Equities, Real Estate and Businesses will Get Far Cheaper This Time Around..

The Current Recession Will be Bigger, Deeper, Longer and Immensely More Painful than Any Other the U.S. Has Experienced Since the 1930’s

Thoughts updated Sporadically at the bottom… latest: 11/28/09

January 16, 2009

The Thrill is Gone for a While

The credit and asset bubble created over the last ten years has burst. In response, the U.S. and other developed countries are experiencing the first global recession since World War II. Thecurrent condition is the first time since WWII that the U.S., Europe and Japan have all concurrently experienced economic contractions. Growth in the BRIC countries, what little there may be, will not offset the devastating effect of our severe debt hangover.

We are probably looking at 10 years until the bottom is established and the optimists can once again be fulfilled with a sustainable rally in price. Certainly there will be bear market rallies in the interim, but they will all be BULL TRAPS.  Eternally OPTIMISTIC Investors will buy these false rallies and their subsequent disappointment and liquidation will drive markets to new lows again.

The 2007 to 2012 recession is not going to be the typical two year dip. It is going to be far deeper and lengthier than any “slow down” since the Great Depression. This one is different. It will trap the optimistic investors which attempt the time tested “buy at the end of a recession” strategy.

A Little History

By early 2006 I became concerned that the real estate bubble was finally ready to pop. I sold all of my real estate with the exception of my primary home and began telling my friends, most of whom had “bet” on the eternal real estate rally, to be careful. In March of 2007, after too many cocktails, I informed my guests that the world was facing challenges from which it would take years to recover. I recommended that they “batten down the hatches”. Sell real estate I said. My prognostication was met with considerable skepticism. In September of 2007 I told anyone who would listen that I believed the game was officially over, the bell had rung, it was time to head for the exits in an orderly but rapid fashion.

In December of 2007 I liquidated whatever investments I had remaining (public and private equities) and plotted short strategies in the broad U.S. equity markets. My belief was that the irrational exuberance would be coming to an abrupt end. At the time, my forecast was not a big stretch considering the rapidly developing credit crisis.

In early December 2007 I had cocktails with a prominent tech investor. He asked my view of the financial world. I told him that I believed that the Dow Jones Industrial Average would see 8000 during 2008. At the time the DJIA was at 13,500 or so and this was deemed insane if not treason against man kind.

I believed and said during 2007 that the world was positioned for a dramatic crash which would occur over several years. A correction that would result in the decline of virtually every traditional investment class, business values, real estate and especially illiquid assets such as the rich folks favorite "investment” at the time, yachts and corporate jets. I predicted major bank problems due to real estate and consumer credit issues. Note that I did not predict nor understand the massive size and global magnitude of the bank derivative problems that unfolded in 2008 which will continue well past 2010 in my opinion.

Bears are NOT Popular, Especially When They are Right

My views were not particularly popular with my friends and business associates (humans are optimists) but right or wrong, my predictions were well documented. Note for credibility purposes that I sold my Southwestern real estate in 1986 and got short the tech equity complex in April of 2000. A great trade which I incredibly, and stupidly in hindsight, closed out on September 10, 2001… missing one of the biggest two day crashes in history and thus MASSIVE profits.

And note that in April of 2008 I told my yacht broker to sell my yacht fast so that I could use the proceeds to GET SHORT THE STOCK MARKET. It sold in June just before the market for yachts crashed along with the equity markets. I miss it. But they are cheaper now.

So Much For My Genius History (No jet, no yacht, so I can’t be that smart)

Optimism Might Be a Trap This Time Around

Man is an optimist. He wants to believe that there is good in everyone and that things will only get better over time. Businesses will increase their revenues and earnings, real estate will always go up, economy will get better starting any day now. If it is not going up next month, it is next quarter or next year.  It is an innate human trait to be bullish and positive.

Watch the financial shows on TV. The pundits constantly look for bottoms in a market, even when it goes down every single week. They do not mention that you can make just as much money when prices of stocks or real estate or commodities go DOWN as you can when they go up.

Why are the pundits always bullish? Their audiences are optimists. They believe that a bottom in whatever market is just around the corner. I doubt there would be a market for a TV financial channel that predicted lower markets. Sure they would have been right, but no one wants to hear the forecast that their 401K is going down 40% this year or that the value of their home will drop 30% in two years. Yes, that is exactly what happened in 07/08, but no one wants to hear that prediction. They want to hear… THE BOTTOM IS NEAR! It sounds much better.

When I, the bear, am at a cocktail party listening to the moaning of losses and am asked my opinion, bringing up my bearish view does not draw a crowd. Instead, people seem to want to head off to the bar and cheerier conversations. Bears are just not popular even if and especially when the bears are right. It is un-American to be a bear on stocks and real estate. It is part of the innate optimist complex to berate the bears and drink with the bulls.

History Says Buy Low, Hold, Get Rich

Guaranteed financial and business success has historically only been a matter of picking the bottom and waiting until the inevitable recovery before an “investment” begins its ultimate recovery. And history has proven this strategy over time to be correct. Average down, buy more now, if you liked it at $50 you have to love it at $40. And then buy more at $30.

Historically, great fortunes have been made by buying the dips and waiting for the inevitable recoveries. Businesses, stocks, real estate… just about anything. The commonly held truth is that you will always be rewarded by buying “straw hats in winter”. This is often difficult to do emotionally, but just ask Warren Buffet, this is how you make money over the long term. And until now, this has been an effective strategy.

Recessions in the last 70 years have been brief and relatively painless. No 30% drop in auto sales, no 30% drop in home values, no 31% drop in sales at Neiman Marcus at Christmas, no 50% drop in new boat sales. Wait two years and the economy, real estate and the equity markets always resume their inexorable march upwards. Buy low, be patient and make a fortune. It has been a great model for many decades. It may continue. Buy in 2009, heck we are already halfway through the recession. Until mid 2008 the recession was non-existent if you listened to virtually every “respected” economist. In some cases the really wild, bearish forecasters in early 2008 said that if we did have a recession it would be “mild” or “shallow”.

And if market conditions were the same as they have been for the last seven decades, the recession that was finally acknowledged late in 2008 would be manageable. But this one is different. Over the last 12-18 months we have witnessed the greatest turmoil and disruption in economic fundamentals in over a century. Yes, more turbulent than the big one in the 30’s.

This is not a typical recession. My belief is that this time the world is a different place. Buying at the tail end of the typical two year recession and waiting for the inevitable return to bull markets in a year or two is going to be a failing strategy this time around. Maybe 10 years later, but not two. The world is dramatically different than it was in previous recessions.

Let’s examine today’s reality from the view of a realist, not an OPTIMIST. I am not quoting actual statistics and generalize in some areas here, but hey, this is a FREE website:

In no particular order, the following things appear to me to signal that our current “recession” is a little worse than those we have faced in the past… okay, a lot worse:

• The big, safe, Bank of AmericaCountryMerrill just got $138 Billion in various capital and guarantees from the Feds to avoid its insolvency driven by their brilliant acquisitions of Countrywide and Merrill Lynch. Two great examples of trying to pick a bottom in a bottomless market. Both would have gone to zero had Ken Lewis’ ego not driven him to buy these “bargains” for a combined $24 billion. Note they also took $10 billion in equity from private investors in the fall, plus the $25 billion in TARP money they also got in the fall.
• The Feds nationalized Freddie Mac and Fannie Mae. The U.S. Government is now the direct owner/lender of 70% of the mortgages issued in the U.S. (this week at rates below 5% !)
• Home foreclosures in 2008 achieved an all time record and 80% above 2007.
• The Feds injected $150 billion +/- into AIG, the world’s largest insurance company to keep it from failing.
• The Feds invested $280 billion of new capital into the nation’s largest banks and investment banks and 200+ other banks with more waiting for their 5% preferred capital (a gift from the taxpayers).
• The Feds guaranteed $300 billion of Citibank assets and invested $45 billion in Citi which has a total market capitalization today of about $20 billion, down over 80% in the last 12 months.             ------- Note these FED investments were AFTER Citi and other large banks tapped sovereign   wealth fund suckers for well over $50 billion in new capital earlier in 2008.
• Two of history’s largest bank failures occurred in 2008; WAMU and IndyMac, Wachovia, which repeatedly said they had no major loan issues, was gifted to Wells Fargo along with $14 billion of tax benefits. A nicely disguised bailout.
• The Wall St. Journal “Winners’ Circle” tracking of 1700 mutual funds performance in 2008 had exactly ONE FUND that made a profit for the year. It made 0.4% gain for the year.
• Consumer confidence as measured by various indices is at a record low… note consumer spending is estimated to account for 70% of U.S. economic activity.
• Retail sales in Dec. of 2008 dropped a record 3.1%.
• Jobless benefit applications in Dec 2008 reached a 26 year high.
• U.S. auto sales dropped to 13.4 million units in 2008 from 16+ million units in 06 and 07, note however that the sales rate during Q4 08 was at an annualized pace below 11 million units.
• The Feds have loaned Chrysler and General Motors $14 billion with promises of more.
• In Q3 08, the Big Three Detroit automakers had combined losses of $18 billion in cash, not accounting tricks. This was before sales completely fell off the cliff.
• During 2008 the Feds gave U.S. citizens $160 billion dollars; not in tax rebates (you did not have to be a taxpayer to get a check). Its effect was minimal.
• The seemingly infallible, and ineptly named HEDGE FUND industry had global assets of $2 Trillion at the beginning of 2008 and $1 Trillion at the beginning of 2009. About $150 billion was withdrawn from them in December 2008 alone. And this was after most major hedge funds put “gates” on withdrawals, limiting what could be withdrawn.
• U.S. retail boat sales were down over 40% in 2008 vs. the already dismal sales levels of 2007.
•  Corporate jet prices dropped about 12% in Q4 of 08 with inventories of planes for sale up over 50% in one year.
• Purported and reported unemployment rates are above 7%... (look for the low teens before this is over....)
• Lehman Brothers, one of the top five largest investment banks in the U.S. filed for Chapter 11 in 2008.
• Chrysler sales in Dec 08 were down 55%... their financing arm just got a FED bailout loan of $1.5 billion to finance consumer purchases of their cars at 0%.
• Bear Stearns, another one of the five largest investment banks failed and was acquired by JP Morgan Chase with a guarantee on $29 billion of assets from the Feds.
• The remaining large investment banks became bank holding companies to tap the liquidity of the Feds.
• GE, one of the only AAA rated credits in the U.S. was forced to issue bonds guaranteed by the FDIC after taking $3 billion in new capital from Warren Buffet at usurious (or so it seemed at the time) terms.
• Goldman Sachs, the shrewdest of the NY investment bankers took $5 billion from Warren Buffet at yields they never would have imagined six months prior.
• The Federal Reserve Bank’s balance sheet has ballooned in total assets from under a trillion at the beginning of 2008 to over two trillion at the end of the year. The balance sheet was filled with purchases of securities to maintain an orderly market.
• To calm the commercial paper market, the Federal Reserve is guaranteeing and buying commercial paper from U.S. corporations. Note part of this operation was also to bail out the money market funds.
• A major money market fund “Broke the Buck” and froze redemptions. (And do remember the Auction Rate Certificate market freeze of 08)
• The Feds shortly thereafter guaranteed all money market funds.
• 30 Day Treasury Bills are actually yielding below zero.
• The FDIC increased the insurance limits on deposits from $100,000 to $250,000.
• Of the 1500 Mutual Funds tracked by Barron’s, one made a profit in 2008.
• Bill Miller of the Legg Mason Funds, a perennial top performing money manager for over a decade, posted a loss on his funds of over 55% in 2008. He might sell his 234 ft. FEADSHIP motoryacht, but will most likely lose money on it since he bought it in 2006… just before the top.
• The U.S. budget deficit is predicted to hit a record approaching $1.2 Trillion. Bets on whether this is an understatement?
• U.S. Mortgage rates are at record lows, below 5% for conforming home mortgages.

Okay, enough bad news. You optimists did not read down this far anyway. You get the point from these various 2008 hilites. Note space did not allow me to discuss the bailouts going on around the globe of similar magnitudes.

This recession is unlike any other. Why else would the new Obamanation be planning a trillion dollar “stimulus” plan upon inauguration?

So what does this mean for investors?

Most “experts” at this point are telling their followers that like other recessions in the past, now is an historic opportunity to acquire assets. Assets such as equities, real estate, etc. A few are recommending gold, but not many. The logic goes something like this… Stocks are trading at historically low levels relative to their earnings, buy them now and hang on long term. Real estate will bottom in mid 2009 and present unique values for investors. Not this time. IMO.

Keep in mind that these are the same experts that said things like: real estate never goes down, and that the equity markets were a buy in 2000 at 5000 Nasdaq and a bargain at a 13,000 DJIA in 2008. They were wrong then and they are wrong now.

This Recession is Different and Thus Your Strategy Must be Different

Here comes the hard part.

The Prognostication. The Forecast. The Prediction. The Actions.

We are in the second year of a five year, or longer, plunge in equities, real estate and many other asset classes. The equity markets will continue down. Not straight down, no crash, no climactic bottom, but rather a sawtooth shaped chart down. There will be many rallies on the way to the bottom. At the bottom the pundits and experts will be finally saying there is no bottom. That is when you know it is over. When the experts say it will go down forever.

This decline will look like a bottom in 2011 or 2012, but it will go lower before forming a long slow base. And someday it will finally come back. Someday being more than five years at a minimum.

Equities

The equity markets will make new lows, then rally 10 to 20% or so, making the pundits believe “the bottom is in, it is time to buy!!!.” The most recent one of these rallies from the Nov 08 DJIA low of 7400 ended in mid January 09. It will then reverse and head to new lows. Again and again and again. This is not a month, or a quarter, or a year, this will last ten years. The first three years will be the most difficult and volatile. The DOW will see something around 4XXX and the S&P will see something around 4XX.

Profit from this by trading from the pessimist view. Sell the rallies. While the others are buying the dips, like the good little optimists they are, you sell the rallies. Go short. This is a lot easier than it used to be. Check out the Exchange Traded Funds (ETF). Some of my favorites are SKF, SRS, SDS and DXD. Or if the optimist in you cannot get short, you can buy the dips, temporarily, but remember you are TRADING not investing. Do not fall in love with your long positions because they will hurt you.

Real Estate, Residential

Your personal home is not an investment. It is a place to live. Treat it as such. This is a new concept and tough to swallow. If you have more home than you can afford, sell it as it is not going up. Yes, there are exceptions to this in a variety of geographic areas, but as a general rule, prices are going lower. Using the rule of thumb that RE is already down 20% nationally from the peak, (a 100K house is now worth 80K) we probably have another 30% down to go such that the 100K house will be worth 56K. Call it a 40% drop off the top. Ballpark. Some areas will be worse, some will be better. A few areas will even increase. But it is not an investment, it is a house. A place to live. The game of buying larger and larger houses is over for a while. A long while.

Fortunately for some home owners, the Feds will use your tax dollars to prop up the real estate market. For some reason we have to support all the speculators (virtually every home owner) who bought more home than they could afford because it was a sure bet. A guaranteed profit. This will not work long term. Prices are going lower no matter what they do. The psychology has changed. It is no longer a guaranteed bet. Some will buy the bottoms thinking they will get the bargains of a lifetime. And some will. But most will be buying a false bottom. It is going lower.

Real Estate, Commerical

Commercial real estate properties are a little different. They are worth a multiple of their income streams, their rents. But note as businesses fail and consumers lose their jobs, they stop paying rent. Rents in general are going lower. Yes, there is the argument that since building has stopped, demand will grow and soak up the supply and thus rents will increase over time. Agreed. In about ten years. In the meantime, rents are going lower and thus the value of real estate is going lower. Again, this is a generalization. There will be plenty of local and regional exceptions.

But keep in mind that no matter how good the credit of the tenant, things can change quickly in this deteriorating economy. Not a two year deterioration, but a 10 year deterioration.

There are too many malls, strip centers and office buildings for our frugal future. Vacancies will soar. Malls will close. Shoppers will stay away in droves. Retailers will fail, not to be reorganized, but rather liquidated. (see Circuit City) A third of the car dealers will close. Half of the boat dealers will be gone in two years. Office space users will have fewer employees and more will work from home. We will experience negative office space absorption nationally. This is of course heresy, but mark my words, it is coming fast. The one exception might be Washington, DC. Your tax dollars at work creating new regulations and bailout programs with the need to house the recipients of this largesse.

Other Assets

Human psychology is what drives much of a market’s ups and downs. When things are good, people spend money. They flaunt their wealth. When times are bad, even those with money tend to spend and show less of their wealth. Neiman Marcus December 08 sales were off 31%. Displays of excess are not encouraged in down times like they are in the big bubbles.

Luxury car sales are down just like pickups, and will stay down. But the rich were going to be exempt from this right? Porsche was going to sell more cars than ever no matter what the economy. Wrong.

Corporate Jets? Down 10 to 20% in price Q4 08 with the used inventory for sale up dramatically. The deposits for new delivery orders are being abandoned. A year ago if you wanted a new Gulfstream 550, wait two years. Today, a delivery next month is no problem. Backlogs for new planes are crashing and the corp jet makers are laying off people weekly. The boys in the auto business screwed up the private jet travel for corporate America. A corporate flight department a week is being shut down. Will all the execs fly commercial? No way. The charter business, already soft, will pickup SOME of the slack but will continue to slide. Large exec jet charter and fractional operations were off 30+% in December 08 vs. 07.

