(Courtesy excerpt of our Daily Briefing, posted at www.ingerletter.com this weekend. Our thoughts and prayers go out to everyone impacted by Hurricane Ike..Godspeed.)
Gene Inger's Daily Briefing . . . for Monday September 15, 2008:
Good weekend!
It's a jungle out there . . . as miscellaneous shifting fortunes for various Financials, are somehow assessed 'as if' any of it had much to do with resolving a deleveraging trend, which is (as I've outlined for over a year and a half now) an ongoing 'process' that, at best, finds building blocks for a resolution, but not a solution that's inscribed in stone, nor readily expedited by any single or set of arranged 'shotgun weddings'.
Concurrently, storm clouds bearing down on Wall Street (struggling to hold above the all-important technical 1200 area of the S&P, about which you know our interpretation of the odds), almost relegate to second-place the storm bearing-down on Texas, that as we pondered last Thursday, is probably the most underrated (and historically large incidentally) natural disaster to ever hit the United States (and that includes Katrina).
(Recalling Andrew and Wilma in South Florida, with better hurricane readiness and a lot of buildings with impact glass; we still had about 95% power outage for two weeks on average, and again, that's in an area always prepared for the ravages of hurricane winds. Hence, striking the 4th largest City, this storm is probably going to actually be a giant not just in damage costs, but in terms of 'time' to bring back daily life, nobody is fully prepared for the duration of power, water and refining interruptions as are likely.)
All the while, financial arguments swirl faster than laundered money in a spin-cycle of a Maytag, in this unwinding of U.S. leverage (I called it a ponzi-scheme to get some attention early in 2007, referring to the pooling of structured-to-fail paper, and clearly feel honored to have help investors 'worried more about a return of their money, than the return on their money', to have pulled in their horns and dodged a very big bullet).
Credit crunches and potential recognition of the persisting financial failures, leave the markets in position for a plunge off the 'defended precipice' we've been talking about, which as and if penetrated, could handily parallel both our seasonal, technical, and a slew of fundamental concerns; not the least of which was a global deleveraging trend that so many argued against while we contended for months that decoupling was just a myth. Yes parts of the market wants to bottom out (especially domestic centric -with no debt or need for capital- growth stocks), but that is put on-holding pending general market washout conditions.
(Presuming weekend meetings either dismember or merge Lehman in shotgun style; a modicum of relief is unlikely, as whether bankruptcy, merger, assimilation in others, that mostly have their own debt issues and limitations of acquisition capacity for now; there is the prospect of investors speculating about 'who is next' and even a bank run or runs, not to mention more hedge and other institutional liquidations. So yes, we did say all year to resist temptations to buy until there's 'blood in the streets', and we saw only wounds where others saw decapitation; hence we remain bearish on all rallies. I now continue to be concerned -sorry- because the fires are not out, and there is even a concern about the quantify of firemen that are available, so to speak. The question, at this point, is will blood overflow the streets before this comes to a real conclusion. You know our answer and thoughts on the subject, and what 'risk' has been brewing.)
Daily action . . . suspects the naïve who failed to recognize the ongoing dangers and tried to marginalize what I called 'debt addiction' amidst rampant global extremism, to the point of premature recovery projections, will now probably try to blame huge hurts on the upcoming catastrophe in Texas and Louisiana from Ike, which will contribute a sad tone to the Nation's woes, but capital market issues would cream stocks anyway. (The combination will not only ravage indicators, but confound Quarterly outcomes.)
Hence, as most citizens focus on politics or the vagaries of a wild market (from which deleveraging risks and systemic threats aren't hardly removed from the markets even if we awake to a shotgun wedding arranged for Lehman Bros., Wachovia or AIG just by the way), we need to prepare to focus on something else: (this portion reserved in fairness for ingerletter.com members), and our condolences' for those who trivialized our warnings about Financials in early 2007.
