(Courtesy excerpts of Gene’s analysis posted at www.ingerletter.com this weekend.)
Gene Inger's Daily Briefing . . . for Monday December 29, 2008:
Happy New Year!
Worst-case scenarios . . . suddenly ‘in-vogue’ among analysts or pundits, generally excessively optimistic most of the way down (or even if cautious failing to grasp what really has been going on, and the implications as well as ramifications thereof), likely are not going to immediately occur. However the best-case argument of a ‘hope rally’ being sustainable just because of what the new President will propose (some of that not generally known, we’ve hinted at aspects of in recent days beyond fiscal stimulus that is broad-based, but also slow, versus individual empowerment ideas that can be implemented), may also be overly optimistic. In this weekend’s 2 videos we’ll address not only technical pictures but discuss a much-feared ‘double-dip’ type of contraction, as ingerletter.com see as far more likely than out-of-control consumer spending being re-stimulated. Next week I’ll expand further on this and ‘competitive devaluations’ too.
I suggest new members review the last couple Daily Briefings, particularly with regard to included economic charts, as should be fairly sobering versus rose-colored glass interpretations out there. Also; as our strategy protected capital throughout 2007-‘08, plus actually made money if you were inclined to sell and/or short noted rallies rather than buying into them with the masses, leaves us delighted to go into 2009 lots better than just ‘whole’. That doesn’t mean we squander the gains by becoming prematurely optimistic; though we will allow rebounds as we suspect will occur roughly inline with timing fluctuations noted (subject to change here at ingerletter.com), as this evolves.
We’re honored to have been ‘macro’ bearish throughout 2008 and more importantly; having forewarned of a distribution topping-process for 2007. Called it a forthcoming ‘epic debacle’, and it was; plus it continues. Deleveraging is by no means completed. Financially we see why the U.S. had no choice but to do the ‘bailouts’, though it was a patchwork affair it seems (portion redacted), and has not filtered-through to small business or consumers as they intended (part of what happens when you don’t have conditional funding). Such massive packages will exact a price, both short-term and long-term, which I’ll assess (further here at ingerletter.com in days or weeks ahead).
Let’s summarize some of the prior day’s remarks; then the new videos will follow:
Multiple lumps of coal . . . encrust America’s Christmas stockings this year. Actually there are so many lumps that they’d exceed all the nights of Chanukah, even if a key one were highlighted each evening. Mostly the ‘men in green’ (bankers), aided and of course abetted by the ‘scapegoaders’ (politicians) who did nothing to restore principle based oversight at all, were bearing just false-gifts under the guise of being Santa, to the masses of citizens who dreamed of happy hearths, not perennial nightmares. It got so bad that NY had a ‘false Santa’ named ‘Madoff’, who along with ‘hedge funds’, slithered down investor chimneys, and made-off with most all goodies under the tree.
Our ideas for 2009 have been provided on a rolling-basis of sorts; as the calendar changes are not correlated to trend changes; aside certain seasonal decisions for taxation, retirement contributions, and the like. We will provide additional possibilities for next year in an upcoming reports; though most correlate with the evolving ongoing process in regards to particulars; whereas major items (such as commercial and New York’s real estate decline) that others now address; are developments forecast here months ago or last year; giving ample time to be proactive (where most ruminations I think in the media or by analysts now are generally reactive beyond time to act upon).
I will say that though it might be tempting to suggest that the perceived ‘optimism’ so many are talking about with respect to the ‘honeymoon’ period of President Obama’s incoming Administration is already ‘in the market’, or over before Inauguration, or for that matter not felt yet; that’s all speculative. We actually have indication from one of two sources suggesting Obama will not merely focus on fiscal stimulus (reserved as to details for ingerletter.com members), contrary to speculation that he won’t do it.
In any event the situation remains dire in many areas; but actually less discounted by the market than might be considered, and the prospect of hedge fund liquidations as may also be additionally forthcoming, loom as offsets to wishful thinking aspirations. I am definitely not suggesting there won’t be a rally associated with the Inauguration, more or less, but just inferring that it could well come from lower levels than present.
We’ll have more on (ensuing) reports, as our forecast ‘epic debacle’ proceeds. The idea of the failure of truly robust yearend action being a harbinger of woes to come is a valid seasonal consideration; but more significant is not only the first month but the first several days of the New Year. Typically running into resistance (or worse) during that timeframe is indicative of investors basically not particularly interested in heavier commitments at a time of year than they usually are. Hence the reason it’s predictive is that if they won’t buy when the Street thinks they’re ‘supposed to’, then they hardly will generally show much enthusiasm for some period of time. However, 2009 has a unique character to contemplate; and that’s the ‘economic shock & awe’ that might it seems be on-tap to awaken construction; invigorate residential real estate absorption of supply; and constrain the downward deflationary spiral that increasingly is evident.
The foregoing clearly denotes that we’re aware typical seasonal sentiments are minor in import relative to what might be initiated, or at least proposed. But at the same time we do not believe unbridled bailouts are a solution, as a modicum of fiscal discipline I think is not only essential, but a commitment to alleviating the burden of generations at this point unborn. That both Parties are willing to encourage commitments to ‘save’ or stabilize the present, even at the expense of sacrificing future finances, actually is an omen of more problems, and demonstrative of the deep challenges now at hand.
