Gene Inger's Daily Briefing . . . for Monday July 20, 2009:
Good weekend!
Market ‘plunge protection’ . . . has come off-the-table with a vengeance in the week just past. Is that an ominous indication of something other than onward and upward? I will explore that in our videos; but having allowed for the Expiration week that’s over now, to be on the upside, and not believing that it being positive automatically denied a negative for more than the shortes-term, I would not be overly comfortable chasing stocks. (To wit: a ‘nominal head & shoulders’ is gone; but is it a ‘breakout/fake-out’?).
For sure I see the pattern bulls are counting on ‘technically’, which we describe via a video remark too (equidistant moves after a consolidation); however most underlying fundamentals dispute this, just as they denied an extension last time S&P probed the 950 plus area with equivalent optimism about how the worst was ‘assuredly’ behind. I’ll get into that subject also via weekend twin videos. As to the wide ‘encouragement’ from the jobs numbers (ie: lower initial jobless claims); it was nonsense; as it included seasonal adjustments that disallowed would mean that the numbers didn’t improve at all. Actually, when reality is considered (lower paying jobs and part-time work), things actually worsened; although not reported thusly. I don’t want to see that; but reality is reality; not fantasy. Recovery will eventually for sure arrive; but it will be sluggish and will not see multiple expansions needed for the kind of move the bulls would like.
There is one way we could get that (key reserved for members); and that would be counterintuitive for the American people’s effort to recover. But at the same time oil going low as some myopic pundits advocate, it’s even worse in the overall long run, as it would stymie drilling or production in high-oil-extraction-cost areas like the U.S., thus ensuring extremely high prices later-on. The fastest way to $150 oil is via 20 oil.
Oh and we would like to confirm that ‘rumors of Goldman in talks trying to takeover all the operations of the United States Treasury’ were solely tongue-in-cheek, of course. On the other hand; if you look at leadership of Government; maybe not entirely nuts.
Daily action . . . will suggest in our technical video a pattern considerably different in the days ahead than in the days preceding. Fundamentally, though we don’t assume the end of the recession (or worse) is here; even if it were that doesn’t translate into a rapid and meaningful period of economic growth; not with an absence of jobs growth in serious ways. And then there’s housing; which in key areas isn’t improved (more). Commercial property woes remain significant: balloon loans as we mostly all realize, peaked right in the early part of the decade, and will be coming-up (timing is noted). Rollovers will depend on qualification of reappraisals and owners, more than lenders, determining whether they’re able to walk-away rather than put further capital into the projects. Seriously; most are general or limited partnerships, so in a lot of situations wealthy owners could disengage without much retribution against them; quite the opposite situation of a great many American homeowners, still just slugging it out.
Speaking of that, we warned in 2005 that housing was on the edge of a precipice; as we thought stocks had maybe a year or more additional time, because money tends to slosh around looking for somewhere to go (held up by oil and commodities then as well). But I felt even then that the clock was ticking for equities; especially as breadth narrowed during the advances of later 2006 and early 2007; prompting our warnings, first of a ‘credit crunch and liquidity crisis’ (in Feb.) and then of an ‘epic debacle’ (from May of 2007 forward; with a ‘circle the wagons’ Paul Revere warning for rallies to be the last chance out, not in; ie: preservation of capital). While the risk obviously was a good bit reduced (and we forecast a turnaround) back in late Feb./early March of ’09, followed by an adjustment; new rally; correction; possible push into early-mid July as a period of risk returned (roughly and choppily); there’s very interesting contests now.
If there’s one ‘unreported’ story of import on Friday, it’s the Oxford group in England, suggesting (something we wrote about just the other day coincidentally); that ‘swine flu’ has the potential to cause a ‘worldwide deflation’ from an economic perspective. Of course we believe it depends on the availability and efficacy of the vaccines that will ensue; but if there is any major outbreak, the travel and business implications for the Fall and Winter will be severe indeed. (Further discussion reserved for members.) I do not understand why the American press is relatively asleep at the switch on this. I say that because, aside avoiding panic, business needs to make plans in advance. I also do not accept the ‘sound bite’ financial journalism that is again dominant; if state issues (like California’s) kicked-in last week and aren’t resolved; they didn’t disappear just because financial reports choose not to address the subject and stay abreast.
Let’s review our key points of the last few days; and then the weekend videos follow.
