(Courtesy excerpt of Gene’s www.ingerletter.com weekend analysis. Forward outlook provided via Flash video charts outline technical prospects for the new trading week.)
Gene Inger's Daily Briefing . . . for Monday September 28, 2009:
Good evening;
Spreads between reality and optimism . . . can’t exactly be traded (the VIX isn’t an adequate expression of the polarized views of recovery versus renewed pressure, as goes further than mere expectations for the now underway stock market ‘correction’; to wit everything we have warned about factually regarding forthcoming foreclosures; defaults; and delinquencies of all types; not to mention Herculean deleveraging that the public thinks is behind, but in actuality has barely had a dent taken out of toxicity. (That’s why we discussed the FHA rule change on ‘spot’ mortgage approvals for all not FHA compliant buildings, and what that will do to drive prices down anew, etc.)
Then there is the Fed, as we have suspected in our writings earlier this week; keenly in preparation for unwinding the excessive debt encumbrances, that helped stabilize the systemic issues, but done little more. While that was our forecast before the panic as you know; we also have been critical that much of the stimulus was focused on for the most part the ‘least impact’ areas (of make-work and/or housing stimulus), that for all their presumed good intentions, put taxpayer money on-the-line for limited gain for the society overall. To wit: while helping some homeowners may be viewed favorably of course; it remains that housing and ‘cash for clunkers’ is putting money into areas of mediocre lasting stimulus; just actually investing tax dollars in depreciating assets.
If it were to be done differently, the incentives would be broader for small-business or any projects that enhance entrepreneurial initiative and innovation, which is talked-of of course, but not significantly implemented. Doing stimulus that way historically has a trend of eventually returning not only the funds, but generates income taxes for the Federal coffers too. Helping roads and housing and clunkers actually does little of it. I think that most of the criticism we hear about is aimed at the concept of indebtedness rather than accepting that stimulus would occur but needs to be far better channeled.
I believe this has forward significance because aside those companies still laden with cash, there has been virtually nothing done to help small business which provides the majority of new hiring in the United States. Hence Government has and continues to be working against job creation and enhanced productivity, while claiming opposites.
Much of the blame can be focused on unsophisticated public and Congressional type focus pressure or legislation, and not just the Administration (past or present). While (as an example) they trotted-out Fed Chairman Bernanke to extol the virtues of small business loans under TALF this morning, and while we aren’t focusing on aspects of it being focused (4 to 1) on ‘minority business loans’; we do note all that discussion it appears related to approximately 400,000 total loans nationally. That’s not that much.
And therein lies the rub; again politics entered the picture (arbitrary selection); but if it is even aside that, the total effort was ‘token’ in nature, and not truly substantive. This
is meant to be just an example, and not start an argument; but if the focus had been on small business stimulus broadly (and not favoring any groups either), with less on one-time hits like ‘cash for clunkers’ or ‘housing subsidies’, the expenditure would be more likely to help the Nation in ways that were productive, with real lasting traction.
Daily action . . . was pleased to see continuity of the downward action anticipated, and we suspect more in the week just ahead (down-up-down pattern most likely). I will in tonight’s single video describe a bit of why I think there is optimism down the road if the Fed reigns-in the excesses of borrowing; and suspect if the market takes a hard decline on such an event (with rates rising concurrently) that will once again be a time for (forward strategy reserved for ingerletter.com members) as the recent fling was expected to be a time for distribution not buying, and present and overall forward action will likely continue proving the merit of that call (for August risk rising in Sept.)
As nothing has changed from the ‘nailed’ top of Fed Wednesday, and ensuing action has been rewarding as we grind downward; the levels where we expect efforts trying to masquerade as support remain unchanged as well; inline with downward behavior. A few words summarizing the week’s earlier remarks, then the weekend ‘tech’ video. (These levels are outlined to our members via the video’s future S&P pattern calls.)