On Wall Street . . . there was an unwarranted surge in optimism or dropping of risk-aversion as 'analysts' looked at lower commodity prices or a so-far-adequate defense of S&P 1200, and concluded that 'happy days are here again'. Wish it were so, but it clearly isn't. Much as we love to be optimistic about America; optimism doesn't mean just being delusional, and 'hope' isn't analysis, but a condition of wishful thinking. For sure this is an unusual era; but that's why we called (when turning from bull to bear in our Outlook for 2007 at 2006; at the same time calling for artificial higher highs in '07, to be used for distribution, which turned-out to be precisely the overall case) for not a simple decline, or subprime shakeout; but an 'epic' protracted decline. We referred to sub-prime and housing in general as a 'microcosm of the overall debt threat matrix'. I hasten to again reemphasize as I do periodically, the implications of the word 'epic'.
My concern is that this whole (wildly choppy) affair is a desperation effort to sustain a fight above the July S&P lows (right at 1200 essentially), and turn it into a secondary test of the prior low. Fine if they can do it; but given the absence of earnings visibility for any but a handful of companies (and not the multinationals they're championing at this point) we do not have any particular confidence that they can pull this off. All the while we do commend Treasury for their engagement, their brilliant trading assisting both the blow-off and crunch in the (coordinated we believe) oil and commodity turns, and that's not tongue-in-cheek, as we warned oil was topping in the 140's, since we'd heard there were quid-pro-quo agreements to strive for a 150 ceiling and (reserved) or so floor, irrespective of this hurricane, though obviously it has short-term influence.
Further, some of the decline (in lots of stuff) relates a bit to commodity funds being purged of investors, of assets, of loosing positions, and a seasonal tendency to avoid new mutual fund (in particular) commitments pending completion of their fiscal years, which most frequently occurs at October's end. If there's a vulnerable spot for big-cap stock market to falter anew or fall through the 1200 level of the S&P, that would seem to be a risk following this committed 'hail Mary' try. (Portion reserved: Of course you'll recall our admonition early this year that 'inflation precedes deflation' as that pretty much infers all one needs to know about the nature of such contractions.)
Finally; Treasury instruments reflect some aspects of assumption or aversion of risk. As we forecast 'before' the Bull wrecked the China Shoppe (Chinese market crash of 2007 projection), emerging markets are continuing overall to submerge as expected. Resource-rich economies are pressed by soft commodity prices (more reserved).
China is effected by economic tightening (a year after our forecast crash), and may in time route surplus funds (which they have plenty of) to sustain domestic growth so as to avoid internal discord, since if growth stops entirely, they're basically in big trouble. The societal polarization makes the mini-banana-republic character of cities here look pale by comparison. Hence they need at least a 5% or so growth rate (half of before), so as to continue to offer hope and opportunity to formerly agrarian dependants. Just for the record, we risk such issues in this Country too, which really is a buried topic.
I could point out as to Asia, that countries like Indonesia have cancelled bond offering issues, as they couldn't get low enough yields to make the overall projects doable. It's symptomatic of global shrinkage, and even global deleveraging, which dashes lots of hopes all over the world. They'll be rekindled, but ways to do it aren't yet instigated.
Remember these (summarized) thoughts from last night:
Intensification of battle preparation . . . not just overcoming credit market hurtles, is something unfolding right now. . . . that is not to minimize our ongoing forecasts for 'debt addiction' to continue financial attacks on our internal ability for self-defense; but there is more going on besides politics; besides the unfolding (and global) recession; and besides wrongheadedness by those who failed to see our 'myth' of decoupling in the light of what it meant (the same crowd who thinks low commodities solves all ills, rather than is a symptom of inflation preceding deflation, which precedes softer times for the economy here, and commensurate activity abroad to a great extent). Part of this is supporting a 'task force' commanded by Canada to protect the Gulf of Aden or shipping lanes from pirates, and possibly to monitor movement of Islamic terrorists (not militants, or extremists, but Islamic barbarian vermin even if politically incorrect), as they try to reestablish footholds in the Horn of Africa, support Hamas or Hezbollah, as well as the Yemeni al Queda who are trying to attack southern Saudi oil facilities.
Several weeks ago we alerted you to some interesting (detailed) naval maneuvers.
