1929, someone who was in a position of financial authority, someone like a bank president or a higher Federal administrator, someone who had already seen a Depression from an elevated position...and so would know what one might look like...upon whom would you call?
You would not be able to. They're all dead. Folks still alive now who survived the Depression were very young then and not in a position to know what that one looked like in the beginning.
It was this thought that led me to the next one:
Even if you did find someone from 1929 who might be qualified to judge whether or not what we are experiencing is the beginning of a 1929-type Depression, would that person recognize the signs of looming Depression in the present? A lot of change has occurred in the last 80 years. The world, literally, is a different place.
Given that as a background now, how much can you trust folks who tell you we are not in the beginning years of a Depression? Of all the pudits and wise men, who really could know?
I believe we are in exactly that. The last big one I lived through was severe but localized to communities dependent on the Oil Patch...like my hometown of Casper, Wyoming. Today it is bad all over, and Casper is on the trailing edge. Casper's foreclosures are creeping up and job listings are plummeting. Soon enough there will be more of the former than there are of the latter.
A friend of mine's son recently appeared in town. He is up from Phoenix. He used to run a construction-oriented crew of 235 in Phoenix. Now he has a crew of 12 and does not have enough work to keep his people busy. That phenomena is being repeated in every major city in the U.S. This Depression is going to last at least 10 years, and we are only about 2 years into it.
One sign that we might have hit bottom will be when pundits start using the 'D' word. Another sign is when banks move as a herd to rid themselves of all their bad assets, a move to come clean. Right now they have no incentive to do so, so they have not. A third sign will be, as it was in Casper in the 80s, when banks cease using foreclosure as a tool. When banks start agreeing to let folks turn in the keys and sign the deed back over, instead of going through the foreclosure process, then we will be close to the bottom. Banks will eventually conclude that it is in the banks' own best interests not to ruin the credit records of thousands of people when they may need those very people to buy the houses still on the banks' books.
September 24, 2009
Red and White D sends these two links:
'Are credit cards the next collapse?', by Christina Rexrode on McClatchyDC.Com.
'Law firms revise recruitment practices'
Here are two other good reads:
'The Ugly Truth Behind Retail Sales', by Josh Lipton on Minyanville.Com. I quote it below.
...Consumers continue to face a range of rough headwinds right now including a bad job market (one in which leading job indicators still don't look good); depressed prices for homes and stocks; and historically elevated levels of household leverage. Given those challenges, it's thoroughly unsurprising that Americans are now more interested in saving rather than spending.
No data captures that shift more acutely than the contraction in US consumer debt. US consumer credit was released last week, and it fell a record $21.6 billion in July on top of the revised $15.5 billion drop in June, while consensus was expecting a drop of just $3.6 billion."
'The Global Financial Crisis Is Not Over', by Laurie McGuirk on Minyanville.Com. I quote it below.
...The sheer weight of money from index-hugging fund managers moving from just sitting on a pile of cash to a greater weighting for equities, have sent equity markets soaring. The herd mentality has never been more apparent. 'The fear of missing out' is a very powerful force. I suspect there are managers heavily exposed to equity markets who would prefer not to be so, given their own analysis and research, but won't move from the herd lest their performance suffer in comparison to their peers. I contend that there is a great deal of 'reluctant' money in equities, and that it will move elsewhere quickly.
I view this rally with caution and find little evidence to support its sustainability. There's been no real economic improvement apart from that resulting from government handouts and stimulus; nothing real has been built, labor sources offshore; and there's been little job creation (except in the ever-expanding public sector). I don’t consider a person working four hours a week to be employed. Banking and finance-sector balance sheets have been prettied up, but I'm skeptical at best about this sector looking forward. Applying lipstick to a pig changes nothing; it’s still a pig.
Consider the USA -- a consumer economy, as much as that is an oxymoron. Consumers are drowning in debt and lacking confidence in the future. They're happy just to have jobs, and even if there are no pay increases on the cards anytime soon. They can't spend like they used to, without the extension of more credit from banks that won't lend."
