(Courtesy excerpt of Gene’s www.ingerletter.com thinking about very volatile current market action, as we breach both Nov 2008 & 2002 lows as I’ forecast for February.)
Gene Inger's Daily Briefing . . . for Monday February 23, 2009:
Multiple dilemmas . . . facing the economy and markets remain unresolved as we all realize. Those ‘hoping’ (remember, though everyone does it; hope is not a strategy) it all turns-out fine ‘soon’, generally are basing that on perceptions of the modern past it seems, in contrast to comparable (or nearly so) capital-crises of the more distant past I believe. One example is a vociferous pundit coming on CNBC and saying ‘the White House has taken bank nationalization off the books’. Actually that’s not precisely right from what I heard (and I did hear). Let me be more specific about what ‘was said’ and what it means. Also while the broader recognitions (as expanded upon in this report).
An example of the latter is how pundits talk of ‘capitulation lows’ and final washouts; it seems as if they are clueless as to credit card delinquency; ALT-A and Option ARMS issues and waves of defaults (not to mention Commercial Property woes) that are out there and pending very soon this year; irrespective of anything in any plan instigated at this point. As to remarks last night: I absolutely realized lots of people were taken down the primrose path by bankers and lenders…. I have often mentioned that as all ingerletter.com members know. (Balance at ingerletter.com for our members only.)
Plus it is true that when you focus on primarily lifting people out of poverty, what you end up with is historically more people in poverty. That’s why you have to focus on a ‘reward’ for those who take risk; rather than bailing-out ‘only’ those who took risk and are frustrated it didn’t work (which of course deters future risk-takers from funding all such future ventures; including loans). Yes, many were relative innocents duped by a corrupt lending and banking element within the overall structure; and that’s extremely demoralizing to the citizenry overall (which is why we argued taking the good assets, from the bad banks, giving them to the good banks; while not rewarding participants in the securitization and distribution games, well before others made similar appeals).
So I’m not a big proponent of big government; but not government so detached that it fails to protect us or enforce the laws. One of my heroes said such ‘government that governs least’ is best. One of our members reminded me of this John Adams quote:
"We have no government armed with power capable of contending with human passions unbridled by morality and true religion. Our constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other.”
This might be kept in mind when we diverge from Constitutional law, and particularly in this housing arena, if we dispense with Contract law (other than right inequities as result from people being hoodwinked into certain ‘types’ of mortgages, such as where someone put down a perfectly normal down-payment, but got shoved into a subprime or negative amortization loan deceptively, because the parties thereto made extra big fees by doing that to the home buyer); not simply bailing-out those chasing a rainbow (if we’re doing it that broadly, personal remarks to our members is withheld here).
As to the breadth of ‘bailouts’; aside Medicare and Social Security (which we pay for) I am unaware of Government programs which really target the middle-class majority. And that makes sense; as not enough money exists to totally do that. Hence program ‘hurtles’ (hoops to jump through) tend to limit the number of people qualifying for any of the Government programs; whether they fit one’s political predispositions, or not. If so there’s an economic (and market) aspect to this: nothing coming or proposed with respect to housing is going to meaningfully interrupt the trend to its natural conclusion over time; which is what we’ve said about the projected housing decline since 2005.
That of course relates to housing prices (for that vast middle class) regressing toward equanimity with the slow curve of long-term rising wages (providing that holds up too, as is suspect too). Clearly means we’re absolutely still in the midst of a deleveraging process, interspersed by spinning heads and theories and political ‘solutions’; most of which cost a lot of money, but actually end-up postponing the termination of duress. I am absolutely compassionate to those who have suffered (know some personally as they were not in positions to liquidate, or willing to believe what I personally did, when ‘corralling cash’ in the 2005-2007 period on a rotating basis in anticipation of all this).
I am trying to address this from a market perspective; or how non-standardized types of processes are chaotic (they plan to change that) or why I don’t see ‘salvation’ yet. I do see periodic snapback rallies as we have described; and this too we’ll address (in fairness to members, solely via the twin ‘technical’ videos accompanying this report).
