(Gene's daily market analysis is posted each night at www.ingerletter.com with a focus on the technical, fundamental, monetary, geopolitical and psychological aspects related to investing prospects. Having called the July top and August lows; Gene's speculates on rebound highs.)
Gene Inger's Daily Briefing. . . . for Thursday, September 27, 2007:
Wear and tear . . . increasingly become visible characteristics of persistent strengths among the various major-cap Indexes, as investors inevitably contemplate whether or not there's something to ideas that 'burst bubbles do not quickly reflate' as we argue.
I suspect the brewing 'student loan' marketing investigation adds fuel to overall fires; at the same time as an issue it's relatively nominal in overall economic impact terms. Overall serves to illustrate that liquidity relief doesn't revitalize structured-to-fail loans. Therefore, as a whole (with Fannie Mae conservatism; etc.); additional examples how Congressional and Federal Reserve oversight finally grapples with general issues of deflecting aggressive structured-to-fail lending; as is at the crux of why I suspect that type reflation unhealthy and not in the cards, despite championing by a few pundits. In the meantime, the same pundits try to push investors into areas perceived isolated from these issues, and when that doesn't work, argue solely for international trades.
Again; the point is that the Federal Reserve, and now the Congress (both parties by the way for 'changes') sees the risks in profligate and abusive borrowing and lending; initially in the consumer sector, but as they look deeper (and that's the part they tend not to address publicly because of concern, which we understand, of fueling panic of the type recently seen in England) .. they see the scandalous derivative leveraging; a sizeable proportion held by the major financials (irrespective of hoopla over a buyer, rumored to be after part of Bear Stearns), and of course the holding of CMO's, which even now are virtually impossible to 'price'. That's part of why the analyst/economists are so irritable and excitable when discussing these subjects; such as whether what's going on is disinflation (correction) or early deflation; as the implications are notable. They rarely focus on 'actual growth' or 'earnings', but merely monetizing investments.
If it's the latter, we're not looking at an adjustment, but multiyear risk absorption, and that could readily focus on more than the real estate and housing sectors overall. The bullish scenario we think is to support what the Fed is doing; liquefy the banks and/or the basic systemic functionality, without providing the mechanism or encouragement for a reflation of the type those desiring the 'game' restarted, would clearly prefer. As to the bearish alternative long-term, that would be accommodating their request for a return to what got us into trouble in the first place, which would mean extreme lower rates, structured-to-fail loans and deals returning, and accelerated inflation with risks of a further deterioration of the purchasing power of the American Dollar.
History is replete with examples of what can happen under such circumstances, and it normally doesn't end well. That's why, believe it or not, we think catching the flack now, is no guarantee, but whether Wall Street likes it or not, provides the better odds for the next decade to be a prosperous one, than sacrificing the future for short-term accommodation and possibly political gain (more details provided to ingerletter.com). Maybe that's why bulls are fond of trotting out references to 3rd years in a Presidential Election cycle as an underpinning; typically the economy is stimulated and that helps the incumbent Party. Since that's not exactly the scene these days (to say the least), as the pattern varies for lame ducks and when the Congress has already turned-over, we suspect even the White House (to extent they're fiscally a little more 'hip' it seems lately) realizes they need not risk damage to the future, for gain that's dubious at best near-term even if investment bankers want them. Increasingly suspect even the State Department is starting to grasp some of the National Security risk inherent not only in outsourcing production, at all levels, but of funneling immense amounts of post World War II generated wealth, to areas of the world that never have seen such riches. The problem: not occurring while the U.S. is 'richer than Croesus', but a borderline debtor.
Having projected both the unsustainable rally in June/July, all of this has been a part of our argument for 'why' increased liquidity would stave-off the worst kind of disaster, but not obviate prospect for water finding its own new levels. Another tidal shift now?
