(Courtesy excerpt of gene’s www.ingerletter.com holiday weekend posting.)
Gene Inger's Daily Briefing . . . for Monday January 5, 2009:
Happy New Year!
The ‘depth’ of global decline . . . still unraveling; is obscured by this very rally that, as ingerletter.com members know, we’ve allowed for, since ceasing all equity shorts, or Index Puts (or related bearish behavior), and commencing some light nibbling; all the way back in November, before Thanksgiving. Now the question revolves around the extend of this move, as the rally of hope, which we indicated last week isn’t really a strategy; unless kept on a short-leash (from essentially a trading basis). Over this weekend we anticipate commencement of ground-war aspects, as Israel’s compelled to root-out the Hamas terrorists firing Chinese missiles smuggled-in by Iran (curious, how the media generally avoids these details, or how the terrorists purposely embed themselves amidst civilians, as an retaliation deterrent; so the world blames victims).
2008 was a disastrous year not only for Main Street and Wall Street, but for investors who didn’t concur with us that this was coming; as projected since early 2007. For the small group of us who dodged not only a bullet; but the thermonuclear war of market declines, there is satisfaction about the correct projection (not an anomaly since we’d been bullish from Fall of 2002 into early 2007; and back in 2002; even then warned it would be a ‘reflation’ hail-Mary rally with big trouble if it failed several years hence, as it did; and we saw the nuances of both patterns in advance; along with a secular top projected in late 1999/early 2000). Concurrently we have sympathy and compassion for those who had their 401k’s turned into 201k’s, but not for analysts or technicians, who in my way of thinking, should have gleaned the clear distribution of 2007, even if they were clueless about the insolvency of the banks (continues by the way), ignorant of the leverage employed by speculators including bank trading desks; unfamiliar with risks of securitized mortgages that were structured to fail, or all of the rest enabling a rather persistent play-by-play forewarning of the devastation headed investors’ way.
Does Spiraling Deleveraging Continue?
Now we have an interesting point where everyone is debating the longevity of what is thought to be the start of a move. While the market may not exactly run into brickwall resistance (we’ll see next week, the real start of the New Year with everyone back) in an instant, and be cajoled by the hoped-for (discounted?) bailout stimulus additions; a suspicion lurks that this relief rally we recognized the ignition of back in November, is increasingly going to become extended. That’s especially so if it becomes robust. In the annual plus 20-year charts I promised for this weekend are further analysis I’ll insert; plus of course ‘technical corner’ video taking a look at longer-term prospects.
For those returning from the holidays, and new members, I suggest reviewing charts and other information we provided during the week just past, as they are revealing as to the ‘real’ conditions that appear to be generally unabated as outlined. Now let’s do a quick summary of some recent points; capsulized speculative thoughts about 2009, and then the video.
When will the ‘sun shine Nellie’?
To those who reflect on the song’s role as ‘stock exchange anthem’ since about 1934 in the middle of the Great Depression, one may realize the significance is (at least in 1934 was to some) it was generally sung as clerks wrestled and punched each other due to absence of ‘order flow’ activity. Their persisting fear was that New York equity trading might, in the fullness of time, be doomed to extinction. Then, as now; that’s simply not going to be the final outcome. But inspiration for change is set in motion. (This piece reflect on traders annual singing of ‘Wait ‘till the sun shines Nellie’.)
If the stock market as a business was open to question in the months just past by the majority who didn’t concur with, or at least didn’t take proactive action to batten down the hatches ahead of our forecast ‘perfect storm’ (using that term before it hit; noting a sort of ‘eye’ in the middle, and then calling in advance for the other side to hit just in the Fall that is now memorialized); what isn’t open to question is the market as some sort of barometer. The market’s Obama Honeymoon rally everyone celebrates, might degrade just about the time optimism starts to seep-into public pressure gauges. In any event, the floundering investment climate or banking concerns for the New Year (comments about regional banks and financials in the new year reserved for member evaluation). When you look at M1 you’ll see how little difference the injections made.
What we’ve got in the wake of our forecast ‘Panic of 2007’ (reference last night’s trite reference to the use of the term because in 1907 on Wall Street they really called it a ‘Banker’s Panic’) is a ‘Governmental Panic of 2008’ now.
For sure, I’m looking for elements of stabilization to continue an appearance ‘process’ we’ve outlined since the November lows; and there are too many after-the-fact ‘crazy bears’ talking of (factors or Gold projections we’ll reserve for ingerletter.com member review); with realization that most of these types miss the ‘relativity’ involved vis-à-vis others; a reason ‘Greenbacks’ are unlikely to turn into ‘Bluebacks’, anytime soon.
