Gene Inger's Daily Briefing. . . . for Thursday, December 13, 2007:
Good Evening,
Is that your best shot? Essentially that question followed the 'fade' ensuing from the 'surprise' coordinated ECB and Central Bank actions (we ruminated some sort were likely forthcoming since the Dollar's low by the way) taken by not only the Fed, but the consortium of various financial governance authorities internationally corralled, for obvious reasons. Remember that a couple weeks ago, besides 'liquidity' and 'credit crunch' concerns (as first noted in May and June before the projected rally into early July that we awarded a 'zero' probability of sustainability forecast), and resulting 'hits', we brought up another issue going beyond systemic liquidity. That was solvency.
This dates to the 'table' months back showing the derivatives exposure institutions (it should be noted that includes brokers and bankers, as well as certain lenders) held; it relates to the 'waivers' by the Fed (Reg 12 and so on) that amounted to an essentially unreported 'reserve requirement' modification, if not cut (because house net capital or similar issues were involved), due to the inability to 'rate' internal holdings any longer, as 'investment grade' securities. That was (since the little Irvine firm's failure months earlier) seen as a sign of danger, and has nothing directly to do (neither does today's move) with the housing crunch per se; or related availability of consumer credit. (All of those 'blaming' the Fed, miss the point: they want solutions from an old era, which have already been shown to be inadequate to cope with challenges of this debt mess which go beyond convention; for which lower rates were called insufficient solutions.)
What it does have to do with is preventing some (not necessarily all) defaults or even insolvencies (depending on the financial sector involved), simply to keep the system functioning reasonably. The liquidity plan combats the situation wisely; but isn't some sort of panacea for problems. Au contraire; it may actually hasten 'awareness' of the mainstream public to financial challenges about which they are generally (as typical and normal, so we're not suggesting average working folks should get all worked-up; because when they do then nervousness about banks etc. increases) unenlightened. Not that we advocate naiveté; but stabilization's aimed to resolve systemic issues; it was never intended to be salvation for profligate lending or borrowing; just keep the system going; so we think those pundits or analysts moaning, are missing the point.
Hence; it's the difference between 'crash' prospects or more 'Chinese Water Torture'. It is not anything that will make a difference between a challenging year, so probably isn't 'all they've got'. But it may be their 'best shot' for the moment, as it's similar to at least part of the surgical approach for systemic liquidity (yes, and solvency) that we'll recall followed the 'attack on the United States' on 9/11. We assessed the sharp rally early Wednesday as a time to sell, not buy; as the day's ensuing action affirmed.
This is not kowtowing to Wall Street; because if this deal wasn't on the table, risk of a 'crash' would become enhanced, rather than continuing to procedurally work through the issues. It won't solve everything that's being debated; and isn't intended to as we see it. The paper that sits on the books of the banks can't be moved; now you sort of unblock some of that; so indirectly you free-up some of the ability for pricing, and that doesn't mean this has anything to do with ease; has little to do with improving 'prices'; and it compels better cooperation between the banking entities, which are sparring in a sense with each other for exit ramps; hence may be inclined toward the competitive downgrades 'of each other' that we're increasingly are being encountered. This, in a sense negates some bitterness surfacing (as reserved for ingerletter.com members).
Daily action . . . thus concludes the 'mess' (simplified for easy grasp) hasn't ended at all; but Fed decisions become enablers of sloshing through many issues, without this miraculously having anything much at all to do with (at least superficially) the public's concerns about housing valuation, marketability, credit availability, or things like that. Except for a key factor they aren't typically concerned about (unless they've watched the Florida pensions, or B of A owned funds): closure of a fund; bank, or panic 'runs'.
Those kind of worst-case scenarios, with inherent snowballing risks of mushrooming, into an uncontrollable fiasco, are mitigated by the continued brilliance (seriously) of a Fed that (for once) is being run with a practical implementation of intellectual wisdom.