In essence; Government has taken us into this holiday season with a panicky sort of patchwork quilt attempt to bailout not so much capitalism, but the excesses that they allowed to go unchallenged, or even encouraged, through at least the last 20 years; but more so in recent years, due to lack of oversight and little details like restraining a slew of financial elves who were bringing anything but gifts to the yearning masses of folks seeking home ownership. Plenty of blame to go around; we’re just pleased to be viewing this from a ‘liquid’ barely invested perspective for the better part of two years.
Of course having warned of multiple lumps of coal forthcoming for this year’s holiday, we at least avoided the gift of stalactites knifing into investor portfolios as did others; even those who were nominally bearish, but kept buying every little rebound effort for months now (to the detriment of those who participated). We nibbled at a washout or two; but only slightly; and have suggested retaining the bulk of buying power intact as in our view the worst was yet to come. Unfortunately for consumers, that’s still a best case scenario; while there is some prospect that for investors the pattern will vary as we get further into this forecast calamity. The smart strategic moves should continue to be selling the surges, and buying the purges, only slightly; pending more evidence of a sustainable bottom or basing structure, which realistically hasn’t been provided.
As a New Year approaches, prospects remain grim
Promises of course abound; led by dangling bailouts or rescue lists. But just like the snow, these may prove to be ornamental and fleeting; with post holiday cheer leading to new fear. A rally of ‘hope’ ahead of Inauguration is prayed for, but a reality of only marginal near-term gain, makes one hoping for much-improvement, feel like a ‘dope’.
The hangover effect (of housing and limited or rationed credit plus too much supply in retail and everything related to property) will linger well into 2009, at a bare minimum. But in the holiday spirit, let me remind investors that our sleigh-ride began two years ago; first in housing, and then in stocks, with the slides down absolutely on our list of ‘presents’ for those who chose to give the gift that keeps on giving; ‘savings of assets and cash’, rather than conspicuous consumption, which we thought was ‘trash’ retail, to underpin foreign exporters, and do basically nothing for America’s economy itself. It was forecast to be the end of the era of ‘bling’, which if you believed, ushered in an era of ‘ka-ching’. In essence; we faded extreme ebullience in-favor of new prudence.
So yes Mable; there is a Santa Claus. It is you who ensured your family’s hearth at the pain of being restrained these past two holidays; thus allowing you and yours’ out in the future to reap the benefits of the maturity you sowed over these past two years.
(Timing remark withheld). And in the ‘race to zero’, we’re getting closer. But for now, there’s scant hope for sustainable celebrations so long as housing’s on the ropes, as the rise of credit availability collides with hangovers of persisting excess debts. That is the reality in a nutshell; so before crack-opening bubbly for the New Year’s, let us at least cheer that our secular top identified way back in 2000; with a cyclical rebound high in 2007, that ‘false prophets’ proclaimed real, avoided the forecast ‘epic’ ordeal.
As the sleigh runs over the hills and valleys (or if you prefer wave-surfing; it’s similar); the ride will find its finish-line. Meanwhile those coins (more cash left in the pockets of those listening these two years; less for those who didn’t) keep jingling, but it’s still so cold out there in terms of compelling investments, that it shouldn’t burn a hole in any elves pockets. Inventories continue to rise (whether housing or retail or empty stores) so unless some force acts to counter the conditions, prices continue to fall (likely) and that means more deflation than inflation; and citizens keep most of their powder dry.
America’s unwillingness to indulge desires (what one wants, rather than needs) tends to increase practical demand, and contract extraneous purchasing. It’s now a trend. So, while demand is theoretically infinite; it’s practically limited. That means even for the cash-rich and relatively prosperous, ‘demand’ is arguably far lower in today’s U.S. economy, than several years ago. The ramp-down of services or businesses as were geared up to fulfill that leveraged ‘perceived’ enduring demand, is still unwinding. We will call that the ‘rate’ of spending, and believe it’s the key for the downward pressure.
The new environment (under Obama) is aimed at ‘access’. Access to healthcare is at a higher point; access to credit is probably at the middle level; and access to fairness in trade and jobs, will be at the peak. It’s that ‘credit access’ that will be constrained in a desire to see a balanced synergy between those who desire it, those who require it, and those who are qualified for it. That may be the spirit that brings in the New Year.
Daily action . . . finds few surprises. Money fund issues; housing price collapses that do not ease; the Orange County (California) Board of Supervisors Chairman warning of new municipal defaults (presumably small towns, but who knows; and we have as you known warned of this as well as commercial concerns, for well over a year now); and all sorts of debates about low points; Obama relief rallies; and signs of bottoms.