Big showy houses? Remember the 30’s? The maintenance bills on these things rendered them virtually worthless in many places if not just completely illiquid. Remember, this is not happening all at once, it is happening over TEN YEARS. Ten long painful years with new lows every year.  Yes, some big houses will still sell, but at decreasing prices over time as cash strapped owners lower their prices just looking for a bid… any bid. The bids will be few and far between and at levels far below 2006.  Cash is king.....liquidity is rare.

Yachts… I am familiar with this market and as recently as early 2008 the standard mantra from the yacht experts was “there are so many rich people in line for 100+ foot yachts that this market will go up forever.” Like the showy houses, this game is over. A year later, the expensive yachts are for sale at what look like bargain prices. They are not. Wait five years and then compare today’s prices to those in 2014. Some of the same yachts listed today will be on the market at HALF of today’s prices or less.

Gold

With everything else going down for a while, gold is the one thing you should probably buy. At $800 it does not look like a bargain, but $800 will probably look like a bargain in about a year. The debasement of the U.S. dollar will eventually result in some sort of large problem for the dollar.

Will it be inflation? Hyper inflation? The government certainly hopes so. It makes paying the debt back cheaper. At the moment the U.S. dollar is relatively strong as the other countries are experiencing their own problems. However, our printing presses are running faster than theirs. The basic economic laws will eventually catch up...

Under the Obamanation, there is no hope for spending cuts and smaller government. Not that Bush was good at shrinking government, but the handouts are going to get bigger and spread to less productive segments of the economy. Give Halliburton a couple of billion and they make productive use of it in generating jobs, goods, bribes, etc. Give a couple of million unemployed people several hundred billion dollars and all you get are less hungry families that stay in their houses another year before mailing back the keys. Not a bad goal, but not one which revives the economy like giving money to productive, job creating businesses. Just my opinion.

In a Nutshell

What looks like a bottom is just a dip in a long bear market. Don’t let the natural, bullish optimist in you lure you into the trap. Go sailing for five years and it will all be cheaper when you get back. Promise.

January 27, 2009

The Inauguration

Think about it for a minute… from the WSJ: “drew a crowd of well over one million to the National Mall..”

Was this a National Holiday? Did these people all skip work? Or were they all unemployed and had nothing else to do and showed up hoping for more handouts from actual tax payers who were back in their plants and offices working? Are we concerned about our national work ethic after they all had the day off the day before due to Martin Luther King day?

From Forbes Feb 2, 2009 cover issue received over this weekend.

David Dreman writes a column “The Contrarian”

In his column this week, in updating his favorite stock picks:

“…I would keep only Bank of America (BAC, $14) and Fifth Third Bank (FTB, $8) for 2009. They are good values.” Note these two stocks closed last night at $6.25 and $2.75 respectively.

His wisdom continues with “I would continue to hold… Best Buy (BBY $31… now $28.40) Carnival (CCL, $25  now $19.07), Target (TGT, 37… now $33.48), General Electric (GE $17… now $12.30) … All are well managed companies….” 

I am sure this is true, but they are, like The Contrarian himself, eternal optimists.  

I realize there are lead times to producing a magazine… but you get the point… picking bottoms in a bottomless market is a very tough business even for a professional “contrarian”.

And as a final comment… if President of the Obamanation had not commented on it, I would skip it.. but John Thain’s Merrill Lynch office remodel did not include a new toilet, it was a COMMODE which is a piece of furniture… not an expensive place to take a leak… come on guys, the leader of the most powerful nation in the world should know the difference. Yes, his father was a goat herder (see WSJ story, 1/21/09) but he did go to Harvard for Pete’s sake… they teach this stuff up there.!!!

March 23, 2009

The Shell Game…

I heard an interesting statistic this week about the total “investment” the U.S. government has made in the bailout efforts.. over $11 trillion. I find it amusing that the focus of the press and politicians this week is on the $160MM being paid to AIG execs under existing employment contracts. Out of the $200B we have blown at AIG, this does not seem very relevant. (For the record, I don’t think the U.S. Govt. had any choice in this bailout as this was truly systemic risk when you look at the counterparties involved… not bailing out AIG would have bankrupted not only Goldman Sachs, but also Virginia and California.)

While focusing on nominal bonus issues, there is no mention of the total magnitude of the money we taxpayers are pumping into the system to keep it afloat. Scary not just in the $11T, but more so in the focus of our elected wizards on bonuses. The house is burning and we are worried about a nick in the woodwork.

The 750B TARP program appears to be just a small part of the bail out dollars that the government created to keep our eye off the real ball; the trillions that were not approved by Congress that are being spent with abandon. The TV pundits sort of understand TARP, but the other $10B is too complicated for them nor their viewers to grasp, so it goes unmentioned.

FDIC Follies

I will forecast that it will eventually be revealed that the FDIC has allowed hundreds of insolvent banks to remain operating as the government lacks the staff and the capital to shut them down.

A Big Bank that Does Not Have to Mark to Market

GE’s disclosure about the GE Capital portfolio this week is a little scary. Their loss reserves appear to be grossly inadequate across the board.  When you don’t have to “mark to market” your portfolio, maybe you can get away with this…

One example: GE’s real estate investment portfolio owned (not loans) is $34B of which 16.6B  was purchased in 2007 (the tippy top of the froth?), yet they are only forecasting a drop in value of 1.9% in 2009. Seems a little out of whack with reality with vacancies rising and effective rental rates collapsing globally. Maybe the entire portfolio is in DC where values have been bolstered by Elliot Spitzer’s recent purchase there. Good to see Mr. Morality weighing in on the AIG bonuses this week too.

There are armies of Wall Street analysts following GE, thus I am sure I am missing something here, but it does not feel right to me. Maybe $5 was the right price for GE after all?

Gold

I guess I was right about this back in January. Be interesting to see where it goes. It makes me nervous when analysts from Citi and Merrill Lynch use numbers like Gold $2000. Their forecasting track record has not been the best…  

Corporate Jet Useage, a Leading Indicator

Yes the auto execs are driving now, but jets are a productivity tool of tens of thousands of businesses. One of the unwatched indicators by the Wall Street experts is corporate jet utilization.  The following shows that jet owners, charterers and fractional users have pulled back hard on the yoke:

Compared with February 2008, business jet and turboprop traffic fell 26.6 percent last month, though it is 23.98 percent when adjusted for the leap day last year. All segments saw year-over-year flight activity decline last month, (Feb. 2009) with large-cabin aircraft taking the largest drop at 41.4 percent. Turboprop activity decreased 19.9 percent year-over-year; light jets, down 28.4 percent; and midsize jets, down 24.1 percent. By operator type, Part 91 flying slipped 15.5 percent year-over-year; Part 135, down 46.7 percent; and Part 91K/fractional, down 28.1 percent.

The Next Shoe to Drop?

Folks who watched their equity portfolios drop over 50% in the last 12 months might find this little consolation. It seems that the pension funds shared your bullishness and are now grossly under-funded… or I suppose I should say more grossly under-funded given their previous returns assumptions.

The State of Illinois for instance has a $70B deficit at the moment. When you run a pension fund like a casino, it is great when you are winning, but very hard to fix when you are not. Pension funds of course invested hundreds of billions in such winning strategies as real estate (it never goes down remember) private equity and bonds. Bond values are up, but investing in them today will not recoup a $70B deficit with 3% yields on Treasuries. In fact, watch the pension funds do just that and shift into long term treasuries which will decline in value once rates head higher.

I would watch for a big shoe to drop when some enterprising analyst/reporter weeds through the corporate 10K’s coming out this spring and totals up the unfunded pension liabilities at corporate, state and local government America. This is not exactly new news, but when it is quantified and totalled, it might get a reaction… and not a good one. The bull and politician’s argument will be that these are very long term liabilities and that they only need to wait until the stock market and real estate rebound to recoup their losses.

The Optimist Risk again rearing its ugly head.

Imports, Exports and Industrial Production

If you are reading this, you no doubt read at least The Wall Street Journal and the liberal voice, The New York Times. Note their recent articles on global industrial production, imports and exports:

A couple of interesting points, recent stats: Taiwan, production down 40%+, Chinese Exports: down 35%, European production: down dramatically. These are leading indicators that all is not right as these are the biggest drops in post WWII history. Note also Maersk, the big container shipper reports YTD volumes down 20%.

And the Psychology of All This

A good article by Peggy Noonan in the March 14/15 issue of WSJ:  Gun Sales, as measured by the FBI’s criminal background inquiries:

                                                   UP 23% in Feb.

                                                   UP 29% in Jan.

                                                   UP 42% in Nov.

“Smith & Wesson stands for protection.” People are scared. “ Of what? the new Robin Hood mentality? (Take from the “rich” and give to the “poor”) or is it that crime rates are soaring?

Same article: “I went to the U.S. Mint Web site… but there was a six week wait due to high demand (for gold coins). (I just went to the website again: Production of gold eagle coins “has been temporarily suspended because of unprecedented demand” for bullion.)