Hence; even though this won't improve profits, defer a contraction economically, or a recession in the U.S. necessarily; what it may do is prevent something even worse by the way. So the spoiled brats around Wall Street can get over themselves; be content with avoiding total disaster; don't expect extreme globalism or nonsensical stimulus in itself to avoid bearish scenarios. Just be pleased it may only consume (time frame for working this out reserved for ingerletter.com members), instead of something more akin to the 1930's, which might take (noted) years to trough-out, and (duration noted) before true prosperity could timidly begin to return. It is the best solution (so far) to a potentially worst-case backdrop; and that means we'll congratulate the Fed for their continued efforts to stave-off disaster rather than try to embrace greed, or revitalize the perpetrators. This is not the time for that. This is time for corralled wagons to stay circled; as the Indian Wars lasted for more than just one or two salvos; didn't they?
A transition from satisfactory (we did not have super) growth to sub-par profitability is a forecast that's unchanged by what's occurred today. Cash remains king; markets at this point are not warranting charging-in with reserves to buy big-cap stocks (actually more risky than many small-caps, which are down and may typically firm interestingly in the first half of '08 almost irrespective of big-cap multinationals in some cases); so we should actually breathe a sigh-of-relief that the U.S. may sidestep a total debacle.
The American consumer will be reigned-in next year; credit card largess will likely be trimmed or constrained in the new year, and lending policies are not going to open, at least not wide for awhile; though that's a structure being (reserved for our members).
Because it's obvious that the 'sums' dedicated to the initial 'rescue swap' pools, that I view as 're-insurance' basically for the banking system (not a mortgage or other type of rescue program), are woefully inadequate (a drop in the bucket) relative to overall exposures in dubious derivatives as outlined in the past.. we presume that the Fed is well aware that it needs to hold-back some ammunition for future implementation. So, whether yesterday (where nothing much would have improved had the Fed cut a bit more, irrespective of those in the 'blame-game' suggesting so) was procedural, and it seems that today's was a drop in the bucket, the most likely interpretation is that it all is part of their strategy. That is a strategic recognition that some companies are doing fine and you can't further debase the Dollar or inflation by excessively cutting rates at a time when there is no assurance (nor prospect) that excessive stimulus even has a chance to give housing or consumption additional near-term traction, nor negate this overall CMO / CDO contagion, that's unique or not responsive merely to conventional monetary intervention(s).
That's why the Fed is thinking 'outside of the box', by acting in ways that will stem the systemic bleeding, while not (yet) weighing on what actually can't be resuscitated in a rapid or efficient way (such as the deflating real estate bubble), by squandering their remaining 'cushion' of rate-cuts, which are best-reserved for when they'll have better prospects for being helpful. That was at the core of our point about this last night too. Once we've had months of liquidations, foreclosures (which can't be avoided) and we slowly diminish inventory over time, then (versus now) aggressive stimulus (more). I continue to believe that we are (proportion of pain) through the bubble-relief activity; so (if right) that means that 2008 will largely see continuation of real-estate unwinding in the impacted areas, and conceivably commencement of same in untouched areas.
Summary: it is that basic; as you don't have a choice of a hot or hotter economy; as there's not going to be a fast revival of the 'games' seen in the earlier years of this decade, irrespectively of what occurred yesterday or today; hence the Fed would be increasing the forward risk by doing more now, irrespective of protestations which for the most part are aimed at fixing blame on everyone but the parties directly involved (the extent of Government responsibility probably relates to too low rates for too long earlier, and a lack of 'rating' oversight and action to curtail speculative excess later).
Our growth is already slowing and would slow considerably irrespective of another larger move by the Fed. The Fed's not excessively optimistic as some pundits distort; just the other way around. They know how dire situations are; so withheld action for the most part that would have been irrelevant (other than interim psychology) anyway .. as that's affirmed by a focus on systemic liquidity maintenance, guarding against an alternative scenario that's basically riskier than bulls or bears willingly contemplate.
Analogy: waging a war to avoid a recession is underway; striking before the forces are trained or armed to invade enemy territory sufficiently could amount to a financial Dunkirk (reference to youngsters of the British beachhead, that had to be evacuated, under Nazi attacks, because England tried valiantly but prematurely to push-forward to liberate the yoke imposed upon Europe). Because of wounds from that premature assault, retreat to and evacuation from Dunkirk was necessitated. Europe's liberation was delayed by about four years, in part because of the premature effort to 'hold-the-line', and that's the analogy we're making. In our thinking the recovery from recession to renewed growth as well as prosperity is expedited, not delayed, by Fed skirmishing with the enemy, rather than rushing headlong without a well-thought-out plan into the jaws of the enemy jaugaurnaut (junk debt armamentarium), which is untenable heavy debt along with impossible-to-maintain economic growth, without a necessary pause.