Then there was our unique call at the beginning of 2007 for a ‘panic of ‘07’, which for several months during which we forecast a distribution into strength found us holding close-to-the-vest (outside our membership) that we had in mind the ‘panic of 2007’ in fact; not merely 1907; though we expected similarities before the ‘epic debacle’ came to an end, or even a mature stage. You may be interested to know that from the ’07 highs we have exceeded the ‘panic of 1907’. Percentage-wise some media only now have noticed this correlation; except they mark-it for 2008, which is just 3% shy of the fabled year JP Morgan blunted the decline a hundred years ago. They only noticed in terms of the ‘worst year ever’ which was 1933, 1907 and now 2008 in comparison. As the high (virtually S&P 1600) was in 2007, not 2008; that actually gives us about 45% off the highs; not 37% or 33%, for those who care about such arcane statistics.
What is clear today, is that while financial linkages are nothing new; the panic of 1907 shows, what's different now. That’s how closely international markets correlate with a similar monetary policy (though by various names), with one another. That’s a danger we tried to highlight with our 2 year forecast that ‘decoupling’ (separation of all foreign markets, especially China that so many counted on to bail-out themselves and hence retain international demand at high levels) .. that decoupling was a myth. It sure was.
Most pro’s tends to invest in the same assets and employ similar strategies, we’d argued besides the issues about there being no ‘trade decoupling’ self-sustenance in those countries. In Financials; it’s as simple as noting that just as Citigroup or Merrill Lynch suffered billions in losses from subprime loans or other collateralized paper, so did banks in France, Ireland, Greece, Japan, China, Australia, Switzerland, Germany and Britain (plus a myriad of others, but we made out point). Hedge funds turned into the leveraged ‘perils (not pearls) of innovation’ and were little more than the ‘pools’ of the 1920’s bubble, as forewarned. Hence we weren’t myopic; not only was it correct that there would be no ‘decoupling’, but global competitive devaluation risk remains.
Why forecast this like the ‘1907’ bust; rather than ‘1929’ crash?
Just about where we said it would; with a November low and mediocre rebound that’s based more on hope (an important but tough to quantify contributor to confidence) vs reality; and based on wishful thinking about 2009, beyond just stabilization efforts. To be clear, we do expect efforts already outlined to ‘empower Americans’ individually in the years ahead, not just broad fiscal initiatives (more for ingerletter.com members).
But this time around, we forecast it would last ‘longer and deeper’ (others say so now but we first said this before the top in mid-2007) than historic experiences in our lives; and also take much longer to repair the damages and restore confidence than it did a century ago. It's not only that the sums are larger now. Even if adjusting for a century of inflation, losses from the San Francisco earthquake before the ‘panic of 1907’ only totaled about $18 billion in today's dollars, according to Claremont College estimates.
That compares with the loss of hundreds of billions dollars and much more, related to subprime mortgages; not to mention the onslaught of Alt-A and Options ARMS and a 300 billion figure we estimate may be overhead supply ‘at risk’ in commercial loans in 2009. As these ‘realities’ sink-in to investors and the pundits over the year ahead, we will see progress in some areas; or the preparation for progress at the very least. For those who think we got that in 2008; no. This was systemic stabilization of the banks, and not much more. Others are surprised, or even mad. But it was our forecast as to the limits of the initial efforts. It involved a fortune because most banks were and are insolvent. The wistful thinking that the appropriated sums would resolve all, typically focused on a ‘liquidity’ issue, rather than the solvency issue we proclaimed last year.
Huge financial losses in the United States spark fear in Europe, China and elsewhere of course. A credit crisis ensues. A liquidity crisis (first forecast here in February 2007 by the way) arrives. Soon the fears spread to Wall Street (which tried to pump-up the Senior Averages, like the Dow or S&P for a few months at the expense of a majority of stocks, which is why we were upset about how the American people were misled a good bit by the financial media back then, since classic distribution under cover of the strength in the big-caps should have been evident to even novice market observers it seemed to me; and because nobody reported the ‘waivers’ by the Fed we remarked a good bit about; which were sort of the ‘smoking gun’ about how bad it could get to be). Next, we get to a point where the biggest banks fight off ‘rumors of insolvency’ to this day, amid a broader economic panic, and after Washington is forced to step in.
The market swoons. If this sounds familiar, it should. Except we're not talking about the subprime mortgage crisis, or the deal brokered by the U.S. Treasury Department solely with American banking giants for funds aimed at stabilizing the global credit as well as U.S. markets. In fact, if you remove my specific references to what’s occurred on our watch over these last two years during which I tried to be a Paul Revere for at least our members capital preservation efforts, it's a brief history of the Panic of 1907, which culminated over 100 years ago. Then as now that was not the low. And by the way, for those that want to know why (back early in 2007) I had decided to compare it (the then-forthcoming financial catastrophe) more to 1907 than to 1929; it’s simple: in Wall Street lore, 1907 was known as ‘The Bankers Panic’. Given that I knew all the big bankers were overloaded with leverage and CDO’s, CMO’s, etc.; the expectations were that this would not be a typical bear market or demand-based consumer decline but a financially-originated panic within the banking and securities industries. Largely as we saw it as the ultimate penalty for abrogating Glass-Stiegal and other long-lived protections separating banking, brokerage, insurance or so on, it had to be centered in the financial heartland itself; and that meant a Wall Street and Bankers collapse.