Daily action . . . hasn't exactly called the market's efforts to press higher a 'dead cat bounce' beyond the past week. In essence money manager's search for 'defensive' stocks has been mostly exercises akin to rearranging the Titanic's deck chairs. Sure, whether it hits or just grazes an iceberg can be debatable, but what isn't arguable is whether ice looms ahead. Actually new chills become palpable as investors generally reverse mindsets 'presuming' banks would take liquidity (injected by central bankers) and create a revived boom, irrespective of whether it led to hyperinflation and bust. It is this mentality that is reflected in the admonitions to think real estate correction, not real estate decline. It isn't just semantics; the differential relates virtually to everything facing the economic argument, even if housing is just a microcosm of bigger issues.
The American people have (overall) low savings, and viewed the appreciation in their houses as a nest-egg, despite most all advisors suggesting they not perceive it thusly (that's exactly how they got in trouble by leveraging the homestead and credit lines or similar; and it's impacting the 'more mature' and cautious too, because of erosions for property values, that trickles across a broad spectrum of property). Even though most of course do not need to, nor desire to, sell their homes; if the decline lasts say 3-5 or more years rather than 1-2; that makes a big difference in projected spending pattern projections not only for Government, but for the individual family unit. Basically it may tend to say to families that they're going to 'stay put', like it or not, and be constrained in their spending, especially if the 'perceived' household equity has any connection to it. That is occurring at a tough time, when the largest number of 'baby boomers' nears 'maturity' (well, we're all kids at heart), and often contemplated unfettered leisure live styles, as the kids are grown and they would sell the home and travel the world. It's a reason we showed the Federal Reserve's own chart projections the other night, given alternatives to property & consumer spending relationship forecasts; vs. GDP shifts.
That, in itself, reflects changed perceptions. Less mobility; reduced incomes; with low interest rates on fixed income investments to boot over time; and clearly depreciating resources (higher return for higher risk investments in debt sectors returns just a bit). Yes it sounds a bit dour, and we don't mean to be; but if the Nation opts to re-hype (I mean reflate) beyond simply funding U.S. banking systemic liquidity, but not much more, then we're in a heap of trouble at a future date, which wouldn't be that far down the line anyway. In this regard this may or may not be the 'time of reckoning' from the macro perspective that everyone with sanity knew was out there in an unsustainable situation, as regards debt or flows of our treasure outward, while borrowing incredibly big, as if there was only the Deficit and nothing remembered called the National Debt by the way; but one thing is for sure: more Americans have become forced to try to grasp this 'actual' economic structure, not the one from their dreams, or of politicians of all stripes, have periodically sought to convey. It's harder to sweep under the rug..
For now; our thinking argues the bankers have already hunkered down, that traders are living in already-circled wagons (irrespective of clarion cheers for new highs even if briefly attained); and both are interested in offloading risk, not putting funds to work in a newly-generated matrix that attempts to press the envelope of speculation. We don't think they can; don't think unspoken (back-channel) requirements of the Federal Reserve's funding, permit such revisiting of profligate abusive borrowing and lending practices (you likely won't hear that part publicly). It's why we opined that the purpose of Mr. Bernanke's efforts were to facilitate systemic liquidity and not a whole lot more.
The addiction to spending is finally becoming understood as 'junk loans' to the home buyers who embraced subprime; and that consumer installment loans are 'junk debt'. The only surprise is that it's taken so long for most of the economists and analysts to grasp this. Maybe it's the predilection to view the glass as half full rather than as half empty; though we're generally inclined to optimism too, but saw this collision coming full-steam. We also saw reality; that housing would not decline 'in isolation' in all this.
I've speculated whether the rebounds in the NASDAQ and SOX were retracements, of the moves down from the 2000 highs, rather than true new bull moves; but it may not be quite so cut-and-dried. (I refer you to last night's comment for analysis of that).
In the shorter-run, there are too many tsunamis present, or bearing down, on real estate and the U.S. economy for super-optimists to be right, about the Fed's ability to turn virtually all threats back, via monetary policy moves. We suspect, based not only on fairly clear evidence from 'papers' Chairman Bernanke has written in the past, that issues faced are reasonably overwhelming to minor movements to re-stimulate, that they offer little real aid to individuals, near-term market prospects, or for businesses in a way that deflects everything they would like to see deflected.