As to ‘bank nationalization’ . . . nothing is entirely clear. However, what I heard with my own ears was Chairman Bernanke at the National Press Club this morning with a remark that may have slipped: “return banks” to private ownership as soon as it’s possible. That followed the hint from Senator Dodd; and a broad White House press remark to the effect that Government was in favor of banks under a private umbrella. (Barney, who forgot the pressure he put on lenders to loan to anyone with a pulse, is a smart guy; but hasn’t fessed-up to his personal role in CRA origins of the problem.)
Well, yes; even the quasi-nationalization already done, has effectively achieved that. (Portion redacted for members.) The majority of banks aren’t recipients of TARP or other monies (only bad ones plus those who wanted to play in that sandbox; though they find their powers may have been sandbagged by doing so in an instinctive ‘let’s get the free money’ moment); so the White House remark is valid; even if they do temporarily take-over one or two banks which are too big to fail, but also too big to save. So they might take them over; under a private umbrella (that may or may not provide relief for private holders on the equity versus debt side, so is a reason we do not understand why everyone wants to gamble on such lottery tickets when there are so many other stocks incredibly depressed if they insist on gambling).
I made an effort in my pre-final hour comment to oppose the media misinterpretations as I saw them; and shortly thereafter the market did finish the upward spike and turn down (unlikely we had any influence on that; if so we’d have been more than a voice in the wilderness warning of this ‘epic debacle’ coming; two years ago this month; at the same time I’m appreciative of the many notes from investors and brokers too who say my calling the coming collapse to their attention helped them avoid catastrophe).
Finally; as to old Rick Santelli who I endorsed (not for everything he may think; but for his candid perspective which is apparently close to my own about this situation, as it was eons ago when we were assessing the markets on Chicago TV), I was of course pleased that he was invited to the White House to discuss these matters. How that will go remains to be seen; but his stance already moderated a bit. I suspect that the White House will endeavor to ‘win him over’ to understanding their side; or if not (and no I don’t think they’ll make him register as a ‘lobbyist’) they’ll strive to quell what might otherwise start to become a ‘Chicago Tea Party’. That would be a tax strike in an historical sense; and that truly would make Washington go hysterical. Especially if it started in the new President’s home town. Hah! Mr. Obama may learn from this too I suspect; as serving the community (a city or nation) as he promised means catering not just to the South Side, but also the North Side, the suburbs, and the loop traders. If the President would (personal reserved view of how Obama should address this.)
I will say this; and this is why the market is so sensitive to what we do with the banks. Just like homeowners (or renters with debt); businesses have to deal with upcoming maturities of their debt obligations in most cases; not just meet payroll and all current expenses. And when credit markets shut down, it puts corporations of all stripes in a dire position. This is exactly the real worry facing hundreds of companies around the country. And it is this dilemma -as much as the banks or beleaguered individuals with dubious loans- that should be frightening President Barack Obama and his aides. So much talk about residential woes that can’t be resolved without new jobs from growth industries; and that’s also restrained by poorly-addressed trade issues too. If it were otherwise fine; but it isn’t. For now, the focus on banks is because solid companies can't roll over their debt obligations. If they can’t do that; they will fail, costing jobs. It will not matter if ‘mortgage mitigation’ pleases the Chicago trader or naïve resident. If you lift up the productive elements of society and stop the seduction of low-cost labor abroad (actually provided for in trade agreements) you’ll go further towards getting us as a people out of this. It’s a holistic approach heard in the campaign; but rarely now.
Daily action . . . has complied incredibly to our forecasts so far in 2009 once again; continuing the pattern commencing with our warning of the ‘most bearish forecast in all my nearly 40 years of market analysis; culminating in an ‘epic debacle’. (For 2009 that was brick-wall of resistance in early January; drop thereafter; little rebound in late January / early February, but from lower levels; and then flail and falter with a bigger drop to new bear market lows in later February. All of that has now been achieved.)
