Goldman Sinks the Financials/Market Update

Good Afternoon!

It looks like its going to be a long rough summer for the stock market. Volumes are extremely light. Stocks are falling further out of favor with investors as profits start to shrink amid inflation.

We started the day out with a HOT HOT HOT inflation number, and the lowest number of housing starts since the last housing slowdown in 1991.

"June 17 (Bloomberg) -- The U.S. economy may be suffering from its first bout of stagflation since the start of this decade, reports on housing, prices and manufacturing indicated.
Builders broke ground on 975,000 homes at an annual pace in May, the least in 17 years, and construction permits fell, the Commerce Department reported in Washington. Meanwhile, the Labor Department said producer prices jumped 1.4 percent, more than economists forecast. A further report from the Federal Reserve showed industrial production unexpectedly dropped 0.2 percent.

``The latest round of commodity-price pressure is adding to both inflation and weak growth,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``It's a pretty negative cocktail for the economy and financial markets.''

Quick Take:

Get used to seeing days like today when it comes to the markets this summer folks. Recessions can be long, boring, and involve very little price action.

Its obvious there are no catalysts to take stocks higher. HOWEVER , there are many catalysts that could take stocks lower. Those risks include a bank blowup, Builder BK, bank runs, high unemployment, inflation. Name the risk and you will see it in a market like this. This is why you need to be defensive with your portfolio.

Take note of the top line PPI inflation number of 1.4%. That's an annualized rate of 16-17% rise in prices. Not good when you are getting 3% raises annually from your job!! At this rate we will be trading our SUV's in for food stamps.

Goldman torpedos the financials

This was the news that sparked the sell off late in the afternoon. Goldman came out with a gloomy report on the banks. Here is the news from Bloomberg:

Highlights:

June 17 (Bloomberg) -- U.S. stocks fell for the first time in four days as Goldman Sachs Group Inc. predicted banks will have to raise $65 billion in new capital to cover losses and housing starts and industrial production trailed forecasts.

``The growth in the market is going to be in companies that increase the supply of materials and commodities, and the area that's going to struggle is going to be financials because they're going to go through this long period of deleveraging,'' said Richard Campagna, portfolio manager at Provident Investment Counsel in Pasadena, California, which manages $3 billion. ``I don't see that changing for the next bunch of years.''

Goldman analysts led by New York-based Richard Ramsden said investors should sell regional banks such as Marshall & Ilsley Corp., which is on its ``conviction sell'' list, and buy trust banks such as Bank of New York Mellon Corp. and State Street Corp., on the firm's ``conviction buy'' list.
Marshall & Ilsley, Wisconsin's biggest bank, fell 5.2 percent to $18.21, a seven-year low.
$65 Billion More

Large lenders also declined. The Goldman analysts said U.S. banks may need to raise $65 billion in additional capital as losses and writedowns continue into the first quarter of 2009. Declining home prices, expected to continue falling through the year, are driving the deterioration in the credit markets, Goldman said."

My Take:

What happened to that second half rally that the bulls were expecting? Goldman is finally admitting that this crisis is going to seep into 2009. I think its going to last much longer.

We will see an economic recovery after debt is either paid off or defaulted on, inflation is tamed, and houses become affordable. Think we can do this in 6 months? HA! Good Luck!

It may take several years for us to dig out of this hole. The Fed needs to start raising rates instead of just warning about pulling the trigger. Will this cause destruction and a lot of pain? Yes. However, it gets us to the recovery that much sooner.

We can no longer prosper in such a toxic environment. Everyone needs to deleverage just like Wall St. is in the process of doing. We have lived far beyond are means for two decades through debt and its time to face the hangover.