I thought the U.S. had the largest gold reserves in the world? Goldfinger got caught before he stole it all I thought? Remember his pilot’s name? Sure, Pussy Galore!

And Church attendance is Up!

April 20, 2009

Obama Shaking Chavez’s Hand with a Smile

In full color on the front page of the NY Times on Saturday we have our nation’s leader smiling and shaking hands with Hugo Chavez. This guy is a thug. He has nationalized (stolen) billions of dollars of U.S. industry’s assets from power generation, telecom and oil and gas. I personally know a couple of the industry leaders who have met with this terrorist face to face and it was not pleasant. And the leader of global capitalism is photographed smiling and shaking his hand, more than once? This in itself should be grounds for impeachment either for being ignorant, naive or worse yet, complicit. It scares the shit out of me and it should do the same to you.

Leading Indicators

I like to think my prediction track record is pretty good. I am not an economist, but there are available statistics that lead rational, realistic thinkers to conclusions about the direction of the U.S. and global economy. A few of recent note: 

• U.S. rail shipments declined 16% in Q1 2009
• Maersk (now famous for the pirated ALABAMA) saw container shipment volumes drop 20% in Q1 2009
• On Friday, the FDIC bank shutdowns YTD matched all of 2008 
• The FDIC bank closures in 2008 were more than the five previous years combined (3 in ’07)
• FDIC insurance fund is at a 25 year low with $18.9B at end of 2008 vs. $52.4B at end of ‘07 
• Banks and other financial institutions have sold $238 billion in FDIC guaranteed bonds and only $33 billion in nonguaranteed debt since the program began less than six months ago. And the FDIC is going to pay for a default HOW? 
• JP Morgan Chase has issued 40B of bonds guaranteed by the FDIC and they are not the biggest issuer… this is NOT in the TARP slight of hand scheme totals 
• Recent UBS study says the used biz jet inventory is up 69% in last 12 months with asking prices off 20-25% and actual trades well below asking prices 
• Res foreclosure rates at new highs, building starts almost at new monthly lows and price declines accelerating 
• Auto sales still dismal despite billions of govt. financing to captive auto finance companies to enable zero percent financing again

The U.S. Govt efforts to stabilize the financial markets, totaling somewhere around $13T have actually stabilized the financial markets, thus a nice equity market rally. Note though that in my opinion this is a classic bear market rally. Bigger than a dead cat bounce, and maybe not over yet, but I stand by my predictions of a 4 in front of both the DJIA and S&P 500 before this is over. See you in a couple of years.

Global trade is crashing (see previous notes above).

Real Estate Foreclosures

The nice thing about giving banks billions of dollars is that you get some say in how they run their business whether it is written or merely threatened.

Nancy Pelosi and Obama are a little concerned about foreclosures, so magically FNMA, FHLMC and the big banks put a moratorium on foreclosures… RE  prices continue to crash and thus the losses are magnified by the delay. Your politicians are making the problem bigger and more costly to you.  As they say in commodity trading, the best loss is the first loss.

Res. RE prices nationally dropped 18% year over year from March 08 to March 09. When would have been the best time to foreclose and liquidate the asset? Last year or this year? Yep, the faster the better. But that is not politically palatable.

The res RE market foreclosure rate, despite the government intervention, low mortgage rates, etc. is going to skyrocket. The bank failures (announced or not) are going up dramatically. Take a look at CORUS Bank as a good example. It is insolvent by any measure, but it is still operating. Virtually every RE development loan Corus has made is in default. Their Miami condo projects are not selling even at 80% discounts. Ouch. And this is not a tiny bank, but rather an example of the systemic risk not in the Big 10 banks, but in the next tiers down. It is a precursor of the future.

This will play out in a similar fashion in the commercial RE market. A good indicator is the John Hancock building foreclosure sale in Boston. Rough numbers: a $1.2 billion purchase price two years ago produces a $600MM foreclosure sale proceeds in Q1 2009. And this is a reasonably full, landmark building in a city that has been less affected than others in say California, Florida, Arizona, Michigan.

Reminder: of GE’s 34B in GECapital owned RE portfolio, about half of it was bought in 2007. If we mark that to market (and they don’t) then what is the loss?

I think the commercial RE market will certainly have higher foreclosure rates, but not at the same pace as residential. The existing lenders will stay and play by extending maturities and raising rates. There are no new lenders to take out existing lenders and perpetuate the shell game.

The banks with development loans are stuck and it will look better (on paper) if they extend and renew rather than foreclose and liquidate at market prices. The borrowers get to stay in control and collect their fees and the bank books a performing loan at a 2006 value for another year, two or three. They will pray for the rebound that will not come in one, two or three years. Then they (or the Fed liquidators) will take the loss, a much larger number, in about 2013. Then you will have a bottom. Asset prices do not bottom until the majority puke at the lows.

The Optimist Risk in Full Color

What is happening here? The answer is simple. Everyone is touting the same song… res real estate sellers, commercial real estate owners, yacht owners, jet owners… Those that are not FORCED to sell are all singing the same song.. “we won’t sell at these depressed prices… we will wait for the rebound.”  The assumption being that our current crash has bottomed and the inevitable rebound is just around the corner. It is not.

We have trillions of debt and leverage yet to be liquidated and dealt with. The American consumer is beginning to get it. The savings rate has skyrocketed. Consumer spending is contracting. Prices are going down. The March over March period was the first time of actual price deflation since 1950. DEFLATION.

It is not time to buy ANYTHING except maybe gold and foods. This is NOT the bottom. It sure would be nice, but it is not. Sorry. The “green shoots” are optimist bulltraps.

May 1, 2009

The Chrysler Socialism Con Job... I will take Don Corleone Any day... At Least he had HONOR! 

 As you may have noticed, my updates to this musing are usually prompted by an event.  Yesterday's  

event is the Obamanation attack on speculators holding secured Chrysler debt that refused to go along with administration's crushing of their secured legal rights in a reorganization of Chrysler outside of bankruptcy to benefit the UAW.  

If you missed this one, the majority of the Chrysler secured debt is held by banks under the government's thumb as TARP recipients. They agreed to take a 70% haircut on their debt. The majority "agreed" to this with significant administration pressure... (another sign that the nationalizing of our businesses and banks is NOT GOOD for capitalism).

The remainder of the debt holders (non-TARP recipients) said no thanks, they would take their chances in bankruptcy court where secured creditors SHOULD have priority over unsecured creditors, such as the UAW health obligations. The Obamanation plan called for the unsecured UAW creditors to get 55% of the reconstituted Chrysler. This is not how bankruptcy works. The secured creditors are supposed to get 100% paid, with interest, before the unsecureds get ANYTHING... and if the secureds cannot get paid in full, they usually get the majority of the equity in the restructured company and the unsecureds get NOTHING. That is the law. That is how bankruptcy is supposed to work. 

The Obamanation and various politicians used extreme strong arm tactics on the non-TARP secured debt holders to try to get them to "do what was right" and take and un-necessary haircut. When they refused, he berated them publicly and is certainly torturing them in retribution behind the scenes and forevermore.

Certainly the TARP funded banks had no choice, but the other guys said "HELL NO. We have a fiduciary duty to our investors to get the highest return, and we sure as hell are not in the business of subsidizing the UAW." 

Note the Obamanation plan was to do just that. Screw the creditors in favor of the UAW. My cheers to the creditors who called Obama out on this socialist ploy and said NO. The UAW will win anyway, but it is the principle... not the principal.  

If you think government involvement in American business is OK, this is an example of why it is not... and we are only 6 months into government dictating what their bailed out subsidiaries (BofA, Citi, AIG, etc.) will be doing to the rest of business. It is ugly.  