As to what’s next; we’ll address that a bit more in the twin videos that follow summary of a few comments made during the course of the week as have continuing meaning.
Summary: It is, as we’ve argued these two years in forewarning of this ‘epic debacle’ (saying in advance it would be the ‘worst financial catastrophe and forecast since I began in 1969 on Los Angeles TV, preceding The Inger Letter or ingerletter.com for sure), no coincidence that Government is deaf or acting like knuckleheads when it comes to our wealth; equity in taxation; protecting our borders; avoiding ‘red herrings’ like tying first-responder cutbacks to every threatened budget contraction; or for that matter the (insane) idea of trying to revive America’s economy without enforcing the ‘trade deals’ already on the books, in order to ensure relative parity in foreign trade. I have persistently argued (for 20 years on this part) that you cannot survive with just a ‘service based’ economy; and by not making much of anything. There is no history in the world of a country prospering for long when they lose the edge in such segments.
So; it all ties together; and Obama did not start the problem; that’s for sure. But what we’re hearing so far with respect to ‘solutions’ is either more of the same or worse. A ‘redistribution of wealth’ seems partially a political, versus economic, course of action.
We have raised the alarm signals on these matters repeatedly for years; and now as Government encumbers our society and future generations with debt burdens that for the most part cannot redress the issues (nor restore globalism to what it was; heaven forbid they actually believe that’s doable or desirable; especially excess consumerism by the way); leaving us potentially imperiled as this continues to track the 1930’s, with the potential ‘rearmament’ cost burdens should the world deteriorate into broad war. I am not calling for World War (for those who will react thusly) but the opposite; enemy terrorist states (including one in South Asia that hasn’t been overrun yet; but is at risk of that happening; Pakistan) will be more, not less, tempted to stretch the limits both overseas and as relates to us, if they perceive us in the grips of untenable situations.
Remember warning about strategic global risks?
Oh, by the way; amidst this domestic preoccupation guess what: Iran just reached a level that normal people in the West have called a ‘red line’. They have produced just enough Uranium hexafluoride (about 1000 kg) to make a single atomic bomb. While it is presumed nations building a nuclear force rarely convert to fissionable material shy of enough for several nukes; the fact remains (not surprised) apologists for Teheran ‘underestimated’ Iran’s stockpiling capacity until they arrived at this threshold point. It didn’t make the news for two days not. Interesting. It’s not coincidental that Iran has developed not only a longer-range (based on North Korea’s Double Dong) IRBM missile; but orbited their first satellite. It is pathetic to listen to Europeans or Russians suggest this is all for power generation. Yes, generation of a new dangerous power.
P.S. Late (Thurs.); Prudential Financial, America’s second-largest U.S. life insurer co., lost eligibility for the U.S. commercial paper program, after a new downgrade by Fitch Ratings, reducing the company’s access to short-term debt markets. “The company’s liquidity requirements are not dependent on access to the commercial paper market or to debt capital markets”, according to Prudential (just to sooth those with policies; the best solution if you’re an insured, is simply don’t die… live healthy and prosper in the future; as you may not be able to depend on any old-era sources for sustenance). By the way; competitors Hartford Financial and Genworth Financial previously lost access to commercial paper programs after downgrades. So this isn’t so surprising. I do note though, that Fitch (additional details; this will do).
Is this where I reaffirm what I said last year: ‘Warren Buffet was early; way early’. I said it respectfully; as I’m no Warren Buffet (and not ready to start life over running funds). However, in all humility; he was wrong and I was right; as predicted then. All these guys, funds, insurers, mutuals; by gosh; didn’t they grasp ‘what goes down’ at a time ‘technical insolvency’ happens to the U.S. banking system? They had to know. But of course I don’t know what they didn’t know. But we knew it. How is it possible?
