Monday, December 1, 2008

Stocks Collapse as the US Recession is Confirmed

Good Afternoon Folks!

I hope everyone had a great holiday.


What a day today in the markets. Stocks are absolutely getting killed today folks! The major averages are all down around 6-7% as I speak. I must admit I didn't expect this kind of dump today. The move is based upon several pieces of news that hit the wires today. Folks, these are serious times. I am really concerned over the price action today.

Lets get right into it. We headed into today with a new research report from superstar analyst Meredith Whitney. If you have followed me for any length of time, you all realize that I believe Meredith is the most brilliant research analyst when it comes to the financial firms.

She appears to have gotten even more bearish since her last research note, and has really changed her tune due to the severity of the crisis we now find ourselves in. I must say I didn't think it was possible for her to become more bearish. Here is the link to her research note:

"As an analyst, it is my job to do fundamental research and call it as I see it, and my bailiwick is financials. My outlook has been negative for over a year and, technically, I have been “right” on my calls. Seeing massive capital destruction has brought me no pleasure, but unfortunately I see little on the horizon that would change my outlook. In fact, after observing the US economy so derailed, I feel that I must act as a citizen of this great country to attempt to offer solutions to this economic train wreck we are all involved in.

First, I am more bearish today than I have been in the past 18 months. In so far as the market has impacted on the economy, capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers. More than $3,000bn (€2,365bn, £1,955bn) of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year.

First, re-regionalise lending. Since the early 1990s, key bank products, mortgages and credit card lending were rapidly consolidated nationally. Banking went from “knowing your customer” or local lending, to relying on what have proven to be unreliable FICO credit scores and centralised underwriting. The government should now motivate local lenders (many of which have clean balance sheets) to re-widen their product offering to include credit cards and encourage the mega banks to provide servicing and processing facilities to banks that sold off these capabilities years ago.

Second, expand the Federal Deposit Insurance Corporation’s guarantee for bank debt. Banks need to know they can access reasonably priced credit for an extended period to continue to extend new credit lines. Any semi-conscious bank management team knows that capital and liquidity are precious and therefore is hoarding both.

Third, delay the introduction of accounting rule FAS 140 until 2011 or 2012. These moves to bring off-balance-sheet assets back on balance sheet for the sake of transparency are a mirage. The primary assets that will come back on to balance sheets are credit card loans. Frankly, there is more transparency in off-balance-sheet master trust data than in on-balance-sheet accrual accounting. Banks cannot afford it now and it will further constrain credit.

Fourth, amend the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010. The proposal includes one major change that will lead to a severe unintended consequence – pulling credit from consumers. Restricting lenders’ ability to reprice an unsecured loan will cause them to stop lending or to lend less. This change could cut over $2,000bn in unused credit card lines, or over 40 per cent of unused credit lines. With so many Americans relying on their credit cards as a major source of liquidity, it would be equivalent to a major pay cut.

This is no time for partisanship. The situation is too dire. These changes are ones I would never have imagined endorsing a year ago, but these are extraordinary times."

My Take:

Meredith has completely changed her tune. Note in her fourth point that she expects credit availability to drop by $2 trillion dollars if this new rule is implemented in 2010. This would absolutely punish the consumer. Imagine being a consumer and having a $2000 balance on a card with $3000 of credit availability. Your thinking ok, I have a little room to spend. If this rule takes effect, overnight your credit limit could drop to 2k as the banks reign in credit availablity. Overnight your spending power could drop to zero unless you have cash to spend.

The consumer is already hanging by a thread. Take away their borrowing power via credit cards and the consumer will be down for the count.

What surprised me the most after reading this report is the fact that Meredith is actually asking for less transparency. Its obvious that Meredith that she is saying this because she is scared to death and worried about the solvency of the system. She realizes now is not the time to continue and pound the financials. The situation is "dire" in her eyes because she knows they are all insolvent and about to go down in flames. We all must begin to focus on solutions and saving our financial system. I applaud her change of tune.

Lets be honest folks, none of us want to wake up one morning and find out that our ATM card won't work because the banks are shut down.

Recession Confirmed

What a surprise: We have been in a recession since December of 2007! NOT!:

"WASHINGTON (Reuters) - The economy slipped into recession in December 2007, the nation's business cycle arbiter declared on Monday, and the downturn could be the worst since World War Two.

The National Bureau of Economic Research said its business cycle dating committee members met by conference call on Friday and concluded that the economic expansion that started in November 2001 had ended. The previous period of economic expansion, which ended in 2001, lasted 10 years.

The current recession, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression, behind only the 16-month slumps of the mid-1970s and early 1980s.

"I think that we've got a ways to go, that this is going to be probably a deep and long recession," Jeffrey Frankel, a Harvard University economist who sits on the NBER's committee, told CNBC. "It could be the worst post-War recession. We don't know yet."

Quick Take:

This is now the third longest recession since The Great Depression. Anyone care to guess how long this lasts? I am afraid to answer this question. I love how this country denies that its in a recession until after the fact.

Forget December 2007, in my view, the recession started during the Tech Crash back in 2000.

I think that when history looks back at this period, the housing bubble will turn out to be nothing more than a temporary bear market rally in the middle of one of the longest secular bear markets in the history of our economy. I genuinely believe that this bear market could last decades. History has shown us that the bear markets are as spectacular as the bull market that preceded it. The last 25 years was the greatest bull run in history.