And while I am ranting about government ineptitude... this just in from the National Petroleum Refiners Association daily newsletter: 

‘Offshore Oil Drilling: An Environmental Bonanza’                                                                          From an article in the American Thinker: “On Earth Day, Secretary of Energy Steven Chu and Secretary of Labor Hilda Solis wanted to make Obama's energy policy perfectly clear: ‘If we are going to create clean energy industry jobs in this country,’ they write in a widely syndicated op-ed, ‘break the stranglehold that foreign oil has on our economy and punish the polluters who are devastating our natural resources, then we've got to be honest about the difficult tasks and tough choices ahead. It's going to mean telling the special interests that their days of dictating energy policy in this country are over.’ Indeed, and we can start with groups like the Sierra Club. ‘Environmentalists’ wake up in the middle of the night sweating and whimpering about offshore oil platforms only because they've never seen what's under them. Louisiana produces almost 30 per cent of America's commercial fisheries. Only Alaska (ten times the size of the Bayou state) produces slightly more. So obviously, Louisiana's coastal waters are immensely rich and prolific in seafood. These same coastal waters contain 3,200 of the roughly 3,700 offshore production platforms in the Gulf of Mexico. These oil production platforms off the Bayou state's coasts also extract 80 percent of the oil and 72 percent of the natural gas produced in the Continental U.S., without causing a single major oil spill in half a century of this process. This record stands despite dozens of hurricanes -- including the two most destructive in North American history, Camille and Katrina -- repeatedly battering the drilling and production structures. So for those interested in evidence over hysterics, by simply looking bayou-ward, a lesson in the ‘environmental perils’ of offshore oil drilling presents itself very clearly. Fashionable Florida, on the other hand, which zealously prohibits offshore oil drilling, had its gorgeous ‘Emerald Coast’ panhandle beaches soiled by an ugly oil spill in 1976. This spill, as almost all oil spills, resulted from the transportation of oil -- not from the extraction of oil. … The production of oil is relatively clean and safe. Again, it's the transportation that presents the greatest risk. … For fear of oil spills, as of 2009, the U.S. Federal government and various states ban drilling in thousands upon thousands of square miles off the U.S. Coast. These areas, primarily on the Outer Continental Shelf, hold an estimated 115 billion barrels of oil and 633 trillion cubic feet of natural gas. This leaves America 's energy needs increasingly at the mercy of foreign autocrats, despots and maniacs. All the while worldwide demand for oil ratchets ever and ever upward.”

The Power and Apathy of Democracy

Ken Lewis, the CEO of Bank of AMerillCountryLynch was voted out as Chairman this week, but a stunning 63% of the shareholders voted to keep him as CEO.. effectively. This is the same guy that has presided over an 80% drop in the share price of BAC and who thought the real estate market had bottomed in the summer of 2008 and bought Countrywide and then followed that brilliant trade by agreeing to buy Merrill Lynch at an absurdly high price in Sept. of 2008.

When Ken figured out that Merrill lost $18B+ in Q4, he tried to back out of the deal (first smart move yet) but when faced with the Government wrath and threatened firing from Sec of Treasury Paulson in Dec. 08 he went ahead and bought Merrill anyway without telling his shareholders of the little loss problem.

Yes, the feds gave him another big TARP preferred purchase and a guarantee on 100+B of Merrill's problem assets so it may have been a smart deal, we don't know the details. But what amazes me is that he has not been removed by the SEC due to his failure to disclose this little problem to the folks that pay the bills, the shareholders. If this were you and me we would be cooked. More amazingly, the apathetic (or stupid) shareholders let him keep his job!

And Kenny's fears of getting fired by the Treasury were not unfounded as manifested later by Obama's ouster of the GM CEO, Richard Wagoner. .... And I thought the shareholders were supposed to do this?

And a few economic statistics for you bulls out there:

• It is official, Phoenix is first city to break the 50% barrier. From 2006 to March 31, 2009, residential real estate prices have dropped almost 51%
• Same time frame; Vegas down 48%, Miami a mere 45%. Los Angeles and San Diego only 40%. These are month old stats, so Vegas and Miami could have gotten to the 50% goal line by now, but Phoenix holds the crown as first to get there. Congratulations! 
• Sun Micro, Q1 revs off 20%
• Wireless Handset sales dropped 13% globally in Q1 2009. Only 245 million cell phones sold for the quarter. The optimistic reporter on this did NOT say "sales fell" and instead said this: "All of the top five handset vendors grew at negative rates." This guy can get a job at CNBC or in the Obamanation Administration. Grew at negative rates? 
• Treasury reports that bank loans in Q1 (non res RE) fell 47%. Lend at the top, not at the bottom. Look up Lemmings. 
• From the FT this week re the GM reorganization: "The UAW would get almost half the equity while noteholders, whose claims have legal parity, would get a fourth as much for debts more than twice as large." No politics here folks... 
• For those of you who have researched the Obamanation background, you will find that he has been actively involved in Kenyan politics since his early days as a US Senator. It is his father's country after all... In a recent news item Kenya where the Obamanation sponsored socialist candidate Odinga is fighting the current president Kibaki, a new faction has weighed in on the battle using the ultimate weapon, The Power of Pussy: 

Headline: KENYAN WOMEN CALL FOR SEX BOYCOTT OVER POLITICAL DEADLOCK. (really, word for word).

"Kenyan women's organisations have called for a nationwide sex boycott to force feuding male politicians in the coalition government to resolve their differences. The women are prepared to pay prostitutes to withhold their services for a week to make the campaign more effective."

 (Note the last skirmish between these two honorable politicians resulted in the deaths of

1500 Kenyans in the aftermath of disputed elections).

 "To ensure solidarity among the 7,000 sex workers in the Nairobi central business district, the women's organizations plan to provide financial support to them during the boycott."

This was of course in response to this tidbit: "men interviewed for an opinion poll within hours of the launch on Wednesday said they would go elsewhere for sex if their partners "got involved". This is from the FT, not Mad Magazine, so I am going to assume it is real. 

• The bullish pundits can sure spin... after releasing the US consumer spending numbers for March, which were not particularly bullish in my view, here is the economists analysis:  "the economy is on the cusp of a growth rate cycle upturn." (Economic Cycle Research Institute) Later in the same article these little unsung numbers popped out at me: "an unusually large once-yearly cost of living adjustment to social security and other benefits (more spending of your tax dollars) and an unusually  big drop in personal tax payments...  In cash terms benefits rose at an annualized rate of 21% in the first quarter, while taxes fell (receipts not rates) at an annualized rate of 43%."

If this one piece does not tell you all you need to know about Obamanomics and the future of our country's economy, I don't know what does; expenditures up and revenue down. Higher rates do not make for higher revenues, they just do not get this...  Caterpillar sales off 22% in Q1, over 40% in U.S. but flat in Asia.

• Whirlpool revenues off 23% in Q1.
• Brunswick boat sales (Sea Ray, Bayliner, Boston Whaler, Hatteras among others...)  sales off 64% in Q1.
• California real estate transactions UP in Q1 at prices down 38% from the highs.. statewide. 
• Think foreclosures are going down? In Broward County FLA, (Ft. Lauderdale)  a friend of mine is trying to foreclose. Backlog to process it "at least six months, we are too busy"  Note here: Statistics lie when moratoriums and the actual process modify the numbers. 
• The S&P 500 is up 29% since the March 9, 2009 low... the market climbs a wall of worry as they say!

July 7, 2009

Events Drive My Comments As I Have Pointed Out Before...

Billy Mays, May He Rest in Peace

Someday all advertising and marketing expenditures will be judged by the leads, prospects and sales they generate... Ad agencies will hate this as random creativity for creativity sake will be lost. Ads and marketing measured by their effectiveness in generating SALES not awards? A good thing? Do I need to ask?

AMEN

Today the U.S. House of Representatives had a moment of silence for Michael Jackson. How many moments of silence have they had for the non-child molesting soldiers who are getting shot at daily in Irag and Afganistan? Almost 3000 U.S. soldiers have given their lives for our country in the Middle East lately.

Michael Jackson died of drug overdoses and paid $20MM to parents of children he molested. I have a problem with this. You should too. The perverts are idolized, the heroes forgotten. Not a good sign for society.

• The Moodys/REAL Commercial Property Price Index declined 8.6% in April from the PREVIOUS MONTH. (Yes, that is a 100% annualized rate of decline) But it is not going to zero... but it may feel like it to some of the banks holding the paper...
• Prices for commercial RE were 25.3% lower than in April 2008, a drop far worse than residential price drops making all the headlines. (See my previous point about GE's reserves for RE owned that was purchased in 2007) 
• Percentage of U.S. homes with negative equity (by metro area) in Q1 of 2009:

                                         Vegas: 67.2%

                                         Stockton: 51.1%

                                         Port St. Lucie, FL: 43.5%

                                         Phoenix:  41.7%

                                         Orlando: 41.7%

                                         U.S. Average: 28.9%

Now explain the pundits views of green shoots and a turnaround in Q3 2009? And see my previous comment about the first loss is the best loss. Think those foreclosure deferrals mandated by the government were a good thing for the banks? Repeat: THE FIRST LOSS IS THE BEST LOSS.

• The Governator said "California will not default on its debts" and two days later started handing out IOU's instead of money to pay debts.  (And you thought I only picked on the Dems)
• Greenberg of AIG won his STARR case today... where was Spitzer to apologize? In a whorehouse?
• Wilbur Ross said today in explaining why his funds are getting involved in the government PPIP program.. "another 500 banks will fail before this is over and there will be opportunities"... and he is an optimist, put me down for 1000+ in next 48 months. 
• My corporate jet usage index gave some interesting signs for May: May over May, flight operations down 27% year over year. Down 28% YTD.
• In a tiny article in the WSJ, the Pension Benefit Guaranty Corps. former director invoked the Fifth Amendment.. and their deficit TRIPLED in the last six months to $33.5 Billion. My math says that is an increase of about $3.5 billion per month.. peanuts in the world of $750B bank bailouts and $787B social spending programs called stimulus.. but nonetheless a real number.. and that was BEFORE the GM bankruptcy... speaking of which..

