'Boston Tea Party; the Sequel'
Gene Inger's Daily Briefing . . . for Monday September 29, 2008:
Good weekend!
Boston Tea-Party Sequels. . . essentially dominated the week's action, to the extent a number of media outlets initially missed the 'Detroit bailout'; Russian arming not just dubious regimes in Iran, Syria and Venezuela, but Nicaragua too; as instead became mesmerized on a late-stage 'bailout rescue' (there we combined both words) that will neither be a true bailout or a sustainable rescue, I suspect. If it is true (and it matters) that 'confidence is so key'; well, the U.S. public has little confidence in shoring-things-up with tax Dollars (presumably borrowed from OPEC & China) to salvage debt woes by piling on more debt. During the week U.S. and foreign Central Banks injected lots of liquidity, which (though not appropriately reported) bought a degree of normalcy in the generally frozen credit markets (for a couple days). Begs the question why that is not doable in an overall scheme of things rather than throwing the onus on taxpayers.
We try to avoid politics, but have taken the skeptical perspective for over a week (well before others); mostly because we have little confidence in prospects for success of the original Bill (with slight variations), as don't believe the market overall will stabilize 'with or without' this Bill; maybe it's just a question of when (not if) another shoe drops frankly. The S&P 500 is heading to its worst seasonally comparable Q3 reports, and I think that is going to be newly sobering for the market, irrespective of this Bill's fate. (I have indicated they probably will pass a spun-for-political-cover variation of all of this; but that while it will give short-term credit market relief; it will not short-circuit the key aspects of the crisis that aren't even generally grasped by citizens; we address that in Monday's ingerletter.com Daily Briefing in even greater detail than we already have.)
It may be that with all of this crystallizing in the days just ahead, our 'pop and flop' call is just how it goes; as fundamentally the immediate future isn't bright, and the Bill -as outlined- as well as most discussions about it, are defensive in nature; struggling very hard to convince citizens that they will help avoid calamity; which is defensive (more).
Well today, one of our long-time members (a lovely Midwestern lady who plays in the Symphony) took it upon herself to circulate the thrust of our 'Empowering Americans' idea. See we are not permabears or negative; just want to help people not politicians, or their pals who constructed the destruction, which by the way has some roots all of the way back to the CRA Act (Community Reinvestment Act of '77), where thereafter certain pressures occurred to create low interest / low down loans for banks failing to adequately comply, and then when you compounded the greed of low interest later, and securitization; you know the rest.. I won't delve into the politics and pressures by and to Fannie Mae and so on by certain Senators and Congressmen, as documented over time, which led over the years to securitization which helped implement the goal levels almost mandated to the bankers.. and offset margin squeezes for bank results, (but that's all another story we have detailed; and is how Washington prodded banks at the outset; then later some (not all) bankers realized profits could be generated by the leveraging and securitization aspects; after having resisted such loans for years.)
Anyway (portion redacted), we think empowering citizens and small business is the key; not this Bill's 'good money towards bad' again; even though it will stabilize credit market aspects temporarily, but do marginally nothing for the present economic saga. However if they did it remotely like we threw out there; tax revenue for the Treasury; and millions of families getting lives together without debt and with confidence (too late and too much common-sense I fear; for the politicians of this era to embrace).
It is indeed about confidence; and that alone would eliminate panic redemptions and so on, that are (frankly) shameful results of a Government that says 'be scared; real scared', instead of combining stabilization with opportunity not to just 'save yourself', but really go forward (such as a truck driver buying instead of leasing his truck; a plumber or electrician, who can buy not lease his equipment; a farmer who can pay cash for his fertilizer or feed, and then start his own interest-bearing account for next year's supplies; no credit at all needed; an approach that simply scaled-up, worked for our parents, and can for us too). And we added if they need to supervise, they of course can administrate the funds so that they're dolled-out to make sure it goes into investing for the future of a family, not for the purchase of 'stuff'. I'm not a politician to work out details; but I thought the concept (started in a Thai restaurant on Wed., as I argued with a University Media Director friend why a positive approach solution was the best approach in my view; one that would give a tremendous boost to the Nation). (Not a bear; not a bull; that's simplistic. I try to be pragmatic, as have all these years.)
In any event; you know my market views; I'll reiterate much of last night's report too; and am trying to get this to our webmaster early as we are shifting Servers as well on the weekend (p.s. the transition went seamless and flawless; and I also sent a bullet point probable-event sequence to all MarketCast members late Saturday). So I'll look at the charts in the weekend videos, with projections; and wish you a great weekend!
Summary of previous night's assessment:
Takeoff and then the wings fall-off . . . is another way of summarizing 'rally to when the wheels' fall off; as one of our members summarized my writing of last night. Sure in my mind, this is clearly not going to be the 'rescue' the Nation needs or wants, but an effort that might be termed the 'Confiscation Act of 2008'; rather than salvation act.