The global financial crisis . . . not only is far from over; but we have warned for at least a period of time, that those believing so are essentially hoodwinked by different types of propaganda. Now, we understand the role of ‘public relations’ and cheering a stressed citizenry during tough times (Roosevelt was right to say ‘we have nothing to fear but fear itself’, even if we actually had plenty very real to fear, including policy initiatives his own Administration implemented that hamstrung recovery efforts; not so coincidentally unlike some of the spending policies of today; albeit not this magnitude of course.. and by the way that’s not to say Roosevelt didn’t accomplish plenty good too; as is also the case this go-round, where what you have is a ‘double-down’ on the policies of the Bush Administration, not really a fresh approach to economic ‘change’) .. while we’re compelled (it’s our responsibility) to look at facts, not just huge fictions.
I have argued most recently that little deleveraging has occurred; and less derivatives unwinding than the American people are still led to believe. ‘None’ of the underlying structural abnormalities, distortions and excesses within the global financial system (most of which we warned of when projecting the ‘epic debacle 2 ½ years ago) have been addressed or rectified yet, because to do so in a meaningful way would involve allowing a constructive depression to purge the system of grossly parasitic elements that caused most problems over the course of the last 10-12 years (largely in the last 8 years in terms of banking implementations albeit longer than that with regard to the political basis being set-up which initially pushed lenders into substandard lending).
Late tonight; there’s more discussion from a Fed official the Wall St. Journal quotes; saying that the Fed will be ‘as tough’ on the way out (because of no political control over the deficit) as on the way in. Bingo. There’s your prescription for strong Dollar (as I’ve recently forecast just before it bottomed and turned up this week), and softer bonds in theory. As to the Post Office; housing; commercial woes; hotel defaults; and all the other issues including the renewed decline in housing; our views are correct.
It’s not debatable nor an opinion because it’s based on looming financial hurtles. Why say that? Because when the media rarely addresses the issues; they say ‘some think or may fear’, when in reality the FHA rule changes, and the impact of ‘recasts’ (not at all simple ‘resets’) are reality, not fiction. Hence, you don’t get through these without an impact. Now how that translates to the stock market can vary; but clearly it’s not a prescription for consumer confidence, increasing consumption; or being out of the woods anytime soon. The Fed’s sober (presumed) determination to save us again from ourselves (as a political animal) is, if true, absolutely laudable and essential for this Nation’s fiscal solvency down the road, and restoration of financial sovereignty.
Perfect timing . . . for a reversal day (Wednesday comment noted). The Bernanke Fed basically says they’ll print as much money needed even in the face of improving conditions to make assets rise further. The initial positive reaction was (to us) just a golden invitation to reverse a long to a short (by intention in my special 2:40 p.m. post-Fed intraday comment) at 1075-76 basis December S&P (Wednesday). Within a half hour the market had turned almost on a dime as it finished lower; in a classic outside-down-day and triple homerun for us (that means 3000 points downside gain).
Plus a sneaking suspicion on our part that as this fails to stabilize, portfolio managers in many cases will evacuate stocks they had good gains in; despite sounding terribly positive about the future. It comes down to performance compensation and just as at least some managers had been buying while holding their nose (meaning in disbelief of the move but needing to match their peers or be in personal trouble for missing it); these very same managers (realizing that our ‘best rally of the year’ is essentially at an inflection point of being an historical artifact) will compound downside volatility too.
We have discussed most issues; but can update just a tad. First of all no rate change of course; and the Dollar (which was down early) strengthened as stocks fell (my idea about how that would go); while Gold hit 1020 (my goal since August mid-900’s) then reversed; and I think that’s because this remains a Deflationary era; not one where a fear of inflation makes sense (yet). It’s ironic that our month earlier gold-top projection nailed it to the buck (so no, there is no reason for gold to work higher for now as yet; I will let you know when it looks primed for the next tradable long-side move).
As for the ‘mortgage-backed securities’ and purchasing of 300 billion in Treasuries by the Fed, these were basically ongoing streams but not news. The Fed said conditions improved, but job losses and low credit remain constraints to rapid recovery and that inflation will remain subdued (of course). (Interpretation of this for members only.)