Come on folks. This is not rocket science. Banks can't lend because they know just how badly leveraged they themselves are. They know that sooner or later they have to pay back the money to the FED. Meanwhile they still have a pile of FED dollars they have to do something with. That money ends up going out to fund managers who put it to work in the stock market: hense the run up we have seen. Bernanke is goosing the markets by leaving the money in the banks' hands.
Rich Kolon sent out a note recently on investing that I thought I would share.
There is
1) Stock risk
2) Sector risk
3) Portfolio risk
You have the least control over stock risk. You can pick a "dull" stock that few people are interested in, and it likely is less volatile (risky). Or pick stocks with lower beta (that statistically move less than the average stock in the market). Biotech stocks are extremely risky.
You can control sector risk by deciding whether to be invested in stocks of a particular sector, or avoid the sector. You could pick sectors that are less volatile than others. At one time utilities were less volatile. Natural gas stocks are very volatile.
With portfolio risk, you can control that with selecting stocks across a broad range of sectors.
Here are ways to implement risk reduction depending on your level of cash.
==>> Low level of investment cash:
Buy ETFs in sectors that you think has good long term prospects. This gets rid of stock risk.
Examples: Like Brazil? Buy BRF or EWZ.
Like biotechs? Buy IBB.
==>> Medium level of investment cash:
Buy some ETFs in sectors you think have good prospects. This gets rid of some stock risk.
Buy some individual stocks that meet different investment themes for long term. Like my GOYAs. This accepts stock risk, but spreads it out amongst different stocks.
==>> Lots of investment cash:
Buy a few ETFs in sectors you think have good prospects. This reduces stock risk. It's a decent strategy when you like a sector, but don't know who may be the individual winners.
Buy multiple stocks that meet a particular investment theme to spread the risk within the theme. This reduces the risk that you were right on the theme, but wrong on the stock pick.
Buy multiple investment themes. This reduces the risk that you may have selected a theme that does not work out.
==>> Substitutions:
For ETFs, you can substitute mutual funds. You can also substitute a group of individual stocks within a theme.
For example, say you know biotechs are very risky. That is, the individual stocks are risky. The ETF known as IBB would substitute sector risk for individual stock risk (the riskiest).
But say you think you have the ability to guess the probability that the FDA may accept a new drug candidate, knowing what you read on the phase III tests, recent collaborating results, blockbuster potential, etc.
Now that my new career is to stay home and trade my portfolio, I thought I could handle that risk. So I invested in a number of biotech stocks that I thought had potential for approvals. I eliminate stocks with drug candidates that did not meet their primary goals in phase III. I spread the risk by buying several flu plays.
This is what I think Ted might want to do.
You probably want to have a group of five to ten stocks with high individual stock risk. Then it's a matter of the homerun stocks offsetting the losers. That's the way to think.
In addition, I did not bet the farm on any stock needing FDA approval. Why? Because biotechs routinely can lose half their value or more on a rejection.
To reduce risk, I made small bets on multiple stocks. Some may work. Others may fizz out. But I showed you an example of my odds making on HGSI many messages ago. A good winner like that can pay for several stock failures. Of course now I have the time to study these stocks, which I did not have before.
If you want to buy individual stocks, make sure you have the time to investigate them and keep up with them.
If you don't have the time or inclination to research companies, the key to making money is stick with good long term themes and ETFs or mutual funds. This will give you diversification.
If you make solo high risk bets and lose, it's over. That's for gamblers. Diversify thru multiple high risk bets.
Peter Lynch had a good idea to buy what you know. Your edge as an investor is if you know something the average person does not. Then use diversification within the things you know.
Rich
September 13, 2009
It has been a while since I have written anything at all. I am sorry I have been so busy. I have tried to keep up on my reading. Here are some links. They all come from Minyanville.Com as my reading time has been limited.
'What's Bad for Toyota Is Bad for the Economy', by Scott Reeves.
'How Overpriced Is the S&P?', by Mike Mish Shedlock.
'Why We Won't Avoid a Double-Dip Recession', by John Mauldin.
'Credit Debt Has Dug a Two-Decade Hole', by James Quinn. I quote this one extensively.
Also important to note is that 70% of the economy is dependent on consumer spending, which means there’s absolutely no chance of a strong recovery.