There are two characteristics that typically precipitate financial crises: complexity and leverage. Our forecast ‘Panic of 2007’ and ‘Crash of 2008’ contained both these viral aspects. Diversification is meaningless when the effort is global in nature; particularly when the implementation of essentially common strategies dominates world markets. When that happens, you get everyone heading to the exits simultaneously; and you’d be lucky to avoid precisely what we suspected would be the outcome these 2 years.
I don’t relish having been right; nor warning that this remains a process; not easily to be rectified by a new Administration (portion redacted for our membership only) even though we have a Fed and incoming Treasury that will hopefully be more proactive, rather than reactive, or avoiding implementing unneeded excess rules in some areas, rather than just enforcing adequate ones already on the regulatory books, but largely ignored. Governments typically fight the last war (sometimes actual wars that way for too long, and through too many casualties before finally getting it right) in any crisis.
In summary think of this aspect: once the Fed gives away money at ‘zero’ interest, what more can it do? Well, it still has some tricks up its sleeve, but its main monetary tool is worthless. It can’t cut rates further. So, it turns to another economic approach as oft-noted here. Keynes. Instead of colluding to fix the price of money (well some believe the Fed tries to do that; and they do, but never quite adjusted to the modern era where impacts are mostly short-term, and the globalization aspect has limited not inspired, their grip on issues), Keynes approach suggests governments should make up for the lack of private spending with public spending. That is where we’re at: more fiscal stimulus. It is notable that this mistake was made in the 1930’s; which allowed excess stimulus; a condition where the Fed has to pull-back, lest serious inflation risks arise. And the Fed will always opt for inflation over Deflation; not because we’re addicted to inflation; but because they know how to address that (lesser complexity).
What we suspect is that the Fed will have trouble draining liquidity; and we think that the American people will retain a legacy of this: greater savings, or life within means. The real economic challenge may not be now; but 2010-’11 as we’ve stabilized some degree. Aside crisis (and the extremes of 2001), the modern Fed kept the supply of money and credit fairly constant, just as it was supposed to; ramping relatively easily.
Then this time, when credit got tight, it cut rates...all the way down to zero, just as it was supposed to. Did that solve the problem? Nope. Not just because the economy is not a simple mechanism. Though it is a complex, organic system, the trouble that in this case relates to the globalization of our ‘debtor status’, cannot be controlled. At least not easily; and though we’ve argued that; I think it’s better understood now. As the crisis is accepted for what we said it was; a ‘solvency crisis’; not just liquidity and credit (though those are obviously forecast initial components; the impossibility now of deviating from the approach of addressing addiction with more drugs is realized. It also continues to prove the point that the ‘price’ (interest rates) of money isn’t at all a revelation as to the ‘availability’ of money (getting a loan if needed); and finally that is being addressed. It’s a delicate process; and 2009 will be (forecast aspect reserved).
As a matter of fact, rather than taking (noted) shipping data as a negative, we ponder if it (at minimum) provides a sort of underpinning for the American farmer and grower, if exports contract, but domestic demand soars; not only because shipments from the foreign supplies of some mystery meats, and most insundry miscellaneous items just contract, but because then there will be more incentive for domestic origin of these. I do emphasize however, that country-of-origin debates are overblown a bit for now; as trade between the U.S. and Latin America and Canada vastly exceed anything so dependent on long-haul container ships (ie: those I noted increasingly now ‘parked’).
Once we get to a point of recovery, rather than an inward-withdrawal tunneling tactic, a slew of survivalists would have us embrace, we will find that ramping-up trade and commerce takes longer; so that will impinge on inventories, to some extent. Whether than is the triggering point for ‘inflation’ remains debatable, as it will depend on other aspects of the meandering crisis and ultimate ‘reflation’, as it plods through the vast middle zone of the ‘epic debacle’ we forecast to develop starting from middle 2007.
To wit: not calling for a ‘V’ or ‘W’ simplistic or even classic bottoming formation isn’t a hedge as much as it is logical. We’re not dealing with traffic signals; but the largest of all economies, in one of the heaviest contractions in its entire history. Further at this point we don’t know but that the lows might come at considerably lower Index levels, and then (at those lower levels) exhibit the kind of pattern completion the premature crowd of optimists has thought existed on each and every dip and ensuing rally so far in this ‘epic’. Now we have identified (with our little nibbling back in November) what’s a ‘head & shoulders’ bottom; but suspect that pattern will be denied before this ends. Nevertheless we are relatively open-minded for (as outlined on ingerletter.com only).
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.
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 then ‘trash’. Government wants people to believe ‘cash is now trash’; the citizenry isn’t biting yet.
Remember; there is nothing conventional about this bear; 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 typically the stock market, and that’s why being proactive was so important in this ‘new era’.
Summary: we do expect something besides fiscal stimulus; like investment tax credit or more. And we envision business capacity constrained (useable capacity) later next year is a possibility; so with tax, accounting, 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.
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.
[Section Reserved]
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 back 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).
Twenty-four 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 combined actions.
Happy New Year!
Gene
Gene Inger,
Publisher
~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com)
