Slipping Into Darkness

From October 29, 2008

The Federal Reserve Board today, at 2:15 pm, announced their obligatory 50 basis point cut of the Federal Funds Rate, from 1.5 per cent to 1 per cent. This is the latest action taken to assuage investors’ fears about the hydra-bear market that has engulfed all capitalism. A triple digit rally was quickly vaporized with an erroneous General Electric rumor concerning the company’s 2009 earnings.

What are not mistaken rumors are the disastrous economic data that continues to flow. On Tuesday came the U.S. consumer confidence index, by the Conference Board, reporting an all time low of 38, down from 68 the previous month. That same day, the S&P Case-Shiller home price index fell 1 per cent, in August from July, and 16.6 per cent, from the previous year. The Census Bureau estimates for the 3rd quarter of 2008, of some 130 million housing units, nationwide, 18.6 million stand empty; 13.8 million year-round, 4 million for rent, and 2.2 million for sale.

On Wednesday, Durable Goods Orders were reported a curved up .8 per cent versus an expected decline of 1.8 per cent. For Thursday, the October 25th week Initial Jobless Claims are announced. Expect a drop of 3,000. Why, I’m not sure.

A General Motors -Chrysler shotgun merger is one step closer to happening, according to reports. If completed, it may add an additional 25,000 auto blue and white collar auto workers to the unemployment line of fixed income investment bankers recently cashiered.

Employment is rising, however, in villages and hamlets across the land as Investment Advisors and Money Managers are deploying their minions to hotel banquet rooms and restaurant’s private cubby holes, armed with clever four-color handouts, PowerPoint Presentations, and empty explanations, as to why their propriety indicators and models could not see the greatest bear market since the Great Depression, sneak up behind them.

I have a feeling that the traditional holiday feathered vertebra – turkey; will not be served this Thanksgiving. Instead, investors will be dining, if they can still afford a meal, on black swan; only recently very, very popular fowl of spenders of others-peoples-money. Of course, it’s too late to sale stocks with portfolios down 30 to over 50 per cent. But, if these Money managers are wrong again, keep some Gray Goose handy.

The Lost Decade: Widespread and Furious

Last Friday morning before the US stocks markets opened, the American financial system was staring into the abyss – again. Complete liquidation had occurred throughout the night in Asia and Europe, and now it was our turn. The US was given a death row reprieve, at least for now.

Virtually every measurement for wealth, even if casually examined since the year 2000, shows a decline in value or no change. The S & P 500, the DJIA, and NASDAQ, closed on December 29, 2000, at the levels of 1,320.28, at 10,786.85, and 2,341.70, respectively. Friday, October 24th, their respective levels were 876.77, 8,378.95, and 1,202.27.

Also on December 29, 2000, the Wilshire 5000 Composite Index closed at 12,175.88 versus 8,806.20, October 24th; the 10-year Treasury note at 5.12 per cent versus 3.69 per cent, October 24th; and Value Line – Geometric closed at 393.47 versus 226.82 last Friday.

REITs, open and closed end mutual funds, individual stocks, and all classes of equity assets have been savagely beaten up by the Great Bear market of 2008, with the same ferocity as it counterpart, the Great Bull Market of 1982-2005, rose. Leverage and deregulation ushered in 30 years of miraculous wealth and prosperity. Now, the tide has reversed. Asset values, first real estate, ultimately all assets, in the short term, have nowhere to go but down.

The federal government is using all of its power to soften the landing, but historically, expansionary monetary policy will only debase our currency and opens the door for massive inflation once we exit the impending recession.

This summer I wrote about the inevitable pain deleveraging would inflict on the economy and why it had to occur. I think we are far from the end of this cycle. Municipal Market Advisors reported municipal bonds staged one of their biggest one day rallies in history on October 22 and the 30-year Treasury bond traded at an unbelievable 3.96 yield Friday. The cash price for gold is currently being pushed lower through forced liquidation.

Baby Boomers, still traumatized by their 3rd quarter retirement account and September brokerage account statements, are having a collective epiphany about their upcoming retirement years. Their careful planning and hard work to secure a comfortable 'golden years' lifestyle has been robbed.

What's next for the economy? Just as all other assets are unwinding, in time, so will the bond markets and the US dollar. By then, TIPS, gold, and non-credit dependent stocks should be your first line of investing defense.

Macro Trends Spell Doom for Banks and Their Profits

The rise and fall of debt is continuing without abatement. In the U.K., bankers refuse to write new mortgages. U.S. consumers are tapped out. Businesses are finding their cost of borrowing prohibitively expensive to continue certain lines of business, i.e. consumer auto leasing at Chrysler Financial, all the while asset-backed portfolio valuation is tenuous and overvalued, at best.