Pop Quiz

In relation to the bank fiasco, the Government Motors bailout projects are a relative pittance, but I will bet you do not know how much the taxpayers have invested in the Auto Unions... errr... Auto Companies... and programs to assist them.. go ahead and guess.. you were in your mind thinking $30-50B weren't you?

Come on admit it.. but the real numbers:

Yes, $97.9Billion. And Canada tossed in another $6.3B for good measure... Call it $100B for easy figuring. Yes, no where near $200B in AIG... (Goldman is more powerful than unions) but still what used to be called a big number. And note, I have not included the loans for energy efficient car development which are another several billion.

Minimum Wage Increase Effective This Week! Yippeee!

Enough pessimism. These damn bears. The minimum wage was increased today to $7.25 per hour, an increase of $.70. At least 2% of all currently employed workers will benefit. It's a happy day! 

Unemployment in the Teens

Note my Jan forecast on unemployment of "in the teens" made in Jan of 09.. not long ago. Someone pointed out to me that this may not occur due to the expiration provisions of unemployment benefits so many will fall off the rolls before the new folks join. Not sure on this, but will get back to you.

The Plagiarist vs. The Socialist

Joe Biden came out this weekend to say that in Jan the new admin did not understand the magnitude of the problem.. or was it "underestimated"? In any case, the Chief Socialist spanked him in an interview later, saying Biden  "mis-spoke" or something to that effect.. and the reported unemployment rate is up to 9.5%. Teens here we come... Biden was busted for plagiarizing.. did you expect him to be an economic forecaster?

S&P Earnings

A very smart trader who has lived through the markets for 60 years asked me today what I thought the S&P 500 earnings for 2009 would be. I admit to being taken aback by this question as I did not think there would be ANY earnings.. He mentioned a consensus forecast in the high 20's.. I think anything above zero would be a miracle.. but then I was reminded of the new bank accounting rules changing the mark to market rules, thus improving financial's earnings... I guess the question is: earnings based on which accounting standards?

Audit the Federal Reserve

Anyone watching the minor skirmish in Washington over Ron Paul's requesting an audit of the Federal Reserve? Not going to happen.. and besides, what auditor could do it,... honestly? Honest Government Auditor.. Oxymoron? Scary that they are fighting it so hard.. must be a budget issue... it won't be cheap.

August 26, 2009

Politicians that Bring Home the Bacon (A Pork Product. Not Bull)

I have a friend in the Midwest that is constantly amazed at the antics of our politicians. I find his outrage quaint if not naive. The reality is that the "people" appear to elect those politicians that promise to "bring home the bacon" and then deliver, no matter what their "minor" ethical and moral shortcomings may be. Self interest trumps morals, ethics and economics every time. This week we have three distinct illustrations of this point.

BS Bernanke
First the reappointment of Ben Shalom Bernanke as head of the Federal Reserve. The Obamanation praised his handling of the current crisis and pointed out his extensive scholarly knowledge of the depression era as part of the reason for his renomination. However, it seems to me that the analogy

of a ship captain is appropriate.

A drunk captain of a tanker sets a course that points his ship directly toward treacherous shoals. The other officers, fully knowing the impending danger, say nothing to overrule their fearless and empowered leader. The ship hits the shoals, ripping out the bottom and spilling millions of gallons of oil into the sea, irreparably harming the environment, ruining the livelihoods of the local fisherman and causing billions of dollars in damage. The captain is relieved of command and the first mate limps the tanker into port and supervises the cleanup of the devastation. Note this is the same first mate that watched the captain set the erroneous course and helped pilot the ship directly onto the rocks causing the carnage to the economy, wildlife, etc. The mate does a heroic job in spending the ship owner's money to clean up part of the disaster and is lauded for his speedy and somewhat effective mitigation of the damage. Sure there are no more fish, birds or seals, and the owner is out billions of dollars, but that is a minor detail.

Is the mate a hero for his cleanup response or a criminal for driving the ship onto the rocks?

In the case of BS Bernanke, he was appointed to the Fed Board of Governors in 2002 and became Chairman in 2006. While many would like to solely blame his predecessor, Mr. Greenspin, for the financial meltdown, is BS not culpable as well? He was a senior officer setting policy. The ship hit the rocks on his watch as captain. Hard. While it is politically convenient to not rock the boat with a still staggering economy, should we reward incompetence with continuity? GM anybody?

Charlie Rangel
U.S. Representatives are supposed to file accurate financial statements of their assets. And presumably as head of the House Ways and Means Committee which oversees the tax code, one would hope he grasps the concept of disclosure and financial's. (I will not get into Geithner here). Today's NY Times on page 17 at the bottom had a little story on Charlie's accounting. A Very little story.

It seems he just amended his May 2008 filing to include a few things he forgot that he owned. Included in the amendment (also as of May 2008) were these items :

                  Between $250 and $500K in a checking account
                  Three pieces of land in New Jersey and
                  Pepsico stock worth between 15 and 50K.

Note: Why do politicians get to use wide bands of value? Doesn't seem the auditors would let corporations do that would they? Will my bank?

Note that in a statement from a wealthier politician, let's say John Corzine, you could understand a minor slip up. But even the NYTimes pointed out that the new statement was "about twice the amount listed in the original disclosure statement... which declared assets totaling between $516,015 and $1,316,000." This was not a minor discrepancy.

Now Charlie has had some issues with numbers in the past.. like $75,000 in undeclared income from renting his beach house in the Dominican Republic or living in four NYC rent controlled apartments at once at thousands of dollars per month below market... and the list goes on. But like Senator Dodd and the other Friends of Angelo at Countrywide, no doubt the "ethics" committee will bless these inadvertent minor and unintentional bookkeeping errors as irrelevant and they will be forgotten. But rest assured that he will be re-elected by his adoring constituents. Why? He brings home the bacon.. a PORK product.. to his homies. He is doing the job he was elected to do... why let a few rules infractions get in the way of progress and tasty bacon.

And For the Grand Finale of Today's Lesson.. Ted Kennedy
Today Senator Kennedy is being canonized for all of his many attributes and 46 years of service to the citizens of Massachusetts. If he were not a perfect example of PORK delivery trumping morals, ethics, honesty and economics, I don't know what is.

The loyal voters of MASS were not about to let his minor transgressions of manslaughter, failure to report an accident, expulsion from college for cheating (2X), crashing a plane while drunk, infidelity, more drunk driving, etc. get in the way of delivering what the voters so richly deserved... a preferred seat of honor at the trough of public handouts.

So to my amazed friend in the Midwest... WE get the politicians WE elect. And when WE re-elect them again, WE confirm that they did what WE elected them to do. WE the electorate consciously make these decisions. WE should not be amazed at the actions of the elected, but rather at the consciences of WE who re-elect them. True? It is not a failing of the politicians, but rather of the citizenry.

And would this very week be the end of the biggest equity bear market rally in history? The biggest bulltrap of all time? Only time will tell. Buy gold.

And another tidbit from today's NY Times.. in case you missed it...

"Commercial real estate sales are down about 90% from 2007" (presumably this means transactions or dollar volumes, not value)... they did not elaborate..

The story was about an investor buying commercial properties for cash, having spent a billion dollars year to date, making him the number one buyer nationally according to the article. Will be interesting to see how this turns out for him. With cash you can be patient, a requirement today I suppose.

September 2, 1009

Sometimes it is OK When the Pros Agree with You

 
If you have read Bulltraps from beginning to end (doubtful and no offense taken) you will note that it begins with my thesis that this "recession" is different. I also pointed out that I thought we were in for a very long slog. I believed then, and more so now, that the previous surefire strategy of buying dips and waiting for the inevitable recovery would not work this time around. I also said that it would be a 10 year recovery process, not one or two.

 
The following from Bill Gross of Pimco is very illuminating. Not because he agrees with me, but rather due to the fact that this guy is a very wealthy genius and not prone to crying wolf historically.
You will note that I rarely give short term investment predictions as I do not feel qualified in that endeavor. However, just for a quick pat on the back, you will note my entry after The Dead Kennedy (8/26) that I felt it was time to sell equities and buy gold. Got lucky on that one. Gold is at a very interesting point technically.. the next month should be interesting.

Investment Outlook
Bill Gross | September 2009

On the "Course" to a New Normal
(note I removed Bill's predicate about golf here)

 
This “new” vs. “old” normal dichotomy was perhaps best contrasted by Barton Biggs, as I heard him on Bloomberg Radio in early 2009, when he said he was a “child of the bull market.” I thought that was a brilliant phrase, and Barton is a brilliant phrase-maker. He went on to say though, that his point was that for as long as he’s been in the business – and that’s a long time – it has paid to buy the dips, because markets, economies, profits, and assets always rebounded and went to higher levels. That is not only the way that he learned it, but that is the way, basically, that capitalism is supposed to work. Economies grow, profits grow, just like children do. I think that’s why he said he was a child of the bull market, not just because he had experienced it for so long, but also because economic growth and higher asset prices are almost invariably a natural evolution, much like the maturation of a person. That’s how people grow, and so I think Barton was saying that capitalism just grows that way too.