And then why do these guys still talk about lows (aside intervening rebounds) when it is (or should be) well-known that the question of bank nationalization is on the table; I think the jobless benefits collections number released today signals deterioration still is going on with jobs; plus you have credit-card defaults about to surpass a prior high. Factor-in the ALT-A and Options ARMS issue; that the stimulus doesn’t address; and you have what; a prescription for a new bull run? Hardly. How about a washout, rally a bit (not just Friday action); and then drop as low as we’ve previously outlined likely.
Technically . . . (back to the market); while the tea simmers in Chicago; you have bears calling for huge rebounds, as permabull types throw in the towel. A bit coo coo. Geez… and only one lady (Geez Louise) finally comes out and echoes our view; that the 2002 low is the key; with the November ’08 low itself otherwise of nominal importance. We’ve been trying to warn of this for going on two years now. And they finally grasp it in the financial world; but past time they can protect and act rationally.
In my opinion (as often stated) breaking November lows, because they’re coincident with the 2002 lows (when we turned bullish after being bearish from early 2000 going forward until the Fall of 2002); will prove my main point: that 2000 was a secular high; that 2002 was a cyclical low AND that 2007 was a cyclical forecast ‘reflation’ high not an actual bull market (the sucker rallies in the Dow Industrials and S&P double top at the time masked the underlying distribution and internal deterioration which preceded that false high). A look at the NASDAQ chart is the easiest way to see this principle. (Remember this excerpt was from earlier in the week before lows in the Dow broke.)
For now; having been the first to issue an ‘epic debacle’ and catastrophe warning in February 2007; and denoting the technical insolvency of most larger banks; we stick to our macro guns; and at no point since early 2007 have called for a primary low yet.
Fundamentals: this relates to lower multiples on lower earnings; not a popular inverse call. That ties-in to my arguing for 2 years to discard preconceived notions of ‘market value’ levels; or to realize the entire pre-top decade was an unprecedented anomaly. So, if we discard anomalies, you regress to normal 8-12 multiples on big U.S. stocks.
I was asked recently; do I think the Dow will hold 7000? My answer: ‘why so high’?
Look out several years
Equity capital evaporating contributed to disintermediation; monetary velocity is gone as we forewarned and often note; leverage and the perils in the wake of such excess do not right themselves overnight; as if there was a disconnect from reality. While we concur with the idea that valuations improve as markets decline; valuations and firms capacities are generally still correlated with levels of non-recurring artificial growth.
(Numerous portions redacted for brevity; members please refer to the archives.)
The long history of honoring our commitments is not why others buy Treasuries. It’s a lot more complex. There are no other markets. China is not currency-reformed. Dubai is do-sell. (There is no real estate market there; all those fancy leveraged buildings in fact are impossible to sell… someday people will make money.. but for now mostly of course we hear 75% declines; but as there are no buyers; maybe it’s 95% declines.) I think that if that were translated to ‘toxic assets’ in general, you’d see why the banks are so upset that they can’t continue the charade by (redacted). The reality is banks never could meet all demands if confidence vanishes; so (as we argued these two years) what the Fed has been doing is properly aimed at systemic functionality only; not just bailing-out banks. (Balance reserved for members.)
(Tues) heard my old acquaintance Abby Joseph Cohen (of Goldman Sachs) ask Alan Greenspan about regulation. He acknowledges we will have to have more. Fatiguing to hear this line of thinking perpetuated; none of these folks talk about circumventing the laws and rules already ‘on the books’ regarding counterparties and more, as Mrs. Cohen inferred, just by alluding to ‘regulations’ and surveillance post-the-1929-crash; which last I heard weren’t repealed. Greenspan didn’t answer the question and fairly quickly started talking about ‘globalization’ and how people departed abject poverty. I cannot accept such people ‘hoping’ we don’t retreat from globalization.. are they still clueless? If the American people aren’t prospering, how can they import goods from the world in quantity? And the rest of the ‘formerly emerging now submerging’ world was not expected to be mature enough to take over the lead without us at the helm. (And don’t forget the major banking risks in Europe and Russia as we warned about.)
