Gene Inger's Daily Briefing. . . . for Wednesday, October 9, 2007:
Redemptions and withdrawals . . in two of the country's largest mortgage-backed securities hedge funds being (newly) suspended, because of sharp liquidity declines in certain mortgage asset-backed securities, must have left angst suspended also; as the markets managed to focus on what it wanted to hear (which wasn't focused as to what the Fed anticipates by the way; beyond President Poole's saying we've got lots more to go). What's afoot? A focus on 'global growth' enticing investors to confidence that the world's markets (including our own) can advance irrespective of how dour the prospects for prosperity become in the United States, aside a small elitist percentage that are participating. But even that group's shrinking in size, almost daily by the way.
This market shuns hearing about fiscal sobriety; preferring delusional expectations of cyclical growth. Sure, that's desirable, if it were essentially based upon domestic economic prospects primarily, but deleterious to U.S. requirements as it compliments global growth hopes; but does very little for Americans. At some point a 'revolt' by at least the bulk of taxpayers (or former ones now on the dole or nearly struggling), and voters, is going to redress this, like it or not. Few on Wall Street wants to confront that reality, as yet. And we understand; they are enthusiasts of 'what works'; whatever for the moment that might be. But in this case it's not a simple 'worry wall' climbing story.
Record levels are attributed to the Fed Minutes; while the unanimity of everyone that wanted a cut is 'cheered'; means they were entirely frightened by what they foresaw; by no means calmed or focused on globalist extremist propaganda. So the market is enthralled by that; rather than sobered. The other side of the coin may be that, while the Fed's actions certainly addressed the 'then frozen' systemic issues; such actions do not imply an ability to bailout individuals facing duress (in-size), or for institutional issues that are yet to compel consideration (during the course of 2008 in-part also).
Citizen revolts are reflected at the ballot box typically; which is why you have mutual contests suddenly to embrace fiscal sobriety; trim unfair unbridled free trade; modify the taxing structure, and possibly temper delusionary ideas that we are inflation free. We are; provided you don't eat, use fuel, pay taxes, higher insurances, or anything a modern society requires, outside of limited benefits from cheaper foreign goods; the artificial productivity enhancements perceived to come from more powerful computer systems; or the irrelevant increased profitability (for citizens) from outsourcing labor.
It is an unacceptable situation; though of course labor and other domestic aspects at this point have been trimmed and streamlined after their own years of abuse. But we have to side with those Republicans and Democrats who say the U.S. continues in a declining phase unless or until a handle is grasped with respect to addressing all this.
Lots of platitudes are heard about free markets and capital creation; but that occurred already. Now we're at the tipping point where consumption created by printing money and artificial low rates (and the already-drained housing ATM) risks colliding with new realities; that while a certain proportion of something may be good, more of it isn't just automatically better (sort of like having desert; more than a nibble isn't good for you).
It's is delightful to have 'real' Republicans confronting the Middle Class wipeout that is not sustainable, and has even been on the backs of an extravagant 'elitist gilded age' as might not crest and come down with a thud; though historically that's what occurs.
Yes, a vibrant economy creates wealth; but we do NOT have a vibrant economy. We had a vibrant reflation that we forecast from 2002-2007 to ramp things up in the hope that growth would catapult the markets and personal wealth higher; and it did, though not as broadly as most caring people would like to have seen (to wit: smoke & mirrors giving people the illusion of broad participation in the recovery, which isn't what's now going on). Currently the medicine for this is to still encourage spending that's beyond logic; though without incentives not to consume, many people will spend absurdly. Of course such things are individual situations, but the masses take guidelines from our leadership; and that's where the encouragement to spend rather than save is beyond it's time. It was the approach taken (in-part) back in 2001 after the 9-11 assaults, and maybe telling people to 'go shopping' was a short-term fix. It's not a long-run solution.
Our industrial might is fractured; as the Information Age replacement of Industrial Age mantras is being squandered by greed under a false cover of unbridled free trade. So while Michigan or other once-dynamic corporate bases are right (and they also failed to modernize to control cost abuses earlier) arguments from others that 'most favored nation' status given to (say) China, helped enlarge our work force, are partially right. However the latter is low-pay; almost no-pay. It's important to distinguish between the motivations, causations, and ramifications; and not just 'lump' all jobs together as if they were similar. We at ingerletter.com have no doubt but that if the Dollar weakens as much as some on Wall Street would like (we would not and don't expect it by the way), you'll have Americans buying a Honda made here rather than one made there (in some cases you already do). But that too is a misnomer, as the key and the art is design and engineering, which increasingly isn't done here, though there are several studios for that purpose (to determine American desires). What's not desirable is to convert this Country to an 'assembly' force, rather than creative manufacturer class; as that's just what opening such foreign factories in this country frequently entails.