None of this seems to make the mainstream news (heaven forbid they talk much if at all about what's important tactically or strategically); including the Fleet Marine Force that's accompanying the task force(s). Still the 4th Fleet's initial patrol is not known by most Americans under SoComm (Miami) command; the landing today of two Russian TU-160 Bear bombers in Venezuela (after overflying Cuba where fighter escorts then joined them) has not been reported; nor basing of TU-142 anti-submarine turboprops, (reserved), nor involvement of several Russian ships in exercises with a demagogue in Venezuela (nor did they report successful Columbian capture of a drug kingpin in Venezuela, which also is significant). The Russian 'Battle Group' is, by the way, not just a couple ships, but includes (of 2 nuclear-powered) 'Peter the Great'… one of the world's largest warships, and assorted frigates and submarines.
Lastly, I can't believe the media obsesses with trivia and truffles, rather than asking political candidates (besides Sarah Palin) hard direct questions about handling these major issues confronting us in the world now, as well as how the war will be fought in-event of more than recession. That ABC did ask her (likely to extricate ignorance of major issues), proves they know what questions to ask in the debates, if they have a modicum of courage to finally delve into what the American people really lust to hear.
Yes, others now grasp what we've talked about for over a year; many thought us just alarmists when we called a Wall Street liquidity crisis looming in early 2007. That is because what they called liquidity was entirely a fantasy greater than (as I'll redact). I argued when turning bullish in 2002 (we got very bearish in early 2000) that with the debtor status we had, we had a 'chance' for a massive reflation to get things on track and then repatriate capital for pennies on the Dollar. Gov'mint and Wall Street badly mishandled it. Thus starting in early 2007, I was compelled to outline where this led.
Today you're hearing about 'commercial property' issues; some are only now figuring out that auto loans, credit cards, and student loans; much less municipality risks and a slew of other indebtedness.. will continue to ramp-up the pressures on solvency as well as the complexity of paying for wages and services during downsizing times. For sure we realize (and projected) that 'deleveraging would be difficult' (a b*tch we called it; but we'll be gentler now); and for sure we realize that Americans by nature tend to be optimistic and forge ahead, believing that sheer tenacity will resolve their problem or challenges. Often that works (and shall again); but in a time when credit is scarce (and generally inadvisable even if available), unfunded tenacity is a non-starter itself.
We are not Austrian economists; and aren't screaming the sky is falling like they now finally (and belatedly because they thought Europe could skip the slowdown) all over Europe (just talked to London and am assured about factors I shall reserve for now). As it was inevitable, without available credit, we argued for immediate transparency, which at least enabled some of us to be proactively defensive starting with real estate a couple years ago; then shoring-up capital positions prior to the worst of onslaughts.
In our view the worst may be behind with respect to subprime; but as we 'dig' into all the other aspects, we felt the crowd calling for a 2nd half comeback was ignorant of all the realities of an 'epic' deleveraging, and those calling for even a 2009 resurgence at this point still appear unrealistic (but not universally as explored further to members).
Amidst this nothing eases regarding bank lending standards; credit card constraints; a propensity to teach Americans anew about savings and frugality (won't last forever) as well as living within their means; and of course a period of time to achieve what is the only thing that has some chance of righting the ship (since 'reflation' was abused by the current leadership and Congress), which is debt reduction Nationally; and for a family unit, debt elimination entirely, where feasible; and as we've argued for 2 years. Given that business and markets thrive on leverage, necessary recuperation means others (to whom our money surely went, as it wasn't 'money heaven') take advantage and absorb too much of our assets and properties during the duration, which also will irk lots of folks politically we suspect. In the long run (if lucky) the result will be similar to experiences back (we explored more of this in full texts previously in the archives).
For now labor and housing erosion continue, and going forward the foreclosure mess may actually be somewhat intensified, if not dramatized, contrary to wishful thinking. I think it may be this reality that compelled the Government's seizure of the GSE's, as I suspect they know that what we talked about with Option ARMS and Alt-A (etc. etc.) is still out there so that there was no solution other than to (as ingerletter.com notes).