After 30 years, two generations of consumers and businesses relying on hyper-credit to generate an enviable lifestyle for the middle and working class, trumpeting painless capitalism – all winners, no losers, and endless increasing corporate profits, that bubble has burst.

This perspective should be viewed from two positions, first, historical and secondly, relative to global living standards. The U.S. is the largest economic engine in the world. Household debt has tripled in the last 25 years.

In 2008, the inability to service debt is akin to the credit depression of the 1830's. Europe in the 1820's became mesmerized with transcontinental travel by train and flooded America with credit. The term transcontinental attracted money then the way dot.com attracted funds in the 1990's. A land rush, sponsored by the government, coincided with this period. Between servicing the railroad bonds debt and the leveraged real estate debt, remaining disposable income left little domestic spending for growth. Expansion became contraction. The great depression of the 1930's was more a function of technological advances increasing output, relative to consumption, thereby collapsing demand.

Our savings rate is the lowest in the developed world. It has dropped below 1 percent. Yet, we also buy more things than anyone else using maximum credit. Credit cards, home equity loans, secured and unsecured personal loans, loans against retirement accounts; any loan that continues the buy now, pay later, merry-go-round, until recently, without question and interruption, was marketed and consumed. Ironically, brokerage firms' margin accounts, the villain of the stock market crash of 1929, is our most conservative usage of debt, today.

Currently, home equity, which rose on cheap capital and hid stagnate wages this decade, has reversed while its cost has risen. Homes that were once ATM machines only three years ago are being repossessed in the tens of thousands each month by banks. Equity in an individual's home once was his or her greatest investment. Servicing debt on growing negative equity is becoming harder to do, both financially and philosophically, for underwater consumers. Prosperity from the mirage of supply-side economics has vanished for the masses.

Looking back, in the 1980's, deregulation through supply-side economics redefined risk and value. In the 1990's, heretofore, imprudent levels of credit, a peace dividend from the end of the cold war in the 1990's, and the integration of cheap global labor, provided the west a temporary and significant head start re-imagining comfort and convenience for the working and middle class.

Looking forward, new banking regulations, regardless of the outcome of the November elections, will restrict the future of credit and leverage for commercial and investment banks. The defense industry peace dividend was consumed years ago by the endless war on terror. Wages in developing countries are rising, and so is the cost of limited natural resources. And, the true bill on previous runaway debt created and consumed in a lax atmosphere is past due.

We are heading into a global recession. The IMF projects at least $1 trillion in total write downs. Total U.S. residential single family home real estate value is expected to fall another 5 per cent to 20 per cent; easily another $1 trillion in value. Bankers are considering reducing outstanding credit lines in the next two years by at least $2 trillion dollars.

Yes, banks and their profits are in dire straits.

Thursday Market Action

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After shaking off a worrisome inflation report before the opening bell and a dismal real estate report soon after the opening, the Dow rose steadily throughout the morning and settled into positive territory for the remainder of the day. The DJIA closed up 82.97 or .72 per cent at 11,615.93. The S & P 500 also closed higher 7.10 or .55 per cent to 1,292.93. NASDAQ likewise ended the day up 25.05 or 1.03 per cent to 2,453.67.

Volume on the NYSE was 1,003,398,038; advancing shares were 663,931,108 and declining shares were 332,074,290 with 7,392,640 unchanged. NASDAQ volume was 1,842,236,076; 1,414,017,121 shares were up, 358,110,252 were down, and 70,108,703 were unchanged.

Bond yields fell and prices rose as the market digested the early morning four week average jobless claims number which increased by 19,500 to 440,500 and the and a much higher consumer price number of 5.6 per cent, year over year. The Two-Year Note closing yield was 2.43 percent; the Ten Year Note was 3.89 per cent; and the Thirty Year Bond was 4.51 percent.

Foreclosures were up 55 per cent from a year ago, July. More than 272,000 homes received at least one notice, compared to 175,000 last July. This was eight per cent higher than June, as reported by RealityTrac. Lenders reprocessed 77,000 homes in July.

Existing home sales fell 16 per cent to 4.91M, annualized, in the 2nd quarter while prices fell 7.6 percent to $206,500 from $223,500 last year. One in three home sales was a short sale or sold out of foreclosure, according to the National Association of Realtors.

Crude oil finished the day at $114.70 a barrel and Gold closed at $807.4 an ounce.