Daily action . . . provides an interesting conundrum. While investors press prices up, to new highs, traders are paying the highest premiums we've ever noticed, to protect against a drop in the Standard & Poor's 500 Index. The gap between the price of Put options on the benchmark for U.S. equity, and the cost to wager on further gains via, of course, Calls, has averaged about 8 percentage points in recent weeks. Not really a revelation of what's next, but notable as it's more than a previous high in July 2001, before the index dropped 34 percent and fell to the lowest this decade. We minimize the relevance only because there was an exogenous event after an existing decline, at the time, which of course was the barbarian's attack on New York & Washington.
So, while we're not saying that the NORAD exercise (apparently eclipsing what might normally be a Homeland Security responsibility) in Oregon, Arizona and Guam, might imply concern about a radiological attack by al Qaeda or a counterattack by Iran if the need exists to probe them tactically in response to their subversion and attacks on us heretofore and ongoing; we are concerned that the upward move in the big Averages has a surreal tone to it, and that worries us. And that's even if you attribute it to today; where the Fed agreed on the rate cut. So what? Who expected them to stand by? Of course not us; but we said they didn't do that to bailout the abusers. Neither do their minutes; even though the market is acting like that was stated. If it wasn't that would not be desirable, but they didn't say that and didn't make commitments on future acts.
Today's political debate highlighted these issues more, and indicate it is an American bipartisan issue; not one lassoed by a party trying to show fiscal responsibility versus the other. The mixed response still has politicians migrating to responsible posturing, and only partial realization that unfettered globalism is a treacherous road with dead-end risks, as relates to the prosperity of the American people, beyond the short-term benefits to certain corporations that function mostly abroad. The comparison with the old Smoot-Hawley Act is only partially true as relates to the pre-War situation, as the curtailments of petroleum, aluminum, engine, and related sales to the Axis powers at the time did contribute to tensions; but their aggressive designs on neighbors clearly predated the cessation of strategic exports. So while 'technically' true, the assertion's inappropriate, as it was not restraint of normal trade that promulgated tensions, and it is a fact that the Japanese zeros attacking Pearl Harbor had Alcoa aluminum and in some cases Allison (GM) engines, plus others built in Japan under Detroit licenses to Mitsubishi Heavy Industries. Hence; it's a spin to suggest that America's chance for a deeper recession is enhanced by normalizing trade, versus what is abnormal trade in the context as exists currently. The attempted sale of nuclear triggers to Pakistan via Dubai is just an example of the 'rest of the story' that most people clearly don't know.
What you heard is an attempt to corral and label anyone arguing that we are draining our Treasure, and an avoidance of the real issues of the growing deficit… and debt. It is a matter of National Security, as were other issues addressed. But at least parts of the issues are getting some attention, which is about time versus total avoidance of it. And you're finally hearing Republicans, who don't equate common sense trading with being protectionist or isolationist (which is a shrill attack by those who might as well in some cases be agents for foreign powers) given their interpretation of unbridled trade (we argue that free market capitalism is great so long as it's fair or balanced too). So in that regard ideas of 'mirror tariffs' or policies, seems a kind of direction to explore.
We extol optimism and confidence; but not delusions that if embraced actually tend to contribute to the further diminution of financial sovereignty. Our prosperity already got put on the line; our security is borderline compromised. And we are in favor of serious responsibility, rather than a vision of globalist extremism that unrealistically favors the exporters to us, which at some point initiates precisely the kind of introverted isolation that we deplore as well. The actual road to free market capitalism, isn't pushing more offshore, but trade deals that are balanced or absolutely done in favor of Americans.
Yes, the U.S. 'rocks', but it is too simplistic to say 'keep going' and continue all of the pandering and posturing that hasn't gotten us out of problems, but deepened them in the quest for the (forecast here) reflation post 9-11. One of the first signs of progress, might be for political realization that recovery prospects were squandered by levered deals and encouragement of domestic debt, versus rebuilding our ability to export as we have basically not done. Sure, we can sell more abroad; but what's desired is yet more limited than it was just a few years ago, which already was a fractured base.
We believe the bullish alternative for markets over the years ahead not only is helped by, but actually demands sober grappling with such issues. If we also add emergence of insider selling, or a masquerade of big-cap enthusiasm primarily due to offshore or debt-averse money going into big stocks, that in this situation perpetuate their moves because of avoidance of debt investments or of small-caps (many of which are under tax pressures this time of year); or pure simple risky speculation or short-covering of stocks that have limited upside realism from here, you get the pattern action that has dominated. Part of that, remember, will be a result of ownership structures that make it tougher for individuals to pull triggers. Most Republicans agree we're eating our so-called 'seed corn', and at least if that's understood, versus mere cheerleading for the growth of foreign countries (other than if balanced trading), this is some progress.
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks interpret structural factors as exhausting on euphoric swings; focusing on identifying 'minefield' characteristic strategies to navigate October or beyond. We realize others are spouting about how terrific everything is (they must not own homes, pay bills or at this point eat, because the prosperity without inflation story wears a bit thin, for those who do), but let us say this: our dynamic economy has us very optimistic if we tackle the inequality and trade inequity debates forthright, rather than with a political mantra.