Financially; still believe the 'crowding out' in the capital markets isn't appreciably as alleviated (if at all really) by the takeover of Fannie and Freddie, as so many believed that mortgage growth would be enhanced, rather than constricted, by the Fed moves.
All of this means that banks and similar institutions are still scrambling to recapitalize. (Additional reflections about how we 'right the ship' are available in the original texts.)
Ensuing action suggests we basically indicated bottoms and tops of those Financial rebounds, within harmony of a macro pattern dating from sale/short of Merrill Lynch at 91 or institutions like CitiGroup, BankofAmerica, Morgan Stanley, etc., in the 50's.
Above all; we have an ongoing credit debacle (not just crisis); a 'perfect storm' of epic proportions (as forecast uniquely back at the tail-end of 2006 and beginning of 2007, prior to projected higher-highs in the Averages masking a classic distribution under-cover of a strong Dow and S&P); churning commodity pictures; continued sensitivity to oil; and mixed energy prices in other areas. It is to say we saw deleveraging as a 'big deal' before others, and have provided plenty of 'food for thought' with respect to where this heads next. I've already expanded on such postulations; and continue to.
Bottom line: macro signs as interpreted; including (updated recently) the following bullet points:
· Financial and bank-capital impairment remains the crux of the ongoing economic crisis;
· (Balance of bullet points reserved for www.ingerletter.com members; we invite you to join.)
Further points: nearer-term issues to contend with beyond above; some with macro aspects:
· Pyramiding mountains of compounding debt have not ended; facilitation assisted banks;
· (Balance of bullet points reserved for www.ingerletter.com members; we invite you to join.)
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast substantive failures by banks or other areas; following breakdown action, as we've outlined. Remember; back in early 2007 we denied the 'liquidity' momentum as a canard; believing housing only the first of the asset bubbles to deflate. We outlined structured investment vehicle failures; banking issues, confluence of asset deflations, and more; continuing with interruptions what we projected long ago: 'a perfect storm'.
As the debt bubbles continue to deflate, there will be alternating moves to play from a trading perspective. In any event we retain a macro (forward-roll adjusted) Sept. S&P 1600 +/- short irrespective of interim oscillations. Technical analysis via video follows.
Daily Briefing Technical-Corner MarketCast Video (Members click to play)
(note: Flash-based video plays in all browsers; 'free' Adobe download / plug-in only if prompted)
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 also focus on Middle East and World War III avoidance. To those who say it’s not a ‘war on terror’ but just law enforcement; actually it’s both. What they should hope for is that the ‘war on terror’ isn’t like a 1930’s prelude to war.
Our 2007 view: we were heading into a recession or potentially worse. As to whether it descends into something akin to post-railroad debacles way back in the 1880's; is likely what the Fed combats here in 2008; with actions that affirm they're desperately engaged to stabilize fluidity of functionality. Regression to the mean remains a goal for not only stocks, but real estate. (Balance continues in the full original text only).
Issues continue including oil, terror; China; Pakistan; certainly all the Middle East, Europe; funny money global economics. Noted for a year: foreign dependencies, as outcroppings of extremist globalism; neither pro-American nor conservative; even as true conservatives support fair trading; constrained spending; not squandering our US crown jewels. We must be 'Americans First'; or we can't consume from the world.
Twenty months ago I commenced projecting an 'accident waiting to happen' ahead; saying that was affirmed historically after long-duration periods of free money (Gilded Age mentality), which doesn't create enduring liquidity; but gives that interim illusion. With all 'games' and bottom-fishers essentially 'out of bait' to attract investors, that's a scenario that can precede (a continuation pattern as described to our members).
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; party over whether they like it or not, as they didn't or only thereafter 'conceded' there's needed rehab). 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 (reserved remark).
Not only is governance from the center appropriate; but essential to sweep a higher tide enhancing meaningful efforts to restore U.S. primacy or our financial sovereignty.
Enjoy the weekend!
Gene
Gene Inger,
Publisher
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