As a percentage of disposable income, household debt-service payments reached a peak of 14.2% in 2007 and have plunged all the way to 13.5% -- disposable income is plummeting as people without jobs don’t have anything to dispose of.
A paradigm shift is occurring, but the mainstream media, mainstream economists, and politicians running this country don’t seem to understand the implications.
Three decades of debt accumulation is not resolved in two years. It’ll take decades of reduced spending, paying down debt, and writing off debt.
...The Fed-created spiral in prices upward has trapped millions of late-comers in houses that are worth 20% to 30% less than the mortgage debt that's strangling them. More than 16 million home occupiers (not homeowners) are underwater in their mortgage.
The decisions to buy houses with nothing down -- using option ARM loans -- were choices made by people who should’ve known better. The decisions to make subprime loans to people making $30,000, to make no-doc loans, and to not verify income or assets were done to enrich the bankers, mortgage brokers, and real estate agents."
August 25, 2009
Here are two links by John Mauldin on Minyanville.Com.
'Lies, Damn Lies, and the Real Estate Recovery'
'Lies, Damn Lies, and the Real Estate Recovery, Part 2 '
Earlier I compared what is happening to our nation going through the seven stages of grief. Of course, different individuals are on different steps, or in different stages. It is possible for individuals to exeperience more than one stage at a time. Read through the stages below and see if you don't recognize some of this happening right now. The loss of the value of your house and the loss you suffered in your 401k is just as real, and just as personal as the loss of an important person in your life.
The following comes from http://www.recover-from-grief.com/7-stages-of-grief.html
"7 Stages of Grief...
1. SHOCK & DENIAL-
You will probably react to learning of the loss with numbed disbelief. You may deny the
reality of the loss at some level, in order to avoid the pain. Shock provides emotional
protection from being overwhelmed all at once. This may last for weeks.
2. PAIN & GUILT-
As the shock wears off, it is replaced with the suffering of unbelievable pain. Although
excruciating and almost unbearable, it is important that you experience the pain fully,
and not hide it, avoid it or escape from it with alcohol or drugs.
You may have guilty feelings or remorse over things you did or didn't do with your loved one. Life feels chaotic and scary during this phase.
3. ANGER & BARGAINING-
Frustration gives way to anger, and you may lash out and lay unwarranted blame for the
death on someone else. Please try to control this, as permanent damage to your
relationships may result. This is a time for the release of bottled up emotion.
You may rail against fate, questioning 'Why me?' You may also try to bargain in vain with the powers that be for a way out of your despair ('I will never drink again if you just bring him back')
4. 'DEPRESSION', REFLECTION, LONELINESS-
Just when your friends may think you should be getting on with your life, a long period
of sad reflection will likely overtake you. This is a normal stage of grief, so do
not be 'talked out of it' by well-meaning outsiders. Encouragement from others is not
helpful to you during this stage of grieving.
During this time, you finally realize the true magnitude of your loss, and it depresses you. You may isolate yourself on purpose, reflect on things you did with your lost one, and focus on memories of the past. You may sense feelings of emptiness or despair.
5. THE UPWARD TURN-
As you start to adjust to life without your dear one, your life becomes a little
calmer and more organized. Your physical symptoms lessen, and your 'depression'
begins to lift slightly.
6. RECONSTRUCTION & WORKING THROUGH-
As you become more functional, your mind starts working again, and you will find
yourself seeking realistic solutions to problems posed by life without your loved
one. You will start to work on practical and financial problems and reconstructing
yourself and your life without him or her.
7. ACCEPTANCE & HOPE-
During this, the last of the seven stages in this grief model, you learn to accept
and deal with the reality of your situation. Acceptance does not necessarily mean
instant happiness. Given the pain and turmoil you have experienced, you can never
return to the carefree, untroubled YOU that existed before this tragedy. But you
will find a way forward.
You will start to look forward and actually plan things for the future. Eventually, you will be able to think about your lost loved one without pain; sadness, yes, but the wrenching pain will be gone. You will once again anticipate some good times to come, and yes, even find joy again in the experience of living.