The Fed doesn't, in our view, want to see rekindling of the kind of abusive borrowing and lending that the recent past saw. Partially it's why citizens with jobs or cash don't comprehend why their home assets could decline; they don't think things are 'all bad'. They're in a sense right; as reflects their personal condition. But the credit worthiness issues are not resolved; the rating agencies horrendous misjudgment of investment grade worthiness; the tightened lending policies of bankers and other lenders; and at minimum an interlude in the M&A leveraged craze; all of these impact all investors in ways they generally do not comprehend. That's why they represent the buyer side of the ledger for now; but will probably represent the seller side; possibly fairly soon.
Why any delay? Because the upward sloping yield curve will (as we argued in regard to the Federal Reserve's actions) sustain a functioning banking system; so as a result the 'credit crunch' worsens, while system liquidity issue 'seem' sidestepped. For sure we're talking in an 'ideal' sense; things could always turnout worse. For such reasons we argue our perspective is actually the 'bullish alternative' for a longer-range future; whereas those having called for the bull's speculative return, in our view, are actually pressing for an inflationary press higher, presaging just a kind of ensuing deflationary bust that historically often follows. If our perspective prevails, then the Fed will have saved the capitalized structure of the banks, but not buttressed speculators, by trying to stave-off a time of reckoning with junk debt. It is the only way we can see (barring exogenous events, like another attack) to try to preempt weakness as is coming with the further tsunamis, and is more bullish for the Nation in the overall. Those crying for full bailout would risk (inadvertently or not) the Nation's future; consigning us to much more complicated recovery processes at the same time their 'globalist' structure may leave few sectors financially able to step-in to absorb supply (any asset class). That's why extreme globalism is not only false financial god, but threatens National Security.
Bottom-line: consumer discretionary spending is weak and will get weaker. Housing is soft and will get softer. The proportion of housing as a percentage of GDP is not at all irrelevant as many bulls contend; nor is their impact on credit-based consumption.
As this plays-out, on a rotational basis, investment attractions will become evident in all kinds of asset classes; but in no way does risk of chasing expensive international stocks merit buys, even if they hold a while (dubious). Risk aversion remains noble.
Also; the international situation is deteriorating which is why stronger leadership has a welcome mat, now that it's finally being provided beyond rhetoric in some aspects (ingerletter.com delves further into issues; plus fiscal and militarily-related issues).
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks clearly took note of the IMF, and then Philly Fed's President warning that might seem contradictory, but point to the same general concern. The slowing economy to us is an affirmation of the continued trend towards 'stagflation', which is why lower prices do not automatically correlate with growing prosperity; given overall circumstances. It is not even a given that a huge (unlikely) drop in Oil prices would be more than short-term palliative, given we're not about to re-embrace nonsensical lending structures.
By no means are we calling for an Armageddon worst-case scenario; but base lots of our current thinking on historical not hysterical, precedent. Remember last night's key remarks: if you want to go further into what the Federal Reserve itself thinks; consider words of the Chairman in accompanying statement the other day: "to try to get ahead of the situation". In our view that was not so confident as anyone disputing powers of the Fed to 'ease' pain being in 'fight the Fed' modes, but just that the Fed recognizes that this particular situation may be beyond an 'easy fix', as occasionally is mustered.
Overall this was the basis of our referencing 'turning the Titanic'. You see icebergs, but won't know for awhile whether your attempt to steer away is successful, grazes it (or several) just a bit, or hits at least one of them, so hard as to deep-six the vessel. It can be added that even then many will survive to be rescued, but those not knowing at least how to board lifeboats, and when to do so, simply leave the outcome to 'fate'.