Fortunately, members here have had the better part of two years (since our late 1996 warning of the year of 'money sloshing' into stocks coming to an end during 2007's 1st half; which followed our earlier 2005 warning of housing bursting for years to come vs a few who thought it would just shake-out; and the interesting valid thought that for a period of time, like a year or so, money would flow into stocks until that too collapsed) and plenty of time to prepare under the simple mantra of 'cash is king'; have no debt.
As a bull until 2006 (from the 2002 forecast lows) we shared a (still fairly unique) sort of theory that the 'actual' major top was NOT the all-time highs projected for 2007 to suck-in investors, but the 'real' secular high w,s 2000 (from our warning in late 1999 that it was going to go higher, but that it was an opportunity to sell-in, not buy for, just very similar as it turns-out, to how we approach 2007 in advance). The importance: it meant 2007 was a 'cyclical' high (or rebound in our projected 'epic' bearish debacle), for the Nation's economy (that's what the term epic has to correlate to), and not just a suffering stock or housing market. What I cannot do is advise anyone on specifics; on their holdings retained all the way down (nothing they'd have done if genuinely I think concurring with our warnings that this was going to be the biggest market mess in my entire humble 39-year market analysis career; hence ample time to prepare for all).
Fighting the Fed . . . is something one member contended. While respecting views, I think this way beyond that. The Fed stimulated too much for too long (no choice after 9-11 is the conventional argument; but few understand the CRA mandated stimulus); and the situation now is that there's no simple solution. It will eventually (reserved). One problem with the current interpretations (reserved) as if we were in a long-term bullish virtuous cycle, which we aren't. Hence, seen as a Wall Street not mainstreet rescue; America doesn't like it. The Fed, is fighting the Nation; not the inverse. From a practical standpoint; the Bill's passage temporarily be a palliative for credit market pressures (such as LIBOR interbank lending and stabilized daily pressures), but will hardly address other aspects (or those pending for the next act) of this 'epic' event.
I have pointed that here at ingerletter.com for more than a year; and believe ending the vicious cycle is a 'process', not a turn-on-a-dime situation, no matter a 'passage'. Again; 'conventional wisdom' can't be faulted for saying that; but it's not convention, and immeasurably complex. As I have said for months the Treasury and Fed actions are 'building blocks' towards a recovery; they are (reserved) modern financial history.
Bankers will become bankers I said last year. That means that even as this 'liquefies' the financial system; they continue underestimating the extent of toxic debt and other types of debt (specifics here; thus are reserved for our members), as logically follows. Those banks will not readily loan money to unqualified people as if owning a new car or anything else is somehow an entitlement. Doesn't mean I'm thinking like old fogey folks (though admit not a spring chicken); again, I'm just the messenger. I didn't say that "I" require absence of ready credit; simply said I think that will be the case from bankers. In a Nation that thrives on credit, this will hobble recovery as (reserved).
That (forgoing pattern evaluation) is probably how it will go, but they don't know that's a resolution far less than 100%. I have said this economic 'epic debacle would occur', and didn't know all my ramifications would occur. They did; with a couple as pending. And I continue to believe that this 'bailout' (they prefer rescue) will potentially be help in some aspects, but not the best way to proceed. You could just divide that amount of money and send it to every adult in America, with a requirement they not spend it on Chinese consumer stuff, but reinvest in retirement accounts or small businesses. As that would be maybe (reserved); guess what. I'm not Paris Hilton; but problems all solved. As you see; I'm not a pessimist I'm an optimists. That's why we warned you in addition to all who would listen to batten down hatches for the last couple years; why we were the Top Timer of 16 on the 'Blue Ribbon Panel' for 2007; or why as recently as May of 2008, Equities Magazine said Gene Inger didn't believe the bulls malarkey.
I am sort of musing; but think of it: there are other approaches than this bailout but as we are being shoved into embracing a conventional approach of resolving toxic debt with more debt (rather than more creative likely effective initiatives as proffered over the past week as we look forward to 'Empowering Americans'); there isn't time now. If they had gotten a grip at any earlier point when we warned 'what to do' we'd be fine. I think they could still legislate an Empowering Approach, so as to cushion damage; of course unless one believes a goal of certain parties is: bury us in unrecoverable debt. Maybe that's why for several years we viewed extreme globalist so-called free trading as stupid trading; that it was not conservative at all, but anti-U.S. economic sedition. I can't help but wonder why the same crowd thought 'securitization' as not a risk. Nuts.
The solution is to enhance small-business survival, hiring, and growth. Not bailing-out entities that contributed to the problem. Reward due diligence or good-faith banking; not concealed leverage for several years, supported by the Dept. of Manipulation, as the majority of Americans clearly feel, based on the polls. It's just common-sense too. (But of course common sense pragmatism is too simple for those enslaving us anew to contemplate; good thing we don't believe in conspiracies; or it could be the plan. I suppose next thing you know we'll be beholden to OPEC and China for a generation; guess what implications that has? Basically most of what we've warned of for years.)
