Gene Inger's Daily Briefing . . . for Monday August 24, 2009:
Good evening;
Robin Hood politics . . . dominate the media while financial broadcasters tend to try to convince Americans that all is increasingly well, as the economy ‘recovers’. None it appears are reporting the reality of the deficit increase, and the ramifications thereof. So yes, we forecast this ‘best rebound move of the year’ from late February and early March (though went higher than originally anticipated); and we’ve also said risk would return starting in August, if (especially if) we got an equidistant move (as I’ll explain in one of tonight’s 3 videos by the way). However what has not changed out there in the financial ‘hood’, is that the heavy bad loans or derivatives mess to unwind toxic debt, has not improved. Sure a time will come when that is accomplished and credit again flows to American industry (something thought correctly would be deferred as they focused all their financial attention, contrary to propaganda variations, on the banks).
Clearly, our idea (over a year ago) that emergency actions by the Fed and Treasury would prevent an even harder fall (to wit the economy not the market, which we were still looking then to enter another panic mode, which it dutifully did as months evolved along the way to being overdone; then a warning not to ‘press’ the downside further) at the time. We never thought (nor do we now) that Government is the answer to real restoration of innovation or creativity in America; but that empowering small business and individuals (to wit the tax code they have not addressed appropriately and also a series of initiatives for business and growth which are miniscule relative to the need) I think was and remains the answer. This President campaigned to do much of that, let us be fair; but on-balance much of the promise has either been sidelined or vanished.
The financial situation you all hear is getting better, is actually worsening. Properties underlie most of the securitized derivative contracts, and these are declining actually more aggressively than before; again contrary to the image they’d like us to believe (certain specifics and charts presenting the reality are reserved for ingerletter.com). To say housing is better based on ‘seasonal adjustments’ while omitting a distinction between single family and multi-unit dwellings, and then failing to denote it as only in part of the Northeast (more), while minimizing the reality that prices are still declining almost everywhere (additional details) is a distortion that sucks investors into housing prematurely it will likely prove to be. No doubt they’re closer to the low (if they need a home)surely; but the low’s not here; as those who proclaimed it are (as I said) wrong.
Daily action . . . will address the market’s current extension (it likely surprised some, that I thought we might just move higher this week, due in-part to the Expiration, and a couple other technical factors; but beyond this is should well be as video outlines) a bit more in 3 technical corner videos provided this weekend. One an overview with an economic comment; another the indexes; and a third on selected big-cap stocks too.
I will show in this report some of the actual inventory and foreclosure charts following onto yesterday’s remarks in that regard, as once this crowd of bottom fishers (many it should be noted are REIT or similar ‘pools’ essentially buying bundles of homes, not single homes as the raw data would lead one to believe) is done; we should see new pressures, and maybe then march toward a more sustainable housing low point. The key matrix remains the absence of meaningful new jobs or growth engines in the U.S.
Just a quick summary of some of the key points this week; and then the video. If you are a new member or would like to review the full texts, refer to the archives please.
The debate has shifted . . . to ‘cautious optimism’ about economic conditions in the recovery phase, that might even have markets advancing steadily through yearend. I am pained to disagree with this delightful concept; but unfortunately there are facts to consider; versus massaged data or illusory gains (for reasons outlined to members).
However, that begs the question as to why the market should do anything abnormal, in what (even in a bull market) is a dangerous time. That takes us right back to points about this market being in a ‘not if but when’ status with regards to heavily retreating; whether or not you believe this to be a bear market rally or the first new bullish phase higher. And we have disputed the idea that this is the most ‘historically overbought’ in the market ever seen as some say; because it simply isn’t based on what we look at. (That’s of course part of why we allowed for markets to extend just a bit higher lately.)
Where that leaves us remains an energy-led presumed exhaustion phase within this phase of upward action; and where corrective action could begin literally at any time. The problem with the ‘good news’ is that recoveries in industrial production have not led to a turnaround in employment trends; without a change (reserved for members).
Meanwhile, traders take shots at the short side and then back off; we do the same for the most part. There is some discussion about ‘performance relationships’; a subject I have broached also; but differently. Most seem to think that means ‘getting into’ stock markets even at high levels, so as to show performance by yearend. We say that’s at best a risky proposition, because we suspect that once the markets turn down, we for the most part will be more likely to see those with cash holding off (suspect already at the margin are doing so), while those who are ‘in’, will scamper for the exists quickly.