 
Well, the surprise is that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

 
This focus on the DDRs – delevering, deglobalization, and reregulation – may be conceptually understandable, but nevertheless still a little hard to get one’s arms around. Why would they necessarily lead to a new, slower growth normal? A little easier to grasp might be the following approach, which feeds off the same concept, but which extends it a little further by suggesting that DD and R lead to a number of broken business or economic models that may forever change the world we once knew and make even Barton Biggs a chastened adult. They are as follows:

0. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace. 
0. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!” 
0. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull. 
0. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.
   
   Similarly, the financialization of assets via the shadow banking system led to an American era of consumerism because debt was available, interest rates were low, and the livin’ became easy. Savings rates plunged from 10% to -1%, as many (if not most) assumed there was no reason to save – the second mortgage would pay for everything. Now things have perhaps irreversibly changed. Savings rates are headed up, consumer spending growth rates moving down. Get ready for the New Normal.

I could go on, reintroducing the negatives of an aging boomer society not just in the U.S., but worldwide. Increased health care may be GDP positive, but it’s only a plus from a “broken window” point of view. Far better to have a younger, healthier society than to spend trillions fixing up an aging, increasingly overweight and diabetic one. Same thing goes for energy. Far easier and more profitable to pump oil out of the Yates Field in Texas or even Prudhoe Bay than to spend trillions on a new “green” society. Our world, and the world’s world, is changing significantly, leading to slower growth accompanied by a redefined public/private partnership.

The investment implications of this New Normal evolution cannot easily be modeled econometrically, quantitatively, or statistically. The applicable word in New Normal is, of course, “new.” The successful investor during this transition will be one with common sense and importantly the powers of intuition, observation, and the willingness to accept uncertain outcomes. As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

0. Global policy rates will remain low for extended periods of time.
0. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally. 
0. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit. 
0. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth. 
0. The dollar is vulnerable on a long-term basis.

Like playing in an Open Championship, future golfers/investors need to play conservatively and avoid critical mistakes. An “even par” scorecard (plus some hard earned alpha) may be enough to hoist the trophy in a New Normal world. Holes-in-one? Maybe if you’re lucky. But make sure someone’s watching, and that their eyes are focused on the New Normal. As for golf, even Sue, my only supporter, has asked me to move my ball, on its own ebony base, away from her more authentic and perhaps the still solitary ace made by Gross family golfers. What a damnable condition.

William H. Gross
Managing Director

 
Far more eloquently put than mine in the beginning of this rant back in early January, but nonetheless a similar result. Slow growth and not business as usual. Would love to be wrong on all of this. No fun being a bear.

November 5, 2009

Blew That One!
You might recall that earlier this year I forecast that the commonly watched equity indexes would stage 10-20% rallies in the midst of a long term bear market. Wrong. How about 60% rally for developed countries since March! Ten thousand DJIA! That is a big rally and I missed it completely. From here? Who knows, but I am glad I am long gold (see Jan. commentary and Augues update) and I stick to my prediction of a 4XXX DJIA and a 4XX S&P 500 in the next five years. Call me crazy.

For you buy and hold bulls… this little tidbit from John Authers at the FT:

“ 10,000 is not such an impressive landmark. It reached that level for the first time in March, 1999. On a price basis (excluding dividends) the Dow has lost 23.5% in real terms since then, once inflation is taken into account. The Dow is also a testament to relative U.S. decline. In Euro terms, the Dow has dropped 28% since then. … its value in gold terms has collapsed by 73.5% since then. So the Dow’s recovery has been achieved in many ways only by the debasement of its own currency.”

Or in really simple terms.. If you bought the DJIA in March of 1999.. by March of 2009 you were down about 35% before adjusting for currency, inflation and dividends. Not a very attractive endorsement of “buy and hold” and NO the S&P did not perform much differently.

Government Management
Since government is eager to get into the healthcare management business, it is always interesting to examine the track record of a manager. Certainly we can point to the common ones of the Post Office, Amtrak and Social Security Administration. But let’s look at some more recent examples…

Cash for Clunkers? Dealers were promised payments in 10 days… many waited well over 60 days. The government blamed it on systems problems. Hope you don’t have to pre-pay for that heart attack…

One un-heralded recent government management fiasco was from the Department of Veterans Affairs. A bill took effect on Aug 1 providing money to cover much and often all of the costs of attending college for veterans who served in the military after 9/10/2001. As expected, it was a popular (and deserved) FREEBIE from Uncle Sam… 277,000 eligible participants signed up. The VA was supposed to reimburse these deserving soldiers and the colleges immediately… 277,000 due… only 33,000 paid. Serve your country and then even the New York Times admits: “…the veterans department, with its antiquated technology, has struggled to keep up with the flood of claims.”

And we the voters are going to allow the politicians we elected to manage health care? Shame on us.

Speaking of Government Waste.. $528,000,000 Government Loan to a Start-Up?
The US Government just agreed to loan a start up car company, Fisker Automotive, $528,000,000.00 (five hundred twenty eight million dollars) to develop their new car and a luxury model initially to be made in Finland.

 
The U.S. built model would follow in 2012 and the U.S. plant would employ up to 1500 people. My calculator says that is $352,000.00 per union job if they make it and hire the full 1500 people. I realize the government is new to the car business (GM and Chrysler for starters) but they might want to review the history of new American auto start ups planning for volume production. I believe the last successful one was FORD in about 1904… (don’t hold me to the dates). For reminders of other car companies come and gone in the USA… Tucker, DeLorean, Bricklin. And we just blew $528 million of tax payer dollars?

Spin Zone #30764
Headline, Financial Times, 10/27:
CATERPILLAR REHIRING ADDS TO HOPES OF US RECOVERY

In body of article: “Caterpillar has sacked 34,000 workers around the world in the past two years.
The company said yesterday that it would rehire 550 of its US employees before the end of next year including support, management and production employees. At the same time it said it would permanently sack 2500 US based workers who had been placed on temporary redundancy.”

Underlines are mine… Anyone see any bias or irony in this story?

Buffett and His Train Set
The guy is bullish on America and his preferred share buys at GE and Goldman look genius at this point. Burlington Northern reported revenues down 27% last quarter and he is buying the whole company. Brilliant I am sure, but that is some kind of revenue decline for an economy that is no longer in a recession according the GDP numbers and the omniscient pundits. 

November 28, 2009

Government Management: Pay Mandates
AIG and the other bailed out government entities are being destroyed by the government. Anyone who has run a business knows that to keep good employees, you must hire and retain top notch senior management and pay them well. In the case of sickly companies, this is doubly difficult as the good employees are always in demand at competing companies without the baggage of an ill employer.

Enter Mr. Feinberg, the Obamanation appointed “pay czar”. His purported job is to “encourage” the government controlled companies to pay their senior executives as little as possible. Companies including Bank of America, AIG, GM, Chrysler and others are all now being told what to pay their current and future senior executives, traders, etc. by Mr. Feinberg and his administration handlers. This is resulting in massive pay cuts in current income with some but not all being replaced by restricted shares in the sickly company, freely disposable in 3-5 years.

If Feinberg is not reined in very quickly, I predict massive defections of key talent by April 2010 as year end bonuses are paid and key employees are quickly snapped up by competitors. The taxpayers will be left with zombie institutions run by the losers that were not good enough to go elsewhere.

Anyone following the CEO search at BofA or CFO hunt at GM? These are just small signs of the future of government controlled entities. Not good.

This is the same Feinberg that forced Citi ($300B in government cash and guarantees) to sell its lucrative oil trading group, Phibro, for book value to Occidental. The fire sale prices was due to the “embarrassment” that the senior executive of this group was contractually owed $100 million in compensation for 2009, a guy that routinely contributed $500 million to the Citi bottom line. His deal was a percentage of the profits. Well worth it, but not politically palatable in a government controlled institution.

Real Estate Debacle is Worse Than it Looks
Underwater Def: When a loan balance is higher than the “market value” of the underlying collateral. (Note: No one is sure what a “market value” is when nothing sells…)

While the green shoots of recovery are being touted by every optimist out there, the realities of the markets tell me that we are in the eye of the storm. As I said at the beginning of this site, this is going to take 10 years to find a bottom. The government is pedaling hard to make the voters think the worst is over, but the reality is that they are making the same mistakes over and over again and exacerbating the problem. Prayer and hope for a quick recovery to bail out at least some of the problems is not the answer. Accounting changes, loan modifications and extensions are only prolonging the problem. The first loss is the best loss….. prolonging the inevitable merely makes it more painful.