Mr. Greenspan says ‘this will pass and it will again be as it was’ with globalism. Sorry; not so. And I don’t wish it so. And the American people didn’t vote it to be so. Nor did their representatives; aside from being uninformed pushovers for being hoodwinked it seems, by anyone telling them we’re protectionist, when all we want is equity.. if we’d regain respect our trade deals; guess what; they’ll all buy from us; with pleasure. It cannot be ‘as it was’ without restoring flase easy money, or promoting above-normal standards of living (that people can’t afford). Clearly; passage of the nature of a huge spending Bill also affirms that Washington overall doesn’t get it; as there is no history suggesting it will work given the horrific creditor status we’re in; and also no reason to view it as being targeted properly. In the longer run we’ll (ideally) get through this; not because of Government (beyond keeping banks open or oversight); but in spite of it.
Again; my point here is simple: the ‘world trade’ data is falling off a cliff; competitive currency devaluations are ongoing while denied existing; state budgets are faltering; pensions have to be reviewed and rejiggered; and basically ‘deleveraging is a b*tch’. The rest is essentially like what happened in the wake of the ‘crash of 1929’ at least to a degree. Lots of individual developments; with various degrees of importance but often perceived as having more influence on macro trends than was feasible. When it is observed that they individually fail; people get negative; not realizing that like a war (it is a war) some plans will work better than others; and others aren’t yet conceived.
Also; Secretary’s Clinton and Geithner pay attention. Prospects for political upheaval are growing. Public anxiety can spill out onto streets there or here, really at moments notice. Governments must act wisely, but quickly; not just express ‘resolve’. What we think is needed in Eastern Europe (where countries threw their lot in with us and lost) is hard currency and guarantees of support. If they don't get help, a simmering public fury will turn into something much more lethal than demonstration in Paris or Athens.
Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail (not may prevail) through (forward timeframe for members only) as intervening rallies in the market, for now, will occur, but be false and abortive. In event or as other developments unfold that could change prospects; we’ll evaluate.
Macro Summary:
Remember; there is nothing conventional about this bear; nor was there expected to be..regular members know we warned ‘longer & deeper’, and ‘epic’ in duration terms, almost two years ago; quite a heads-up on those doing it now; after the devastation has already occurred, and there’s little latecomers can do about it; but that’s typically the stock market, and that’s why being proactive was so important in this ‘new era’.
Overall Conclusion: historic combined illiquidity was so gargantuan in the business world; or insolvency for much of the banking / institutional worlds; that for it not to triumph was delusional. Lest anyone misunderstand: we need a smarter 'velocity' of money to become energized and involved (since toxic housing debt is a microcosm of the overall debt picture); so we anticipate 'velocity' created in ways that 'empower’ substantive American revivals, as the banking issues are sorted out somewhat better.
Meanwhile, the Fed has not really addressed ‘mark-to-market’ nor Dollar-erosion that ensues. That leaves basically fiscal stimulus; or let the chips fall where they may. As this evolves; prices plummeting as the Deflation genie isn’t put back in the bottle yet.
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 videos.
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 more while as we must focus on Middle East and World War III avoidance.
Our 2007 view: we were heading into a recession or potentially worse. Preventing it descending into something akin to post-railroad debacles way back in the 1880's; is precisely what the Feds combatted back in 2008. Actions affirm they remain engaged to stabilize monetary fluidity or functionality; as we argued for months; and has now gone into 'overdrive' so to speak (refer to prior comments for expanded discussions).
Twenty-four months ago I commenced projecting an 'accident waiting to happen' as affirmed historically after long-duration periods of free money (Gilded Age mentality). Such doesn't create enduring liquidity; just gives that interim illusion; we postulated in 2007. Do not overly focus on particular price levels associated with big-cap lows. It will be useful for trading Indexes of course; but sector-rotation will define bottoming in the course of a year or so ahead; as what we don’t have is a ‘V bottom’ and panacea.
Enjoy the weekend!
Gene
Gene Inger,
Publisher
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