A ‘Teflon’ market . . . this is not. While allowing that it could appear thusly this week (a combination of early favorable earnings; nominal Expiration and short covering too of course), we had outlined a few concerns going forward. As to Professor Roubini’s remark that the ‘worst of the recession may be over’; well… that’s what I said months ago; based on the inability of a cut-in-half S&P (or housing market) able to replicate a debacle entirely; since in the ‘race to zero’ we proclaimed we won it way back (Feb.) I envision however a number of issues that can make a recovery reasonably squirrely at best, and in a worst-case situation; some of the proclamations of salvation might at this point be occurring just in time for a new downside salvo to appear on the horizon.
As to the Professor; he later said he was taken ‘out of context’ (that we understand of course; having experienced it too). Our view actually is that some of these economist and professorial types have had the right idea; but were either too early or too late for the most part; and generally got either too negative at the lows last Spring or now are too optimistic about the timing of getting out of this National mess. It’s very complex.
Please note VP Biden’s comment about Health Plans ‘or bankruptcy’; below.
No we’re not going to focus (that’s not good for the eyes anyway) on an ‘eclipse’ next week; nor the specter of heightened earthquake risk along the West Coast (that we’d noted last week, based on the increased rumblings in the San Andreas fault, plus the unique nature of those rumblings as assessed by University of California geophysicist staff both in Los Angeles and at Berkeley). All week I’ve said that next week actually was more important from an analytical basis, rather than this Expiration week which I persistently suggested likely on the upside (even though I remain concerned about over-optimism or premature conclusions as to how ‘better’ isn’t exactly now ‘good’).
I will say that activity in the San Andreas is definitely ‘non-partisan’ in this politically or Federally-charged economic environment. Nevertheless if something horrendous did occur (notably while I’m in California; but been through temblors before of course), for this Administration it would probably be the California version of Katrina; an excuse to ‘bail-out’ the State financially, which is otherwise prohibited (unlike Federal budgets).
The irony could be if all these analysts and economists (typically in New York or DC), despite good intentions, do not really grasp the trouble average Americans are in. It’s likely many of them are too detached (an old accusation about elites viewing the rest as provincial) to comprehend not only what people are really going through, or their new-found propensity for frugality and savings. Trends like that are hard to initiate as well as tough to reverse. The American people generally feel they’ve been ‘had’ by a poorly performing Government before this year, and now one that is ‘doubling-down’, instead of limiting stimulus to systemic integrity, and then backing-off before unborn generations are encumbered with debt servicing in perpetuity. Officials see statistics, but do they really understand? Probably not. Banks do that’s why they’re not lending. And serious market analysts should; as in a socialistic environment, the value matrix is not going to put back multiples that are justified only in superior growth timeframes.
Finally; this story is making the rounds Thursday from Joe Biden’s speech to AARP it is presumed focused solely on the Heath Plan. Vice President Joe Biden told people attending an AARP town hall meeting that unless the Democrat-supported health care plan becomes law the nation will go bankrupt and that the only way to avoid that fate is for the government to spend more money. Let’s quote the V.P.:
“And folks look, AARP knows and the people with me here today know, the president knows, and I know, that the status quo is simply not acceptable,” Biden said at the event in Alexandria, Va. “It’s totally unacceptable. And it’s completely unsustainable. Even if we wanted to keep it the way we have it now. It can’t do it financially.”
“We’re going to go bankrupt as a nation,” Biden said. (Are we back to fear; do it as we suggest, ‘or else’? Last time we heard that was a hastily-crafted stimulus Bill.)
“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that's what I’m telling you.” (I’ll have no further reflections; entire ‘parallel universe’ text comments are available in the ingerletter.com archives.)
Which universe is it? The reality or the fantasy? Both for the moment. The fantasy as would imply the ticking time bombs are going to be diffused (more details); and that restoration of the same games that contributed to all the issues (details spelled-out) it seems are not truly reformed (ie: doing things the Washington way rather than in right ways). If we get through the weeks and months just ahead absent a new ‘cratering’ of the markets, then indeed the fantasy may have to be accepted as the new reality. But that would be a premature assumption. Rather, the impact on miniscule improvement in bank lending; credit card delinquencies; commercial property erosion and absence of construction; slowness in trade policy reform (too detailed to spell-out here); plus pell-mell haste evident trying to tackle everything; not the least of which: healthcare.