August 20, 2009
The Orange Section writes:
A brief rebut to the article you posted on Retail Sales as a warning shot of future consumer spending issues. Retailers having a bad 2nd quarter is certainly not good news, but most retailers have relatively low sales during most of the year, and then do 70%-90% of their annual business in Q4 during the holiday season. Their Annual Reports even have footnotes to this effect.
This doesn't mean the author is wrong, it just means I am a bit skeptical of his argument. I don't think July is a significant indicator for retailers, not compared to November or December.
I think the market is in a slight trading range that is approaching a tipping point where the it will decide it's next trend. Crashes are tough to predict, but I agree with your sentiments that there might be one coming soon. It is very easy to be defensive in here, I have been. There is a lot of fear out there and even worse, not a lot of incentive to invest in growth."
Here are some links of interest.
'Why Stocks Will Stop Defying Valuation Gravity', by Vinny Catalano of Minyanville.Com.
'Five Reasons Why Negative Equity Could Kill GDP Growth', by James Kostohryz of Minyanville.Com.
'Mounting joblessness fuels US housing crisis', by Saskia Scholtes of The Financial Times.
'Housing Bottom Still Not Upon Us', by Mike Mish Shedlock of Minyanville.Com.
And the last link is to 'Pay No Attention to that Fed Behind the Curtain ', also by Mike Mish Shedlock of Minyanville.Com. I quote this below.
It's easy to blow bubbles and get consumers to spend when consumer attitudes are on your side. However, it's much more difficult now that consumer attitudes toward spending and bank attitudes toward lending have dramatically reversed.
The Wizard behind the curtain has now been exposed as a fraud. Yet, in spite of massive evidence that the Wizard is powerless to change attitudes, most stubbornly believe in him."
What I see is a very mixed financial world. Review the steps that people go through when they suffer personal loss, particularly the loss of someone very close to them. Do anger and denial come to mind as steps? Great financial loss is no different. We are seeing a rise in anger, particularly by those affected by loss of jobs. Obama and the Democrats are reaping some of that anger at the town meetings for health care reform. Many of the questioners don't even want to talk about health care reform. They just want to express their anger.
We still see a great deal of denial. People would just love to have the FED 'turn the machines back on.' Not going to happen, I'm afraid.
We are in a depression my friends. It is, naturally different from the one the U.S. suffered in the 1930's. But the one we are in will last just as long. Deflation is rumbling along just fine, thank you. It is going to rumble for many more years to come.
People are having a hard time adjusting to the idea that the machines are not going to get turned back on. Anger and denial are part of the human make up. It is how people cope.
August 13, 2009
Here is a link to 'Retail Sales Are Warning Shot Across Economy's Bow', by James Kostohryz of Minyanville.Com. I quote it below.
Furthermore, it is my view that the widely predicted inventory correction is unlikely to materialize to the degree anticipated in an environment of contracting consumer spending. This view gains some support from today's release of June inventory data, which shows that inventories contracted by 1.1%. The inventory /sales ratio in June registers at 1.38, which is near all-time highs. It compares to a level of 1.26 12 months ago.
How anxious are business owners going to be to deploy precious capital to restock inventories in circumstances in which consumer spending continues to decline and inventory levels -- although they have plunged -- are still high relative to the level of sales?"
From Ben Smith comes this most excellent article to 'Mustard Seeds for Deflation: The Deflationary Cycle Full Monty', by J.D. Rosendahl on SafeHaven.Com. This is a must read for all. I quote it extensively below.
...All of these wage trends are barely beginning, and we should expect a continuation of lower income or wage deflation in the coming years, which is a drag on our economy. Lower income levels equate to a reduction in consumer spending, less home affordability, and decreased tax collections.
...Another round of foreclosures creates continually more issues. It creates more supply, lower values, and more bank losses to deal with. This will create or add to bank closings through the FDIC, and even tougher lending standards. More foreclosures also equate to more net worth destruction, which leads to a pull back in consumer spending. So, more bank losses and lower consumer spending will equal less tax revenues for governments, which ultimately place pressure on either higher taxes or lower government spending. It's just more of the same old same old!