The upside cheerleaders are fond of noting this day as the 5th Anniversary of the Bull Market from 2002. Interesting indeed; as most of those guys were calling it just 'bear market rebounds' at the time, while we were among the few believing the 'emergency low' interest rates would trigger a tremendous resurgence and insipient reflation effort to manage the (then) situation. Now, with big-cap multinationals -among the most not least overpriced- in this environment leading; they are extremely enthusiastic. While it doesn't mean we're at a top, the risk has increased, and that's why 'premiums' reflect it (as noted). When/if this does fold, a low point might be forthcoming but interestingly not necessarily for the same multinationals. For now discretion remains logical; this is a continuing -dangerous- high wire act irrespective of intraweek rally tries as forecast.
The market is missing something: consumption as a percent of GDP already is lower. Don't take my word for these concerns; interbank rates are suggesting precisely this. And nothing in the Fed Minutes contradicted any of 'actual' vs. 'perceived' concerns.
Bottom-line: consumer discretionary spending is weak and will get weaker. Housing is soft and will get softer. The proportion of housing as a percentage of GDP is not at all irrelevant as many bulls contend; nor is their impact on credit-based consumption. Investments in China and India are huge opportunities; but corporate success must in a sense be measured so as to not overwhelm the benefits to the American people for the period of time between now and the next phase of (sensible) international growth.
Key credit or derivative issues are not ameliorated, as projected Fed actions were, though 'structuring' does move toward improvement, essentially 'pushing on a string'. That's a different issue then just stemming a tide. The Fed is treading carefully, and doing the right thing. We are hardly yet out of the woods with respect to housing; or debt or war issues. Important: a Fed 'staying ahead of a situation', isn't preventing it.
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.
Rarely we will comment about stocks in text. Typically remarks are via audio-video.
--
Comments are interpretative speculative postulations provided 'as is with all faults' and all risks with no assurance about future performance of anything (markets or stocks) in any way whatsoever. Personal necessity, irrespective of opinions, may require buys or sells deemed necessary, without prior notice.
In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples, by elements including organized terrorist forces in various countries. A world addressing terror threats continues, as domestic issues absorb us less as we focus on the Middle East crisis and World War III avoidance. (In this case World War III is Islamic terrorist and Iranian interference, targeting 'global village' communication or necessity supply-chains.) Are we maintaining high alerts?
Though few generally concurred for five+ years, our consistent view has been slow but persistent American growth isn't negative, allowing the protracted gradual growth without ancillary significantly high interest rate pressures. There's no truly-restrictive monetary policy; nor was there likely to be one irrespective of whining by Wall Street bemoaning disappearance of 'free bucks', as we absolutely correctly forecast would be the underpinnings of this ongoing saga. Slow growth is good; fast growth in price movement for housing or big stocks, resulted exactly what we long forewarned about.
Slow growth will likely descend into recession; of course that fear too prompted what the Fed did, inline with expectations (and a tad more), albeit with a bigger reaction to it. Our 2007 view has been that we're in an ill-defined recession; likely recognized if at all, only later. As to whether it descends into something like post-railroad debacles of the 1880's; well in-part it's what the Fed worries about. Regression to the mean and traditional affordability 'rules' will be hallmarks of lending guidelines for a while.
McClellan Oscillator finds NYSE 'Mac' rebounding to overbought on-Fed-rush cue, with those intervening bull-bear shuffles soon returning on the NYSE and NASDAQ. If LBO / hedge funds increasingly implode (post-forecast Fed reprieves), of course allowing rebounds until or unless 'events' occurs (as noted) the Fed will respond as needed. Reflex rallies allow lots of 'risk off-loading' implementation tactics. These are ongoing; holdings aren't all investment grade. Multi-month efforts evolve. And in this regard, we suspect that strategy is actually ramping-up with the market, not trying to revive attractiveness of (in-advance) structured-to-fail creative financial paper.
Issues continue including oil, terror; China, Pakistan (possibly the key to survival for a number of aspects of the 'war on Terror'); certainly all the Middle East, Korea, and yes, a hangover of funny money NY economics. Members know all views about what likely happens after final Quarterly Expiration phase at Quarter's end. Don't miss the other shoes to drop; because now the market won't be prepared for that, though we'd be surprised if the Fed doesn't know exactly why they moved to head-off panic. We'd thought time was bought by the big boys and pundit friends for risk-off-loading setting up absorption of re-pricing, and possibly prepping the market for next phase declines.
Given the amount of time evolved, we projected repeated new rebound efforts, which falter in the face of extending recovery highs. The last day or two were assessed as upside breakouts; we suspected not so simple, so that sans the short-covering, clear sailing would not lay ahead. This week suggested as down-up-dip-up-fade; it evolves.
Enjoy the evening,
Gene
Gene Inger,
Publisher
~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com)
~Gene Inger’s MarketCast™ (Intraday audio updates emphasizing S&P futures and market action)