In our experience, we’d be delighted to say one ‘point’ is a low; but this isn’t that kind of market or economic environment; and we’ve warned it wouldn’t be for two years or so. Rather it’s a process; just as the distribution in early 2007 was a process too. But this is not yet an accumulation phase, even though some see it thusly. It will be but in good time. For now; though Government tries to cajole, compel, or even coerce new investment by virtue of taking interest rates to ‘nil’, investors aren’t biting that fish bait as of yet. Once equities prove a bottoming pattern in one of several noted ways, we’ll be delighted to proclaim what will be ‘windows’ for opportune investing. Meantime the hyperinflation fears are generally premature; but are something to contend with later.
Remember; there is nothing conventional about this dip; 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 typical in the stock market, and that’s why being ‘proactive’ was so important for this ‘new era’.
A drop (in the New Year most likely) from resistance shy of (reserved levels); likely precedes the S&P getting a 7 handle on it; and that’s the bullish alternative. Into the 6’s would require certain repeated failures of other initiatives; but we’ll be watchful. If you think the majority are pessimistic; survey the public. The official ‘lines’ of analysts are optimistic; but we take that with a grain of salt. We have called every rebound just a failing or flailing rally in a bear market, and have been right. Now obviously one will be something more enduring, and eventually the trigger for a better (if slow) climb-out of this historic forecast ‘epic debacle’. We’ll try to spot the genesis of that as it occurs; which may or may not be accompanied by worsening sentiment as too many are now in that mode anyway. So it may be based on something more substantive; like facts.
That relates to certain hints of demand in basic and raw materials and so on. But not yet; and there are no signs of that substantively, suggesting others proclaiming it are early. As for resistance, of course (reserved levels); but we doubt we’re going there and it’s not because there aren’t shorts (there are fewer interested in that, and we do agree that shorting is dangerous, now that we won the ‘race to zero’ for 2007-2008). I just don’t want investors to presume the reduced risk equates to sustainable bottoms.
Summary: we do expect something besides fiscal stimulus; like (noted to members). And we envision business capacity constrained (useable capacity) later next year is a possibility; so with tax, accounting shifts, putting small business back in the game; of course there are going to be aspects that help us get-up off the economic mat. We look forward to that; but ironically in some ways the business climate may improve a bit later in 2009, before the housing, commercial property or sustainable equities do. And again, regardless of what pedestrian media says, higher Oil will be a good sign.
I am exploring avenues to recognize optimism amidst the rubble. There are risks too: let’s face it; the Chinese debt issues are a risk; the Middle East tinderbox will explode in the short-run, due to Hamas provoking Israel with missile attacks on civilians; and of course there is the tendency of exogenous risks (terrorists) to take our weakness, when it occurs in economics, as ‘bait’ inviting them to try to exploit vulnerabilities. In the early days of the Afghan war, I described B-52 cluster bombing as sort of a U.S. ‘force multiplier’. The terrorists, should they be able to attack us here at home while the economy is on its back, would be a ‘force multiplier’ from their vermin perspective of course. Part of a risk of systemic malaise is that enemy’s will try to take advantage. (Editor note: above was written days before Israel’s retaliation for Hamas terrorism.)
(There will hopefully be less rancor from the right and left in 2009; as pendulums for now have already swung in alternating directions. We don’t want to be dogmatic as it relates to the bailouts; but these private entities taking Government money is getting ridiculous; as analysts and economists on both sides of issues are starting to agree. I think revelations TARP money may have gone to developers is about the last straw.)
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 smart 'velocity' of money to become energized more (since toxic housing debt is a microcosm of the overall debt picture); so anticipate 'velocity' created in ways that 'empower’ substantive American revivals.
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.
Bottom line: macro signs interpreted; including (updated slightly) the following bullet points:
· Global economic decline advancing; inline with ongoing forecast of rising economic contagion;
· Capital market improvements helpful; but investors shouldn’t discount later economic lows;
· Eighteen month macro key forecast was correct: not short and shallow; but long and deep.
· (We invite you to join us for more bullet points & videos via your ingerletter.com membership.)
Further points: nearer-term issues to contend with beyond above; some with macro aspects:
· Derivatives issues linked to municipalities or pensions barely grasped (extremely fluid still);
· Our two-year warnings about Goldilocks globalism as extremist, has been robustly vindicated;
· (We invite you to join us for more bullet points & videos via your ingerletter.com membership.)
[MarketCast (intraday analysis & embedded Daily Briefing audio-video). . Reserved for Subscribers]
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.)
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 here 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).
Issues continue including oil (as was too low vs. too high earlier in the year); terror; China; Pakistan; all the Middle East, Europe; dubious NY commercial property as well as lots of non-housing entities. Noted for a year: international dependencies, as outcroppings of extremist globalism; from which there is a veiled retrenching already. We must be 'Americans First'; or we can't ‘consume’ from the world, as they prefer it. As was consistently argued here for over a year; this clearly proved to be realistic.
Twenty-two 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.
Since early 2007 we noted economic conditions more similar to post the Gilded Age ending in 1929, the panic of 1907 (hence our call for the start to be the 'panic of 2007' last year at the end of that Gilded Age, and it's not coming back in the same style). It is not a structure entirely resolved by rate cuts, stimulus, 'miracles', arrogance of the few who think they can influence it. But it can be rescued by sound incentive policies.
Happy New Year!
Embrace the holidays!
Gene
Gene Inger,
Publisher
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