(Courtesy excerpts of the current Daily Briefing, published nightly at ingerletter.com; all primary forward technical analysis projections are provided by embedded videos.)
Gene Inger's Daily Briefing . . . for Tuesday January 19, 2010:
Good evening;
A charade of optimism . . . about the extent of recovery, and what ‘really’ is going to impact the dominant complacency of yore, will be explored in tonight’s report as well as via two videos. The source proving my contention about ‘shadow inventory’ just as a for-instance, is an officer of one of the largest banks in the Nation. As to the Google issue; we’ve warned for weeks not to buy that (ludicrous upgrades after the run-up in my thinking were exceeded only by those who wanted to buy Gold after it ran 50%); a move we caught and warned was topping.. we’ll be back there again; but not yet as it makes no sense given the concern about Deflation and Stagflation, not inflation yet).
Secondary declines are anticipated this month. I’ll delve into that in the main video. I’ll also make some comparisons with other historical patterns and anomalies that many are embracing, but which are not appropriate comparisons for this era (as forewarned long ago; this is a time to view matters as they are; not comparable to recent history).
Last night we spoke of a tech shakeout before it began; suggested cellular had also it seem ‘been played’, and mentioned experiences of folks using the Google phone that I heard (or at least that variant of now three from Motorola) but are not reported in the media (one thing about CES, you do get to hear of praises and complaints depending what a very tech-savvy crowd personally is using). Today’s Verizon move followed by AT&T may even trigger a price-war in the sector.
The ‘fade’ in the wake of Intel’s report is precisely what we projected all week long as members know; so there was really nothing surprising about Friday’s action; not even the late firming; as we were suspicious that might occur due to a nominal Expiration. I suspect next week (especially if downside follow-through) will then initially rally anew; and so that may provide a pretty neat opportunity for (as outlined on ingerletter.com).
Daily action . . . analysis and projections went according to Hoyle this past week, as well as are included in the accompanying videos. Now a few of the week’s highlights, after brief reflections on the Atlanta Fed comments that got some discussion today.
Banking criticism . . . runs far and wide. Much is reasonable; some is notable. One tenet of the rhetoric coming out of the capital these days is that banks are not lending – on purpose. However, there is evidence that a good part of the problem is a sharp falloff in loan demand. We have said before that some businesses can’t get loans; but others don’t want to extend indebtedness since business doesn’t demand leveraging further; not in this environment. The take from this new Atlanta Fed survey affirms it.
Contemplate a recent survey reference from Atlanta Fed President Dennis Lockhart:
"A recent small business survey performed by the Atlanta Fed suggested that business loan demand was down primarily because of weak sales and modest revenue prospects. The credit availability picture was mixed. No surprise, construction-related firms and manufacturers had the most trouble obtaining credit during the last six months. But others did well in having their credit needs met. Of more than 200 respondents, nearly half did not look for credit at all, mostly citing weak sales or sufficient cash reserves."
Taking a further look at the Atlanta Fed’s blog where they reviewed the study more is found. How did businesses surveyed respond? Slightly more than half of respondents said that they had sought to obtain a loan or line of credit from a bank in the last six months. The primary reasons given were (as further outlined).
That apparently sums it all up. What these businesses need are customers, not just friendly loan officers. So while definitely obtaining credit remains difficult, why borrow if business isn’t there yet. It isn’t in large part; because the dynamism of recovery is more fiction than fact, at least at this point in a forecast epic struggle.
Could a seemingly laudable initiative . . . that is widely hailed by the public and the internet community overall, actually become a trigger mechanism for a tech shakeout or something approaching that? That’s a subject we hinted at the past three nights. I will expand slightly on that this evening; as it’s a subject not properly ‘cast’ widely yet.
How so? Because the truth of the Google threatened ‘disengagement’ from China as it turns out, has far wider implications than reopening search, or protecting security of Gmail members (political activists) in China. Rather, turns out that though unaffirmed, at this point, it’s the 20-some (or more) big companies such as Dow Chemical and of course security-contractor Northrop Grumman, that come closer to revealing truths in this well-spun PR effort by Google. That’s why the US Government is concerned too; and probably why (indirectly) the Chinese Government made threatening overtures in the wake of Yahoo! simply saying they support the integrity of privacy on the internet.
Google sells adds. The more people entrust their personal information to the ‘cloud’ (further discussion). If you use Gmail accounts, which require personal information; if that’s compromised you might tend to withdraw to corporate, or your own ISP’s email (balance as outlined in the last report). I suspect that what has happened is lots more severe than Google let on; or that they are fearful that what China has done, directly or potentially threatens the very heart of their business; possibly with back-tracing of search and/or Gmail accounts. That would perhaps be sufficient to get them in the reported tizzy we are all aware of, whereas their prior history doesn’t suggest social anxiety alone. After all they weren’t they complicit in censorship with China, until now.