Further, the FDIC is scrambling to replenish the Deposit Insurance Fund, which might not be worth mentioning, other than a large number of bank failures is ahead, not just behind us. Also, an executive of Bank of America confirmed verbally today that they’d agree with me about a run of foreclosures from ‘recasts’ (not just mere ‘resets’) of risk loan portfolios they have to deal with (we’re not excusing them for allow that at all just noting it) is going to be a factor later this year and well into 2010. Finally, the FHA did acknowledge that the ‘spot or flash’ approvals of individual mortgage applications for condos in buildings that don’t earn FHA approval, will indeed terminate November 1.
I think that’s a big deal; because it means buyers will have to secure seller financing or pay cash. It means a rash of relatively low-down (or subsidized by the year’s policy initiatives) mortgages and non-cash acquisitions of distressed condos is virtually over for this phase. With Government programs winding down; there appears to be little to inhibit the anticipated ‘other shoe’ dropping in residential real estate soon; especially in the condo market in overbuilt metro areas where occupancy rates or percentages of units leased (not owner-occupied) compel non-FHA conformity. This will trigger as well ramifications on the tax front; as more condo failures means more demands for homeowners to make-up the property tax deficiencies to keep local services going. Again this is reality not fiction; and barring FHA reversal; is a forecast based on fact. You don’t hear it in the media, because they want to keep the ‘housing turnaround’ myth (which has been limited to stressed and lower-end properties) alive if they can.
We are great proponents of ‘fair’ capitalism; also believing that normal conservatives historically did not correlate (and do not now) generating profitability with squelching compassion for human beings. Heck, carried to extremes, even in the ‘old South’, it could be argued that those landowners who were kindest to their slaves found that it paid off in terms of loyalty and productivity; as opposed to outright meanness. That a segment of society has been influenced by the radical left to believe that Americans, by choice, seek to suppress their Countrymen, is extremist propaganda; which gains some credence only because of the abuses that lenders and others engaged in over the preceding decade during the bubble. Capitalism indeed made this country great; but only after decades of hard work by average folks toiling to build a Great Nation. I would point out that one word summarizes why America has worked so well: ‘credit’.
Credit, in normal implementations, and used responsibly, is a wonderful leverage for the middle class, and deflects social stigmatizing and more. Now because of excess (which by the way is bipartisan since the programs pushed on lenders got initiated by a leftist cabal, or some with good but misguided intentions, of making every man the homeowner of ‘American dreams’), we have anti-capitalist movements gaining some ground; mostly by distorting the reality of what prompted the excessive credit levels. I say this tonight, because you’re going to hear lot more about it when Michael Moore’s newest movie goes national next week. And much of it is a biased distortion of truths.
Socialism, as in the European model lauded in the movie, would unwind much of the accomplishments of the United States in creating individual initiative. However; much of it has been unwound, by a mediocre public education system; trade policies, and a propensity to have no strategic vision, but react to crisis typically mostly after-the-fact.
On some of these points the President has been correct, and his campaign argued a logical addressing of the issues. However, the execution has been something vastly different, which is why we opposed the unhindered release of public funds to bankers who clearly have been unable to account for the precise utilization of such funds. The fact that the Nation made a profit is not the point; the point is a lack of transparency in this case as was ‘promised’. We suspected that little would reach citizens directly or I emphasized in terms of ‘small business’ support (which hires the majority of people in new jobs), and unfortunately we remain right about that as well. While I desired that a governance from the ‘center’ dominate; I feared what we migrated to; the left side. To that end, at least the civics classes of yore have been helpful; as citizens galvanized to expose the lunacy and reveal the truth, and demand a redressing of grievances. In our thinking this is not ‘fringe’ society; but mainstream America finally waking up to an often pronounced, but little embraced recognition: democracy is not a spectator sport.
"I am one of those who do not believe that a national debt is a national
blessing, but rather a curse to a republic; inasmuch as it is calculated to
raise around the administration a moneyed aristocracy dangerous to the
liberties of the country."