Summary: Are we position short this market? Index-wise yes; variable individual days, as outlined (but making position guideline point to represent concern beyond prior intervening rebounds); common stock wise, no. Holding short a December S&P guideline from S&P 1585. Candidly stayed suspicious of recent thrusts higher beyond general levels outlined in our audio-video 'chart' comments and were, as members know, expecting -irrespective of how the Fed's response was- that risk was again rising.
Bottom line: signs as we interpret them, included the (updated Wednesday) following bullet points:
· Lunatics are not in-charge of the asylum (thankfully); the adults are; and moving deliberately;
· Rate cuts invite banks to manufacture profits here; as none of this would increase lending;
· The way the Fed's moving compels banks or lenders to address the actual problems first;
· Nothing done now would generate low-quality lending to bailout the millions impacted;
· Thus the Fed's doing what we said: protecting the system for future basing and new lending;
· The credit-clog would remain stalled regardless of Fed action here; so they're acting properly;
· Fed's action was appropriately restrained; since 100 basis points prior made little difference;
· It was in our view the Discount Rate cuts that mattered; maintaining systemic liquidity, as;
· There was never an effort to do the impossible, which was re-invigorate consumer demand;
· Or somehow actually stop a continued unwinding of one of history's biggest credit bubbles;
· Meanwhile it remains incredibly important to maintain some 'reduction' cushion under here;
· That's versus squandering the remaining maneuvering room where it would impact very little;
· Washington Mutual dividend cut is logical; and probably Citigroup will be on-tap soon too;
· MBIA surged on 'investment'; gee, is that all the money they could raise (makes us curious);
· Rumors about WCI defaults; but tardy as that housing stock already down to near nothing;
· Retail tailing-off; high-end and adult clothing in particular; Best Buy may be shy of forecasts;
· The above anecdotal, but based on discussions relating to National, not local, activity levels;
· Fed rate cuts (funds anyway) are a myth with respect to resolving the current system stress;
· Clearly they all now finally 'get it'; but unfortunately way past the horses leaving the barn;
· This is more than a 'slight credit crunch', and despite politics; no real solution yet offered;
· Basically this is a National de-leveraging that is by no means over; barely towards midstream;
· Fed's Janet Yellen affirmed our concern about economic risk remaining particularly high now;
· England's MI5 issues warning to firms in GB about Chinese state-sponsored web espionage;
· Rumors of high-risk terrorist penetration across U.S. border per BOLO's to law enforcement;
· Preconceived notions of how finances 'will be' are now historical guidelines; not certain rules;
· Risks to reinsurers (monolines); pensions; municipalities are not ameliorated by today's news;
· Add concern about Commercial Paper holdings or even money funds not fully in Gov'ments;
· Debt issues are not resolved; massaging of every aspect being attempted as 'they' best can;
· Subprime bubble forecast to burst was a microcosm of bigger issues clearly not resolved;
· Murky financial structures have less liquidity than 'advertised'; only limited Fed rate cushion;
· Many major banks have far larger leveraged derivative holdings than generally realized;
· Fed action or actions stop systemic freezing; but won't instantly solve overall credit crunch;
· In this regard it should be too early for the market to discount an economy recovery in 2009;
· The foregoing does not necessarily mean a housing recovery commences concurrently;
· Seasonal market rebounds not withstanding; there's no change to further-out evolving risks.
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks continue intraday alternating guideline efforts to catch volatile short-term swings. Our comments tonight emphasize why key credit or derivative issues are not resolved.
The position short guideline from December S&P 1585 continues; and we began this (second) Fed day with a forecast for the market to slide from the Wed. gap-up surges on the 'rabbit being pulled-out of the hat' perception. As we recognized that to merely be a facilitator of systemic issues rather than palliatives for consumers which couldn't get traction anyway, we again believed the Fed has it right; but nevertheless shorted the rally, as too many bought first, thinking it meant something other than what it did.