That would be so as to ‘preserve’ whatever gains they’ve achieved in what we called last February / early March to be the year’s best rally. Now whether or not pandemic plays into this or not (and we hope not; but many are gearing-up as if it may); this is a market that is increasingly dangerous to play on the upside, day-by-day, even if it’s a bit of stretch to call it historically overbought more so than at any time in history (not).
As to the pandemic, we already knew the estimated vaccine supply (if even inclined to take it) would be at least a third lower than first estimated as what was needed for the population of the U.S.A. Now you heard a National TV report saying it’s a third or so lower (and that’s of the lowered estimate, though they didn’t frame it thusly). We’ll take a shot and suggest that’s because the adjuvant used to maximize yield from the eggs used to grow the vaccine, is probably being curtailed since there are no tests to establish its safety; versus the problems that ensued after use in the Anthrax vaccine pre-and-post-Gulf War I. We wrote about that recently; and believe this is the issue.
While we are certainly not counting (and praying the opposite) regarding ‘pandemic’ as an investment risk; we do believe that if anything like the m&m projections occurs (that’s morbidity and mortality), you will see economic contractions in obvious areas.
To wit: you should hear about how the only way to grow our way out of this is serious incentivizing small business, and creating bulwarks against unfair foreign competition (such as this President, Obama, promised in the campaign); but alas, we don’t hear it at all. Rather we hear about subsidizing Chinese purchasing of U.S. assets; and that, by the way, is on the back of U.S. taxpayers; as the Treasury wants to subsidize this.
Fallacious logic of pundits and commentators plays-into this; also whether naively or by intent. Monopolization of liquidity on the part of Government for the bankers has in these reports been not only a realization of fact, but a forecast predating how they for the most part would address matters these past two years; and is how they behaved.
Weakened economic fundamentals and unsustainable or unrealistic earnings reports (primarily from cost-cutting and of course looking better ‘relative’ to Q3 and Q4 of last year; how could they not), have dominated the cynicism about the proclaimed ‘newer bull’ market. This remains a secular credit-starved contraction; as I’d forecast 2 years ago; interrupted by what was expected to be 2009’s best rally starting in early March.
Instead of a nominal decline and then higher prices (the prevailing majority view) or a correction and higher prices; the minority contrary thinking view (reserved remarks).
But counter-cyclical fiscal policy is notoriously difficult to unwind. Once a government program is in place, it tends to take-on a life of its own. That's why long-term Federal programs are a terrible way to fight a recession; any recession. But that’s what we’ve got, and it’s about the only effort that’s kept the banks open and the public mood a bit tempered shall we say (it roils up now and then as you can see; but generally tamed).
The core of the problem is no different than we’ve outlined for a couple of years if not longer: the U.S. is addicted to debt. We didn’t solve the tech bubble with easy money; because we merely stimulated an already then-brewing housing bubble. Now they try resolving the housing bubble with even more cheap money; but we’re not, because it mostly is Government promises and pressure; but private initiatives that achieve what little is being done. Today's massive monetary and fiscal stimulus is however creating another type of asset bubble. I call it a ‘transference’ of debt from the private to public sector; but it’s still there (even larger), and inures to all of us. (Full text the other day.)
In summary . . While we don’t disparage the comparisons widely heard with our own calling of a low in 2002-2003 (well before nailing the high technically & fundamentally in 2007); we dispute some of the monetary and credit dismissals made by those who expect a complete simplistic replication of what followed (years in which we rightly said ‘all declines would be false and abortive and rallies continue’). It was true that the housing bubble was in full-bloom then; credit for consumers and small business was broadly available, even if danger signs loomed. A point we made even then by calling it ‘a reflation’, was to constant remind that the ‘piper would be paid’ at its end.
Sure, investors (and citizens more broadly) are eager to put an overall historic credit crisis behind, and look forward to recovering to preceding highs. But those hopes are based on assumptions (details in fairness reserved for our members only).
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.)
Twenty-nine months ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a struggle readies after impressive rebounds as an 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 evening,
Gene
Gene Inger,
Publisher
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