...As the real estate correction continues, it will broaden to the non-primary residential real estate markets and gain momentum, creating an entirely new problem for the banking sector. People will begin to walk away from vacation homes, commercial building, and maybe even apartments. More wealth destruction is ahead of us in real estate, and yes, that means a continued pull back in consumer spending and a reduction in tax collection, spurring higher taxes in the future.
...However, California is the world's 8th largest economic power with a substantial portion of the U.S. population. Any sizeable economic decrease in California has to affect the entire U.S. because of its size and shape. The quantity of business that is done in California that subsequently flows to other businesses in other states is huge. So too has been the flow of money out of this state into real estate markets in other states.
It only makes sense that the state (California) that benefitted the most from the bubble real estate days and the bubble economy will experience one of the sharpest economic declines within the United States. Unfortunately, it's 'too big to fail', in that a large economic contraction in California will only exacerbate problems for the national economy.
...After a consolidation of the current gains, I would expect the markets to move up again, forcing the monthly MACDs to cross and turn higher, which should signal we are in the middle of wave B up in the greater bear market. That move might last into late 2010 to 2011, and so we'll create the lower high needed to confirm a larger bear market supported by lower highs and lower lows.
In addition, such a move higher will once again suck in all the novice investors at the top, setting up one last wealth destruction move and thereby scaring generations away from investing in the stock market, which is ultimately what deflationary periods and large corrections do."
August 10, 2009
I begin with two links to book reviews in the New York Times:
'While Regulators Slept', by Paul M. Barrett
Here are links to two news stories on Bloomberg.com.
'Fed Focusing on Real-Estate Recession as Bernanke Convenes FOMC', by Scott Lanman. I quote it below.
'Consumer, Celebrity Bankruptcies May Hit 1.4 Million', by Linda Sandler and Andrew M. Harris. I quote it below.
'Rising unemployment on top of high pre-exiting debt burdens is a formula for higher bankruptcies through the end of this year,' ABI Executive Director Samuel Gerdano said in a statement. The group, composed of lawyers, accountants, bankers and judges, is based in Alexandria, Virginia."
Here are links to two commentaries by Mike Mish Shedlock on Minyanville.com.
Right now, we know that the jobs picture still sucks, that credit-card defaults are still rising, that bankruptcies and foreclosures are still rising, and the budget deficit is out of control.
Furthermore, we can easily see the massive $14 trillion balance sheet of the Fed while the benefit is debatable. The 'unseen' is the massive set of problems down the road unwinding the Fed's positions. Those consequences are, without a doubt, coming.
Presuming we're indeed 'on the brink of recovery,' what PE are you willing to pay, given that the recovery hasn't even started -- and we still face the seen and unseen consequences highlighted above?"
'The 'Recoveryless' Recovery'. I quote it below.
In regards to unemployment, there is no way the bottom is in.
In regards to housing prices, the same applies. The bottom is not in.
In regards to housing starts and permits the bottom is probably in.
At this point, the market has priced in a strong recovery, something that is not going to happen. And even IF the bottom is in, the market is likely to do nothing from here (at best), for quite some time."
And here is a note from Rich Kolon.
http://stockcharts.com/h-sc/ui?c=QQQQ,uu[w,a]walayiay[df][pb20][vc60][i]&pref=G
Simply. If the QQQQ is trading above the 20 week moving average, that is bullish for stocks. If the QQQQ is trading below its 20 week moving average, that is bearish for stocks.
In general this chart keeps working year after year.
It is not perfect. It would whipsaw you thru a sideways trend. But it definitely is a good guide when the stock market trends up or down.
Right now this purely mechanical method says we are in a solid bullish trend.
Now I suspect the reason is that cheap money (Tarp funds?) is channeling into the stock market, regardless of historic market valuation models.
And I can understand how investors may be perplexed by how the stock market is up strongly while funny money accounting is hiding the true condition of our banking system and the economy.
But this tool is telling us the buyers in the stock market have more money now than the sellers. (Since the Fed prints money up, that is the likely origin.)
Looking back at the end of the mania in 2000, paying attention to the price vs moving average is a good way to determine when to leave the general stock market as the mania ends.
We are not there yet.
Staying bearish under these conditions may not be profitable until the buyers run out of cheap money. My guess is that the Fed will keep on printing. So I naturally like 'real stuff' stocks."