If so, the implication would be that a hard business decision, not altruism, is behind it all. Google and others want us to entrust more information to the internet; displacing our hard drives (even for financial storage). I looked (for instance) at s new (withheld for non-members) application from (redacted) at CES, and while nifty; the heck if I’m going to put personal or broad financial information on that ‘free’ website in the cloud. Sure, we all do it if trading online; but again that’s different; a) it’s a defined fiduciary relationship; and
its insured too. But a revolt against allowing free services access to personal information may have a far broader implication than what is reported by Google this week. Network security in essence comes back to the forefront (I heard Steve Balmer of Microsoft acknowledge it clearly today; partially because again it occurred through a new Internet Explorer bit of a vulnerability; funny how I use only Firefox). The perception of the internet as safe for anything ‘free’, as opposed to a safe place only for services you pay for, having a fiduciary relationship, or at least a customer relationship with, could be reawakened.
The storage or surely data processing would retreat to more conventional proprietary approaches. Cloud (further details and prior major firm experiences cited to members in this segment). So indignation, or even righteousness aside; I suspect there’s more to this from the past week’s Google freakout.
Most of what Microsoft is doing is based on cloud computing; including Windows Live which generally (especially since the advent of Windows 7) requires downloading an email client; which is not exactly the same as having Outlook (as expanded upon). So clearly my point is not to say all this is threatened at this point, but that maintaining integrity of the internet as an information exchange medium (outlined to members).
So I think this goes well beyond the sudden stiff-upper-lip of standing-up to Chinese censorship or demands to surrendering web addresses of dissidents, as noble as on the surface that surely is. Again; the real key to what I’m thinking isn’t Google per se, but the 20 odd companies in military, chemical and media, that were attacked from China-based IP addresses. (Portion redacted.) As the late Paul Harvey may have put it; we remain keenly interested to hear ‘the rest of the story’.
On a far grander scale, the California downgrade by S&P which was expected, has hardly any media play. Why? Fear people will rekindle concerns of Federal failure to meet obligations; not to mention other states of course. We think getting the deficit under control is an imperative; and that’s why we argued for systemic stabilization of the banks in 2007 and 2008; but otherwise opposed truly big-buck spending which did terribly little to help average Americans, or small business. Because maximum or heavy borrowing was pursued by this and the last Administration, a serious reduction of our deficits seems almost impossible; even if not a single project is approved again over the next couple years. Deficits are running 10% of GDP, consecutively, and that of course is nothing they want to talk about, because the word default might come up for discussion. The former head of the Congressional Budget Office and Government Accountability Office, are on the same page I am with this; so this is not wild thinking.
Furthermore, as cutting entitlements to the elderly is about the only way they can bring things under control given what they’ve borrowed; it seems unlikely they can pull that off. People are ticked-off sufficiently now to give at least a lot of pause about the midterm elections; and if that goes as anticipated; you’ll see the heaviest turnout of (portion reserved), which is a bipartisan demand for sobriety and common-sense in appropriating funds.
I think Government and some Congressmen made a big mistake calling ‘tea partiers’ a mob or radical or anything like that; since most are normal people who are upset. It was a false accusation that will come back to slap those who said that, at the polls. If you combine the antipathy towards lobbyists and even some Wall Street folks, you’ve got the makings of a modern version of a populist revolt against false promises and a trend toward change, that actually may have made some sense; but was too late for it to be easily pulled-off in economic environments after years of ludicrous spending.
Credit woes piling up . . threaten to douse the optimism generated by a false rally in terms of the extension by the stock market. This will be felt (didn’t say may be felt) by a slew of commercial sectors first, and by the consumer sector as the year advances I fear. After the close today, S&P downgraded ‘the State’ of California, cutting ratings on $64 billion of ‘general obligation bonds’ as Sacramento feels strains over what is a $20 billion budget deficit. Interesting how the financial press obscures that today as if everyone knew it was coming (sure); and it therefore doesn’t matter (not). Note S&P also issued a ‘negative outlook’ on California debt; a sign it may decline further than the A- (7th highest investment grade) rating of today. Now closer to Moody’s or Fitch (not that any of them were efficient or realistic in any of this) with a Baa1 or BBB rate, this emphasizes (or should) the coming ‘cash crunch’ in March, pre April tax revenue.
Just because many expected this; does not make it irrelevant; my goodness. When it occurs that California goes into a negative cash position in March, will they also say it doesn’t matter? Probably. Perhaps the jousting at the Washington ‘crisis’ hearings in this case may have inferred that if Wall Street banking houses were to fund California through this, Government would look the other way about possible ‘fraud’ accusation discussion, one would have a short-term loan solution to buy yet-more time for them.
I’m just slightly cynical because this ‘bad news is good news’ stuff from the market is wearing thin. Then there is the crowd who believes hurricanes and earthquakes are a good thing for markets, if not for victims. Perhaps both if they are uprooted or moved to safer hygienic quarters. But this Government has squandered and misdirected lots of our tax (and borrowed) Dollars; so that there is a limit to what can be done for Haiti (which has not been a productive country previously; irrespective of being sensitive to the plight of the sheer catastrophe; not to mention other seismic activity in the region, as is highly unusual). (Further portions are redacted.)
In Great Britain the economy continues to contract. Worst in 88 years now; a bigger single year fall than any single year of the Great Depression, and that won’t be heard (at least not yet that we know of) on financial media. Source: The Times of London. If you want to know the next worst year? 1921; when all the troops came back from the front lines after WW I, and the result was large unemployment and a recession then.