Daily action . . . assessments remain little changed; so we'll summarize them. Just a note to remind everyone that Russia is taking advantage (even more so) of America's perceived contraction (we should remember this time when and if they cozy-up anew) not only by supplying new missiles to Iran or now Syria (where they also put warships recently), but by agreeing to re-equip Nicaragua's entire military; and on top of it now issued (today) a statement saying they 'may launch nuclear cooperation with Chavez of Venezuela'. So, who believes Russia is a force for peace and stabilization? The far left that's who. They're nuts; and will say it's to counter us. Nonsense. These are the new czars, and carry a machismo that dispenses with Russia of the 1990's that had some thinking all was changed forever. Putin actually said 'ties with Latin America' are now a Russian priority. You know what? I think they are trying to counter not just us, but Chinese expansionism, which has included the Panama Canal and Bahamas. Too bad American media (really at no time this year) has noticed any of these events aside the occasional reference to a couple bombers moving here or there by Russia. When was the last time you heard about China's 'docks' and mysterious warehouses in Freeport, Grand Bahamas? Partially certainly legitimate; but isn't it a bit curious?
Back to the 'rescue' plan. It doesn't address the underlying credit quality of issuers; it doesn't restrict 'what' assets the lenders can throw to the created Treasury agency; it is relatively small when you consider the overall size of the challenge including credit card delinquencies and tail-risks that may occur; and won't be implemented actually immediately (aside interbank aspects); also something that allows more bank failures and dislocations to likely occur in the process (reserved) anyway. (Rest reserved as includes discussions of muni's, pensions, money funds, credit cards, and more.)
Bottom line; I summarize it by saying the American people's instinct is correct: you'll not likely correct the ills of this kind of credit and solvency crisis, by restoring liquidity to the segment of the industry that was at the heart of 'enticing' American consumers (or the politicians who pushed industry early on; egged on by once-understandable if naïve notions about 'everyman' home ownership, irrespective of outcomes). I believe you'll find that abuse (as we forewarned) included credit (hint of Tuesday's topic); so that's another issue we'll delve into; as the overall exposure has become really gross.
As to the Dow Jones (we discussed all that last night). That will come incidentally; but it's far too early to anticipate (reserved), when we must at this point still be concerned about the depth of economic duress, which remains fluid. More in the weekend video.
Also of course; let's lay this on the line: we agree with most everybody that there is 'a crisis'. I forecast it a year-and-a-half ago; said would permeate literally all economic facets, and called it a forthcoming 'epic debacle'. Believe it began over a year ago.
By my reasoning that's more than a crisis or crash for that matter. All the media talk is expediting an awareness by the populace that we are in trouble. If we didn't have an impending crisis; we sure do now. Scare talk is pathetically tardy, with some parts of the economy (limited areas) fairly immune; so what this does is frighten even such Americans as are in good shape (reserved as discussed last evening).
Many (reserved) factors are present today (as warned for over a year), at larger-scale I believe, and in faster markets and times of instant communication. The primary shift is that the United States is now the world's biggest debtor rather than creditor nation.
We do not mean disrespect to Treasury Secretary Paulson; absolutely question what in the world the SEC Chairman was doing for the past year on this; and admire what great work Chairman Bernanke is doing in trying to cope with a sequel to his studies; which I eminently respect (and do not relish the debacle either has inherited either).
Key bottom-line points: compression in multiples where earnings are truly superior, is of course favorable; maintenance of multiples where a stock simply holds together with earnings, but had shown global growth; may warrant (reserved for members; the purpose of an excerpt is a courtesy acquaintance with our views; invite your joining; I appreciate that members feel I've dedicated what should be semi-retirement times to preparing citizens; and if you want to share how we think this evolves; we welcome of course your membership). For traders who've lost gumption or don't know which way to play; have they forgotten there are various ways to fade any extreme; or (reserved) positions; which is something we've done from a macro perspective since S&P 1600.
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.
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'. Finally the dikes 'appeared' to have been buttressed; but the extent remains fluid and I remain suspicious as noted, that 'debt cures' may be worse than the 'debt disease'.
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.
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.
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 combat here in 2008. Actions affirm they're very desperately engaged to stabilize fluidity of functionality; as we've argued for months; and has now gone into 'overdrive' so to speak (some call them a Department of Manipulation now).
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; just gives that interim illusion. As 'games' and bottom-fishers essentially were 'out of bait' to attract investors, we'd viewed it as a scenario that can precede a washout and bottoming process initiation. Do not yet presume any particular price level as associated with Senior Index lows.
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 assisted by sound banking policies. Those are now in the process (finally) of being codified into pending new legislation.
Not only is governance from the center appropriate; but essential to sweep a higher tide enhancing meaningful efforts to restore primacy to regain 'financial sovereignty'. Meanwhile, the desperately needed leadership initiatives that deflect this being even a worse debacle than need be, are something demanded for months, and pending.
Enjoy the weekend,
Gene
Gene Inger,
Publisher
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