Time bombs continue ticking . . . irrespective of markets celebrating a hedge funds good results; that of Intel having better sell-throughs; or the concern that some others are having opposites it seems (in ways that may more accurately reflect what’s going on or rather not going on) with regard to economic activity. Those ‘time bombs’ range from the specter of an obviously bursting bubble in commercial real estate; to specter of liquidity swaps in an unusual alignment with the Dollar; to encroaching ‘swine flu’, which while a few dismiss it as hype (wish that were so) is attracting new appropriate coverage and a growing fear abroad (especially in Great Britain) versus that here in the United States (which actually has more cases, but less coverage by investigative reporters more interested in reviewing what happened versus a pending tragedy).
Speaking of that, and tying-in the valuation issue; it’s hard to imagine (expansion). While we try to sidestep lots of partisan political issues; there is this one quote that ought to summarize why it may be that stock valuations in a society that is centrally directed will be constricted:
"SOCIALISM is a philosophy of failure, the creed of ignorance, and the gospel of envy. It's inherent virtue is the equal sharing of misery."
Sir Winston Churchill
Per remarks the other day about ‘why’ there is something wrong addressing problem origination as somehow the ‘product of a few’ (which wasn’t true as there was plenty of blame to go around); this also explains why such remarks smack of class warfare.
It is also why we encourage centrist governance, absent ideologues prevailing. And if indeed there is more blame due to the financiers than to the laymen (it’s arguable for at least a degree; though the politicians pushed the original sin of unqualified lending) one might ask why taxpayer funds are used not to encourage lending, but to stoke all the coffers of those who attempting to trade in manners not effectively differentiated it seems from the past, at least as of yet. There is no resentment against trading gains, of course; but there is anxiety about the absence of democratized business lending if that indeed is what Government contends they are trying to effectively stimulate.
The core economic problem remains that our system is laden with debt, and that has not changed. The level (while some argue is maintainable) is triple that relative to the GDP of the 1980’s. We have said that debt-induced serious inflation isn’t here as yet (some call that a ‘black swan’ event) and we think that’s the case. But yet isn’t ‘ever’.
Also risk is further hidden in complex derivatives, such as the swaps and CDO’s that we warned about starting in early 2007; and which are not adequately unwound yet. I do not seek to put an immediate bet on inflating asset prices (though eventually see it thusly) and continue to suspect the risk going forward remains what the Deflation that is so difficult to contain relatively speaking. Deficit-based stimulus is what the Feds of course have chosen as a solution; but this itself creates its own vulnerabilities as well as risk of being imbalanced relative to common sense or actual needs (addictive too).
As noted; a bounceback from overcorrection of inventories and the ‘shock & awe’ of late last year, is statistical, more than real, as far as recoveries go. As a Nation we’ve become desensitized to debt; that is a danger itself. (Further member-only analsysis.) To believe currency markets will facilitate the policies without being roiled, is naiveté.
It’s not at all my point to emphasize (flu) other than it’s a real issue. Reuters this week reporting that the ‘new flu’ “resembles the feared 1918 virus” and that’s a quote. They also say that researchers are reporting that the virus has the ability to infect the lungs more so than common seasonal flu viruses. To wit: presume this means it can spread beyond the upper respiratory tract and go deeply into the alluvia of the lungs, where it is more likely to linger and cause pneumonia. They also found people who survived the 1918 pandemic are less likely to contract disease; there are many still in nursing homes and assisted living facilities, allowing this type of assessment to be possible. The point is: “the H1N1 virus replicates significant better in the lungs”.
Is that alarmist? Well, if this is coming, better be! It means healthcare workers (most especially the young) need to get the vaccine first when it becomes available; and it means that this virus will impact truly on a worldwide basis, with a human disaster in the months ahead, unless the vaccine makers can make immunizations available on a truly worldwide basis. They probably won’t; and you can assess the implications as you like. This particular virus’s place in history is yet to be established, contrary to all those who dismiss it, or try to politicize its ‘sudden’ move to the forefront (not sudden; and nothing to politicize). Simply put: this pandemic has potential to produce a very significant impact on human health and also on the global economy.
So it may be coincidental that it will likely peak about the time the Government will be agonizing about the failure of the multi-phased stimulus plans to really take root; and there may be some political dancing to suggest that ‘otherwise’ might not have been so; but forgive me, who cares about the politics. We initially forecast the stimulus was a controlled effort to keep banking functionality (systemic risk avoidance) going; and at no time was really intended to help homeowners or small business much (more); nor particularly provable nor pertinent with respect to overarching issues of today.
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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-eight 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 periodic 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; (as delved into).
Enjoy the weekend!
Gene
Gene Inger,
Publisher
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