Now, if I wanted to throw more cold water on the ‘recovery optimism’ beyond reprieve I could reference ‘rail traffic’ in 2009; the lowest since at least 1988. And that’s with at least 12 of 19 major commodity categories of cartage being up due to foreign sales in the most part. It means that domestic demand isn’t zilch, but it’s definitely still slim. Of course I take no pleasure in reporting grim reality; but somebody has to do it if what a large segment of the public relies on for balance is actually imbalanced with regard to their perspectives (to wit; investors need to know both sides of the coin). Perhaps our Government has no choice (pained to spin most things favorably; and it shows); we understand. But the reality is actually fairly risky, and in that regard we remain alert).
I don’t know for sure whether more would have improved had Government listened to a chorus of citizens of both parties and directed funds better, or cut taxes, or both, vs. the ridiculous approach equivalent to a little Dutch boy sticking his finger in the dike. I do suspect it would have been better; especially had we not borrowed any funds with the realization that while they would argue that would keep us down; we are down in any event; so why be down and owe all that debt on top of it we ask, and asked lots earlier, because we expected Government to do just what they did; mediocre rescue of the economy, with we suspect close to a 40% risk of a (reserved for members).
Thin markets increasingly . . . become vulnerable to surprises. Most investors may rightfully turn a suspicious eye towards data (such as AAII) suggesting that a majority of investors are bullish, by 2-to-1 presently; and few realize that the S&Ps advance of less than about 4% since where we thought it was about time to backtrack around the Labor Day secondary rebound peak, has essentially been an irrelevant fatiguing extension, in which there have been negative divergences too, and heavy underlying selling (incredible proportions of corporate insiders selling over buying).
Again, as noted before; even though we absolutely have said Q4 earnings reported in weeks ahead will in many cases be superlative (even exceed estimates in some cases); we think these at best are discounted in advance, and at worse will miss here and there. Either way it’s a set-up for sobering awakening that (as further expanded).
A record ‘credit contraction’ . . . was misinterpreted as a positive event by analysts who likely failed noticing a calculation error on the part of the Fed’s latest report. That is the troubling aspect, suggesting they didn’t check their work. Furthermore, while of course we welcome a ‘slight’ improvement in some aspects of the Employment data, for the most part these are statistical gains; but not with respect to underemployed in our workforce, or those who have dropped-off the rolls. Sure we’re looking for (more).
It is hard to say the recession is unequivocally over; as I know several bears recently have proclaimed (capitulation into extended strength?). Rather poor stewardship and borrowed taxpayer (or foreign) fund allocations have prolonged the timing for exiting an historic ‘epic debacle’, just as we fear would occur given the nature of government and financial ties, and what they perceive as important. So far the support for housing is mostly political (and not particularly productive), and the support for small business is shameful (more talk than action). So much could be saved from this ‘complexity’ I’d think, if they would simply protect our industries no more nor less than competitors do and actually reward initiative and incentive, rather than encourage dependence upon government. Job losses (rates of deterioration) are slowing; but that’s not the same of course as a vibrant recovery. And most corporate leaders remain (further discussion).
Covert monetization . . . as so many believe the Treasury and Fed are involved with notwithstanding; there is plenty to worry about in these markets. Hyperinflation is not one of the near-term concerns; although the reasons for that (contrary to Gold bug or similar pitches) are a little bit more distressing, with respect to what may yet occur. Of course only a Gold-plated moron would have bought Gold since we suggested selling into preceding strength (straight up into an unsustainable blowoff into the 1100s plus) having bought last (trading wise) in the 800’s. We will again as this report will outline.
One point: we’re not taking our guard down; as complacency and ‘resignation’ has a way of causing a capitulation into the market ‘by default’, just before it does what has an historical record of some magnitude and importance; and that is a growing risk.
I have called this a controlled Depression since forecasting well over two years ago that the Fed and Treasury would facilitate systemic stabilization, but not much more. I regret to inform you that we were and continue correct. It dovetails in that businesses and even municipalities (we know of two) who concurred with our specific expectation back then, circled their wagons, harbored their cash, and properly rode-out the storm.
Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening rallies in markets will occur (some fairly wild), of limited duration. In event other developments unfold that could truly change prospects; we’ll evaluate.
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Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of technology issues (needed for assessment of general factors in tech overall, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection. (Individual stock comments generally are provided in the video overviews only; once in awhile I'll have some thoughts here, where something's particularly emphasized or of technical nature necessitating some discussion. Increasingly most all is via video.)
Thirty-four months ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a market struggles with extended rebounds as this economy tries to restructure.
Though enormous efforts have avoided systemic disaster on the banking front; there is no equivalent rescue of the overall economy besides perception; nor restoration of engines for sustainable growth. People are adjusting to lower expectations; which will never be a favored approach to American life. Actually we don’t see it as permanently alternating the future; but we still have major adjustments to work-through. That’s the reason we warn about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. And as I’ve said; there are fairly visible new storm clouds gathering.
Enjoy the holiday weekend!
Gene
Gene Inger,
Publisher
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