It is very important, in a way we explored; meaning preventing unavoidable slowing from worsening. It is our view that pundits arguing we now have to go through various cathartic troubling times that could otherwise be avoided, totally miss the point. They merely are looking for scapegoats for lending excesses, which require an unwinding or realization, that you can't go from 'hot times' to new 'hot times' without a requisite historic interim cooling. They want to go from 'hot to hotter'; irresponsibly untenable.
Key credit or derivative issues are not ameliorated, as projected Fed actions remain, in our view, appropriate. Adjustments move toward improvement, whereas doing lots more would be 'pushing on a string'. It's a different issue then just stemming a tide. In our view the Fed is treading maturely; doing the right thing. We're hardly out of the woods with respect to housing, debt or war issues. Notably: a Fed 'staying ahead of a situation', isn't preventing it. Actual financial risk situations remain enormous, and in our opinion would be exacerbated, not assisted, had the Fed tried to stimulate more.
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.
--
Slow growth has likely descended into recession; of course that fear 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' fluctuating via intervening bull-bear shuffles on the NYSE & NASDAQ. Reflex rallies allowed 'risk off-loading' tactics; as 'Street' debt holdings aren't investment grade. Multi-month efforts evolving. In this regard, we suspect that strategy is fluctuating with markets; trying to salvage attractiveness of structured-to-fail creative financial paper. Many analysts 'volunteer' what bargains financial firms were; made it dubious; much based on consolidation or salvation (of distressed borrowers) speculation; that's incomplete and doesn't calm risk aversion. Today's additional pressure essentially validates our point in this regard. Clearly they get more interesting as they decline; but there's no rush we see to get into that fray.
Fears are rising in the credit markets that the turbulence could last for months as big US & European banks come under pressure due to losses in US mortgage securities. The 'cover' of strong economic activity masks the greatest credit bubble ripple effect risk since the 1907 Panic, if not the 1930's. The similarity is somewhat like I recall in the 1880's when the 'railroad' bond debt fiasco took the Nation into a situation taking years to recover from; more so than the 1990 banking mess that led to mergers and a rebounding stock market (though there are similarities, and this isn't going to yield easily). Frankly, though trading opportunities expected; folks will pay for real growth; it will often be smaller domestic stocks, nominally big-cap multinationals or financials.
So while there were lots of reasons for rebound (shorts among them) it's increasingly an historical anomaly within the downtrend. Like I said: too early to expect some sort of uninterrupted joy-ride, without visiting a ditch first. At the moment we're basically at the shoulder of the road, deciding whether to roll-over into another ditch. Likely might. Remember, the debate is how miserable things will be; not about robust profits. Had the Fed done everything the so-called bulls want; we'd have fiascos with softer Dollar and unrepentant lenders and derivatives players, along with higher interest rates as it would promote inflation and probably require that to attract money to these shores. In that respect the ECU and other central bankers are cooperating, as this is far wiser.
After a protracted period of adjustment, the world and U.S. economy in particular, will not only get back to business, but prosper while the Nation thrives. That will occur not by underpinning what can't be rescued, but by avoiding the worst-case alternative as might have otherwise unfolded, and working through this over time. Consequentially I suspect it's impossible not to have further large losses taken during this evolution; but at the same time that's what sets-up fantastic buying opportunities in months ahead. I believe that the short-term's aggravated by the Fed's moves possibly; while long-term prospects are enhanced; with at least the duration of forecast contractions shortened.
Six months ago we called this an 'accident waiting to happen', and commented that it is affirmed historically that long-duration periods of free money (Gilded Age mentality) do not create permanent liquidity; but give that illusion while the opposite transpires.
I've argued that you could not compress 20 years average growth of real estate into 5 years without deflating that bubble (almost entirely conceivably). On Wed. Greenspan in an op-Ed piece in the Journal, reinforced our ongoing thinking on this subject. Sure we're pleased the esteemed former Chairman concurs (more details for members). I can only wish the overseers moved sooner. To others saying this happened 'virtually overnight', we demur. It did not. How could we, or for that matter at least a few others see this building for 2 years; noting dangerously leveraged derivatives basically all year, if there was no visibility of an insatiable lust for free money, irrespective of risk, and devoid of fiduciary rating responsibility as occurred, and was evident well before the most recent series of rotating air pockets.
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)
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.