Let’s start with the FHA. You would think that the financial masterminds would have figured out that when a borrower has very little at stake via low down payments at purchase that foreclosure rates rise. We learned this two years ago.. or so I thought.

Today, the FHA will be happy to make you a loan of $200,000 with only 3.5% down payment ($7000). Using the $8000 government cash gift IN THE FIRST TIME HOMEBUYERS GIVEAWAY, you can buy a nice house in most places in the country and leave the closing table with a check! Please do not call the $8000 a tax credit as it is not. You get the $8000 whether you pay any taxes or not. It is called a “refundable tax credit”. No tax due? They simply send you the check.

As to where this will take us, count on a federally funded tax payer bailout of the FHA in the next 24 months. Last week the FHA reported that its reserves are 0.53% of the $685 billion total loans insured. Federal law requires 2% reserves. Even the government auditors grasp the problem and concluded that a bailout will be required in 2011 if we do not get a robust recovery fast. Over 20% of all U.S. new home mortgages are FHA insured and the FHA portfolio should hit ONE TRILLION DOLLARS by the end of 2010.
Note the ill named first time home buyer’s tax credit program was just extended UNTIL APRIL 2010 and its requirements loosened to include current home owners! The estimated cost of the first act of this attempt to prop up the real estate market is estimated to cost $15 billion in 2009. More than double the cost approved by Congress in the “stimulus” package. Ooops.

And as another point on government management talent and oversight: 

• 19,000 filers for the “credit” who claimed $139 million did not actually buy a home (source: U.S. Treasury, really!)
• 74,000 filers claiming over $500 million already owned a home

A few more facts and figures on U.S. residential real estate issues: 

• Headline Wall Street Journal: 1 in 4 U.S. home mortgages are under water 
• More than 40% of borrowers who got a new loan in 2006 are under water 
• 11% of borrowers for homes in 2009 owe more than their home’s value

Wells Fargo has $107 billion of loans tied to option adjustable-rate mortgages. Many of these are under water. WSJ: “To solve that conundrum, WF is taking a gamble: The San Francisco company is issuing thousands of interest only loans that will defer borrowers’ balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in consumer income will eventually cover the bank’s underwater Pick-A-Pay debt.”

OK, it is only $100 billion +/- but this is what got me: “We’re banking on the fact the economy will improve and recover over time.” Michael Held, co-President of Wells Fargo Home Mortgage” Well at least he did not say hoping and praying… instead he used the more formal term “banking”. I guess it sounds better. This will be buried in their numbers, but it would be fun to see how many of these become foreclosures down the road at much lower values. The first loss is the best loss…

Commercial Real Estate Problems Just Beginning
The U.S. has $3.4 trillion of commercial real estate loans. Fortunately, only $1.84 trillion of this is on U.S. bank balance sheets. The balance is from holders of bonds and foreign banks. Smaller banks with one to 10 billion in total assets only had $450 billion of these soon to be problem loans. The problem is that number represents 3.3X their Tier 1 capital. My math says that if the mortgages fall in value by one third, you wipe out 100% of the bank’s capital.

Far fetched? See previous pieces on how far commercial real estate values have fallen. This is a very murky number as the transactions have dropped over 80%.... no one knows the real value of many of these loans and the regulators and bankers really do not want to find out. So the regulators and accountants got together and created new rules!

The new guidelines encourage banks not to foreclose, but rather to restructure and extend. Or extend and pretend as they say in the banking business. From the WSJ: “Citigroup and Whitney Holding Corp. and other lenders around the country are planning to review loans now considered non-performing to determine if they can be reclassified under the guidelines..”  Now, for you non-accountants out there, if the banks can reclassify these non-performing loans as performing under the new creative rules, they can book a profit from the reclassification! Feel better now?

Foresight Analytics estimates for commercial RE bank loans maturing between 2010 and 2014 that 68% of the $800 billion are currently under water; the amount of the loan is less than the value of the property… assuming you could find buyers and financing for the buyers.. at any price.

And if you are thinking TARP is going to help out here… an update on the genius of that program.. At least 27 banks that received TARP money have already failed or will shortly. This is out of 690 institutions that received TARP funds… but we have not yet reached the one year anniversary of TARP!

Reis Inc., a New York real estate research firm reported that in the third quarter, effective office rents declined by 8.5% nationally .. the steepest decline since 1995. Negative absorption amounted to 64.2 million square feet the highest ever recorded since tracking began in 1980. Or put another way, the office vacancy rate hit a five year high at 16.5%. This is not just a regional phenomenon… vacancies rose in 72 of 79 metro areas and effective rents dropped in 68 of them.
(see my comments on this earlier this year..)

As I said earlier, rents are going down, financing for commercial real estate is limited and the big pension funds and institutional investors will be licking their wounds for years before re-entering this market.

Bank Failures.. Government Management
I seem to be ranting about government management this week. Must be a Dubai thing. One issue which really irks me is the bank failures. We depositors and tax payers spend a significant amount of money paying for various layers of federal, state and FDIC oversight of banks. The FDIC is officially broke and is assessing banks special fees and even forcing them to prepay 3 years of future FDIC payments ($45 billion) so as to shore up their ability to bail out more failing banks. The banks book it as a prepaid asset and the FDIC gets the cash up front. As I predicted earlier this year, the failed bank list will approach 1000 before this is over. Now I am guessing it may be more. I think we are still under 140 for 2009.

On the last Friday of October the FDIC closed 9 banks, the most since the beginning of the current financial crisis. These nine, none of which you have probably heard of, had total assets of less than $20 billion. The announced, estimated cost to the FDIC is $2.5 billion dollars (can you guess if these loss estimates are high or low..)

Banks have capital which must be lost first before the FDIC insurance kicks in. Typically this will amount to 8% of total assets (it is variable, I am using a round number and won’t bore you with the math). There are armies of auditors, examiners and other “experts” examining and managing banks to insure their safety and prudent lending policies.

How do these government hawks let 9 relatively small banks get so sick so fast that we do not bother to shut them down until they have lost 100% of their capital (in this case about $1.6 billion) AND $2.5 billion of the FDIC funds? Someone is not doing their regulatory job.
Anybody at the OCC, Federal Reserve, state banking regulators or the FDIC going to get fired for this? Not a chance.

And remember, this is just small fraction of the FDIC’s loss year to date. CIT got big headlines for losing a mere $2.3 billion of TARP money, this particular bank failure got little notice.

Anybody wondering why? Is it politics? The nine banks that failed were part of a holding company, FBOP. One of the banks that was shut down was Park National Bank of Chicago. Hours before it was closed, Tim Geithner himself was in Chicago awarding the bank $50 million in tax credits to help spur community development projects in low income communities. Rev. Marvin Hatch of New Mount Pilgrim Missionary Baptist Church described it as a bank “that had such a community investment and development profile.”

Is there a pattern that investing in the community via loans repaid by taxpayers down the road in bailouts is a good thing for someone? FNMA? FHA? FHLMC? Community development credits? It is not the bank shareholders…
 

Madoff Tax Benefits
If you were a typical investor and bought stocks which you knew had risk and were sure to go up and down… many mostly down.. and you lost money in a year, you could carry certain losses back for three years for tax purposes. However, if you forgot the old adage of “If it is too good to be true, it probably is” and invested with Madoff and his guaranteed, miraculously steady returns, your friendly politicians are going to help you out.. your losses from Madoff and other Ponzi schemes can be carried back 5 years. Is this not blatantly rewarding greed and knowledgeable investors that should have known better?
HealthCare “Reform”
I admit to not being an expert on this government power grab, but one recent item caught my attention.
Wellpoint, a large health insurer, a part of the BlueCross/BlueShield franchise published these interesting findings as to the effects of Obamacare on its policy holders. Wellpoint specializes in providing insurance for small businesses and individuals, not Fortune 500 companies. They operate in 14 states.

“Young and healthy consumers will see the largest increases- their premiums would more than triple in some states- though average middle class buyers will pay more too.”

Raising costs on small business is not the way to create jobs. The Wellpoint report estimated that for the average small employer in Indianapolis, health care costs would rise by 94%, 91% in St.Louis and only 53% in Milwaukee. These are just Obamacare increases, not the natural increases in costs from new therapies, treatments, etc.

Bottom line, we are in for a very long slog. The green shoots are the eye of the storm. There are more shoes to fall. Gold prices are a leading indicator. Even joe six pack is getting on the gold train, usually a bad sign… but in this case maybe not. How? By buying U.S. gold coins. Ooops. Another government mess up. Earlier this month the U.S. Government suspended sales of U.S. gold coins as they ran out. No mention of when they will resume. Maybe we should let Walmart or Amazon run the mint… they rarely run out.

And watch for the next Bulltraps update. A lot is brewing in the middle east and Tiger Woods made the cover of National Enquirer last week. Big fireworks to follow.

November 28th Update to Bulltraps.com