In that regard we think near-collapse in Great Britain got attention that mattered. Key credit or derivative issues are not ameliorated, as Fed actions (as projected) were, though 'structuring' does move toward improvement, essentially 'pushing on a string'. That's a different issue then just stemming a tide. The Fed is treading carefully, and doing the right thing. We are not hardly out of the woods with respect to housing; or the war issue. Important: the Fed's trying to 'stay ahead of a situation', not prevent it.
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.
Rarely we will comment about stocks in text. Typically remarks are via audio-video.
--
If you quote excerpts of our remarks anywhere on the internet, please respect our work; as we request mentioning it came from www.ingerletter.com . At the same time, please realize sending or posting our entire Daily to another investor isn't fair to us or members, unless done rarely, so as to help enlighten investors as to our work (that courtesy graciously appreciated). No web site is permitted to repost any Daily Briefing in entirety, in any routine way. A financial web site may request to receive a once-weekly partial excerpt of a Daily; as may be infrequently provided, also in fairness to ourselves and members.
Comments are interpretative speculative postulations provided 'as is with all faults' and all risks with no assurance about future performance of anything (markets or stocks) in any way whatsoever. Personal necessity, irrespective of opinions, may require buys or sells deemed necessary, without prior notice.
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 less as we focus on the Middle East crisis and World War III avoidance. (In this case World War III is Islamic terrorist and Iranian interference, targeting 'global village' communication or necessity supply-chains.) Are we maintaining high alerts?
Though few generally concurred for five+ years, our consistent view has been slow but persistent American growth isn't negative, allowing the protracted gradual growth without ancillary significantly high interest rate pressures. There's no truly-restrictive monetary policy; nor was there likely to be one irrespective of whining by Wall Street bemoaning disappearance of 'free bucks', as we absolutely correctly forecast would be the underpinnings of this ongoing saga. Slow growth is good; fast growth in price movement for housing or big stocks, resulted exactly what we long forewarned about.
Slow growth will likely descend into recession; of course that fear too prompted what the Fed did, inline with expectations (and a tad more), albeit with a bigger reaction to it. Our 2007 view has been that we're in an ill-defined recession; likely recognized if at all, only later. As to whether it descends into something like post-railroad debacles of the 1880's; well in-part it's what the Fed worries about. Regression to the mean and traditional affordability 'rules' will be hallmarks of lending guidelines for a while.
McClellan Oscillator finds NYSE 'Mac' rebounding to overbought on-Fed-rush cue, with those intervening bull-bear shuffles soon returning on the NYSE and NASDAQ. If LBO / hedge funds increasingly implode (post-forecast Fed reprieves), of course allowing rebounds until or unless 'events' occurs (as noted) the Fed will respond as needed. Reflex rallies allow lots of 'risk off-loading' implementation tactics. These are ongoing; holdings aren't all investment grade. Multi-month efforts evolve. And in this regard, we suspect that strategy is actually ramping-up with the market, not trying to revive the attractiveness of poorly-structured (borrow short and low; lend high and long) paper, which is not about to suddenly be acceptable as 'investment grade' debt.
By the way; the 'stealth storms' labeled 'invest' are potentially developing patterns not (yet anyway) active storms. This is cutting-edge computerized technology that NOAA is doing to give ideas where storms 'may' form when patterns are near the mainland.
Issues continue including oil, terror; China, Pakistan (possibly the key to survival for a number of aspects of the 'war on Terror'); certainly all the Middle East, Korea, and yes, a hangover of funny money NY economics. Members know all views about what likely happens after the FOMC and Quarterly Expiration trade. Don't miss those other shoes as may drop; because now the market won't be prepared for that, though we'd be surprised if the Fed doesn't know exactly why they moved to head-off panic. We'd thought time was bought by the big boys and pundit friends for risk-off-loading setting up absorption of re-pricing, and possibly prepping the market for next phase declines. Given the amount of time that has now evolved (and being past a primary Expiration), we would not be surprised that a couple rebound efforts falter as we come under new pressure. This week's nominal Quarterly Index or Index options Expiration still looms.
Enjoy the evening,
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)