-- Andrew Jackson
(1767-1845) 7th US President
Source: letter to T. H. Colman, 26 April 1824
"And I sincerely believe, with you, that banking establishments are more
dangerous than standing armies; and that the principle of spending money to be
paid by posterity, under the name of funding, is but swindling futurity on a large scale."
-- Thomas Jefferson (1743-1826), US Founding Father;
drafted the Declaration of Independence, 3rd US President
Source: letter to John Taylor in 1816
By the way; see if our ‘balanced’ educational system has enlightened our students of such correspondence. And if so the majority will probably presume those to be liberal statements, rather than true conservatism, which abhors aberrant indebtedness or for that matter the use of credit for non-essential and non-productive growth means. The use of credit to augment consumption, is almost the antithesis of responsible lending.
And further more, the gross indebtedness threatens the long-term stability of all of us; which makes us vulnerable to policy inhibitions and throttled ambitions; characteristic of many countries in the world, but not the United States. Both parties caused all this; and in that regard, if he can control his minions, we wish President Obama success.
If on the other hand he is motivated by an unspoken (but suspected) ideological bent, then indeed the Republic will be looking forward to a demise of unrepentant Federal borrowing, or an inhibition of those in Congress who would perpetuate that unrealistic short-term expedient. So far (outside the Fed itself) they are attributing the causes as well as the solutions, to generally risky solutions using debt to solve debt problems. It has impacted the markets primarily because it was ‘controlled’; and the absence of a balance (pro-citizenry) approach to ease the credit crisis risks continued attributing to issues that were ancillary to the primary problems in recent year, and in Depressions.
Finally, with respect to the Option ARMS issue; one financial network actually said on the question, that as long as the Federal Reserve can keep short-term rates at record lows, there is not a problem with mortgage resets. Excuse me; but that’s absurd. This issue is not about ‘resets’, which are rate changes. It’s about ‘recasting’ mortgages; a payment change. That has to do with the majority of such borrowers paying minimum levels, whether they perceive that as ‘renters with debt’ or not. If they do; they will run from those loans as payments are doubled or tripled in some cases; not because of a ‘rate’ reset, but because fully-indexed payments alone would radically spike payment levels. Please enlighten anyone confusing ‘recasting’ with ‘resetting’ on these issues.
In the past weeks, I’ve outlined ‘why’ the market has been able to extend the upside; why it’s in a period of rising risk (which may reach a crescendo of sorts anytime now); and why the abandonment of certain liquidity generating mechanisms actually raises the risk spectrum going forward. At the same time the ‘equidistant’ technical measure (minus spikes) only kicks-in just about now (or a hair higher) as my videos denoted. (I note this paragraph was written 2 days before the actual top of the extended move.)
I thus have talked about the extended move lasting longer or going higher than we’d originally thought when projecting it while others were panicking back in late Feb. and early March; but it was expected to be the ‘year’s best rally’, and was thought helped by the structures we outlined, and the ‘control’ (using taxpayer money largely) given to certain institutions. Now, irrespective of sidelined cash, there are exhaustion signs where overvaluation challenges being an equivalent of undervaluation 6 months ago.
This condition doesn’t mean we have to encounter free-fall immediately; but it does in many ways suggest that those proclaiming us ‘out of the woods’ or ‘recession ending’ are in a sense naïve or myopic about what can lie ahead. It’s that’s not ‘perhaps’, or a possibility; or an opinion. It’s the reality based on strained Consumer Credit; pipeline of defaults or foreclosures current and forthcoming in both commercial and residential arenas, and having hardly anything to do with the ‘news du jour’.
Again; whether or not we anticipate an advance from lower levels; the short-term is fraught with peril, irrespective of banter from pundits telling you that’s not so because too many are looking for correction. Maybe it is a correction it should be noted; but what few contemplate is something not nearly so sanguine as historic typical partial retracements of the advance projected to start early last March.
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 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; 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 weekend!
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)
Updates about 10 minutes after: the opening bell, 10 a.m. ET, noon, 3 p.m., with a nightly final issued at approximately 8 p.m. In times of volatility, an additional interim report update is frequently provided.
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