As a result, the oncoming bear market's brutality will need to match the intensity of the epic bull market that just ended in order to successfully wring out all of the excesses of living beyond our means.

The market in my eyes is like a mental patient with bipolar disorder. There are periods of time where the market gets completely manic and shoots to the moon. We all know that these manic episodes are bad and cannot be sustained. When a bipolar patient reaches this euphoria, its almost always followed by a serious depression. Bipolar patients must take their medicine in order to prevent these bouts of depression and help keep their lives in proper balance. The stock market needs the same thing after its own bout of mania. The bear markets are the medicine the stock market must take in order to prevent depressions and remain stable.

My point here is huge bear markets are healthy for our economy. They help us "revert to the mean" and remain balanced. They also remind us that "keeping up with the Jones" is not what life is about. They also allow us to build character as we all help one another as millions of family and friends struggle to survive after losing their job or house.

Bear markets also remind us that family and morals are much more important than owning a McMansion with two Hummers in the driveway. Its the simple things that make all of us happy. Perhaps we needed something like this to remind us of this.

Just turn on reality TV if you want to see how far we have lost our way when it comes to what is important in life. The "Paris Hilton" era is over folks and I personally look forward to it.

Bottom Line:

Back to the markets. A few other things to take notice of today. The China manufacturing data was a huge negative catalyst today:

"Dec. 1 (Bloomberg) -- China’s manufacturing shrank by the most on record and export orders plunged, adding to evidence that recessions in the U.S., Europe and Japan are dragging down the world’s fastest-growing major economy.

The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e- mailed statement. A second PMI, released by CLSA Asia-Pacific Markets, also showed a record contraction."

China manufacturing is collapsing folks and this is not good. Art Cashin thought this was the most important news story of the day. This is news because for several reasons. Their government is not very stable, and an economic collapse could trigger government instability. This has geo-political ramifications. Secondly, they are a huge consumer of both US goods and treasuries. If they collapse its going to make our situation that much worse.

A second thing to take note of: The 10-year continues to collapse!:

"Dec. 1 (Bloomberg) -- Treasuries rose, pushing yields to record lows, as Federal Reserve Chairman Ben S. Bernanke said the central bank may purchase Treasuries and target long-term interest rates to combat the deepening recession.

Bonds rallied for a fourth day, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities. Bernanke said he has “obviously limited” room to lower interest rates further and may use less conventional policies, such as buying Treasury securities. The panel of economists charged with dating business cycles said the U.S. entered a recession in December 2007.

“Cash and Treasuries are king,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., who oversees $90 billion in fixed-income assets. Bernanke “wants everybody to know he has more options. Some are more effective than others.”

Final Take:

We are witnessing historic drops in the yields on treasuries. This is a giant deflation/depression indicator folks. This is the most massive rush to cash that I have ever seen. I believe everyone is now diving into treasuries. This includes investors, banks, and the Fed. I am speechless as I watch this move in the credit markets.

Whats frightening is the lower interest rates have done nothing to spur borrowing. Consumers continue to refuse to borrow, and banks refuse to lend because everyone is panicked that the economy is going to collapse. Houses continue to sit vacant despite the fact that mortgage rates have plummeted.

This is what happens when you are in a deflationary death spiral.


Held onto my shorts into the close. I am tightly hedged short. I don't like this market at all folks. Days like today remind me that now is a good time for cash. I plan on moving all cash positions into treasuries this week. The FDIC will be a nightmare if the banking system collapses. Your money will be safe, but it may take you weeks to get it back if your bank goes under.

I strongly advise that you put cash positions into short term treasuries. Forget about the yields folks. Right now, you want to preserve capital and have it available in case we have an economic meltdown. Treasuries are the safest place to put your money, and it is the most easily retrieved if TSHTF.


Growler said...

Re Market: Ugh : (
Not much else one can say.


It's nice to hear your trading activity.

Jeff said...


The market is unbelievable right now isn't it?

The charts are a mess right now. we seem to be stuck in this trading range of around 7500-9000 on the DOW.

opportunistic said...

"I strongly advise that you put cash positions into short term treasuries"

If I'm mostly cash now, why go into treasuries rather than maintain a cash position?

Jeff said...


You should be safe in cash as long as you are under the FDIC limits in your bank.

The problem is if we have a meltdown millions of claims will have to be processed via the FDIC. Who knows how long it would take to get your money back.

Treasuries will be much easier to redeem in a collapse because you avoid the red tape. Its also the safest paper guaranteed by the government.

Here is the site where you can buy treasuries ditectly.

Its very easy.

dahn taoknee said...

hey cuz. great post and summary.

what site/resource do you use for looking at technicals, graphing trends, etc?

Jeff said...

Hi Dahn


I use a lot of sources for my technicals.

Karl Denninger's site has a lot of great technical info. I also listen to various TA traders Bloomberg, Fast Money on CNBC, and several other sites on the net.

I must admit that I am not a pure technical trader. I am more of a macro guy, and I think the news flow coming out on the economy is just as important as the technical side.

I will trade more on fundementals than I will on technicals. Everyone has their style. I think that daytrading on technicals is a very tough way to make money unless you can devote your whole day to focusing on it.

Its a complicated game and I have my share of dogs just like anyone who trades does. So far I have been able to navigate this mess pretty effectively.

Itlooks like we will bounce at the open today. Not sure if it will hold.

Good luck with your trading!