Saturday, January 3, 2009

Merrill Lynch's David Rosenberg's 2009 Forecast

I guess I should say Bank of America's David Rosenberg since the merger was finalized last week. I was able to pick this report up today and its excellent. Its a PDF so I can't cut and paste it on here. I will highlight a few points below.

Here is the link. This is a must read.

Highlights from the report:

- The total loss of household wealth from the current crisis is estimated to be $13 trillion when Q4 numbers are included. This represents a 20% loss of household wealth.

- To put this in perspective, according to Rosenberg, the tech bubble resulted in a loss of $4.2 trillion in wealth or about 9.6% of total household wealth. So the current downturn is basically twice as devastating as the tech bubble bust that resulted in an 80% loss on the Nasdaq. This is simply staggering.

Rosenberg also explained that it took 3 years for the market to recover after the tech bubble burst. I have to laugh here because almost every economist I listened to on Bubblevision the other day sees a second half recovery in '09. Ahhhh....Sold to you! If the tech bubble took 3 years to recover from and this is twice as bad, will be in the 3rd inning in my view at the end of '09. Bubblenomics...You gotta love it.

Rosenberg estimated you shouldn't expect a recovery until at least 2010.

- David alsosees at least another 15% drop in housing prices.

- Deflation will continue to dominate and it will last at least 2 years.

- The dramatic loss of household wealth will force consumers to go on a massive savings binge which will cripple the economy. Rememeber folks, the consumer represents 70% of our economy. Recovering from a $13 trillion dollar loss will be long and painful in my view.

Bottom Line:

I loved how David took some shots at the many clueless economists out there. Please just plug your ears when you hear talk of a recovery in late 2009. It is utter horseshit. Its not going to happen. Bill Gross recently came out and said we could see years and years of 0 to 2% growth as the consumer recovers from one of the worst recessions in history.

Keep your bear hat on in 2009 and continue to stay defensive. Respect the current rally and my advice is to sell into it if you have major equity exposure. It may be your last chance to get out of equities at higher prices.

That's it for today. Things are pretty quiet out there for the most part.

Stay Tuned!

Friday, January 2, 2009

Party On!

Good Afternoon Folks!

Stocks rallied sharply today for absolutely no reason at all! The Obama hope rally continues. I must admit I am surprised by the size of the move. The DOW actually closed above 9000.

I think this is an interesting level because we are getting near the higher end of the trading range that we have found ourselves in over the past month. The move today was on extremely light volume so you really can't read too much into it.

As for news, it was a quiet day although we did get the ISM mfg number which showed US manufacturing shrunk as orders hit a 60 year low:

"Jan. 2 (Bloomberg) -- The decline in U.S. manufacturing deepened in December as demand for such products as cars, appliances and furniture reached the lowest level since at least 1948, signaling further cutbacks in factory jobs and production this year.

The Institute for Supply Management’s factory index fell to 32.4, below economists’ forecasts and the lowest level since 1980, from 36.2 the prior month. Readings less than 50 signal contraction. The group’s new-orders measure reached the lowest level on record and prices slid the most since 1949."

My Take

How do we rally 3% after seeing data like this? I continue to be amazed by this market. As I said last week, be nervous if you are short when the market starts ignoring bad news. Some of the greatest rallies in history occur during bear markets.

We were due for a bounce after selling off so sharply last year. It appears the Feds spending binge has calmed the market down for the time being. The VIX continues to drop as the market breathes a sigh of relief. This will create a wonderful shorting opportunity once everyone realizes the Obama stimulus will do little to get us out of this mess.

Recommended Reading

If you have a moment, take a look at this excellent commentary by Prudent Bear's Martin Hutchinson.

I have been talking a lot about deflation recently, but I think its important that we all keep an eye out for inflation down the road. Note in this commentary that the money supply grew by 1000% in the 4th quarter as the Fed went on a spending binge bailing out America.

Deflation rules the day for now, but the inflation risk that's been created by all of these bailouts must be respected down the line. One pigmen that I highly respect told me the next leg down in the markets will occur when the Fed is forced to decrease the money supply back to normalized levels when inflation rears its ugly head.

I am not too worried about that right now because the deflation and debt destruction now overwhelms any inflationary risks. Just some food for thought here.

Torches and Pitchforks 2009 Style!

Well I don't see any pitchforks on this video, but you get the point. This is the scene from Iceland yesterday as the country continues to suffer following their economic collapse. Icelanders are angry and now rising up. Their Prime Minister had to be rushed out during a TV interview two days ago when an angry mob tried to break into the studio. If you thought this couldn't happen in today's society think again.

We could see it here if we continue these bailouts without the money to back it up. This is what happens when a country defaults on itself folks. Lets hope this never happens here.

Bottom Line:

Next week will tell us if this rally has any real legs. I am not convinced. We get employment numbers next week, and if the news continues to be terrible we could selloff again.

That being said, a hope rally heading into Obama's inauguration is very much on the table. I actually put a few shorts on today. I bought some QID calls and some SPY PUTS at the end of the session. I hedged it with some TBT.

My thought with TBT(short treasuries) is if we continue to rally then money is going to start coming out of treasuries and into the market. Monday should be interesting.

Stay Tuned!

Wednesday, December 31, 2008

Deflation and Debt Destruction

Good Morning Folks!

This will be my last post of the year. I hope everyone has fun celebrating tonight. Be safe and have a Happy New Year! I am sure many of you are glad 2008 is over from an investment standpoint! Lets hope 2009 isn't as painful.

The markets are up mildly this morning. Jobless claims for the shortened holiday week were still close to 500,000. A startlingly bad number but what else is new right?

I want to highlight an excellent interview around deflation that I caught on the Market Oracle last night. This is one of those interviews that sends chills down your spine and keeps you up at night. The interview is between the famed economist Martin Weiss and his currency expert Jack Crooks.

I will put up the charts from the interview followed by a few comments and highlights from the interview. In my opinion, these two have it 100% totally right. This has been my thesis for about 2 years. The deflation we are seeing is breathtaking and getting worse, and the Fed is powerless to stop it.

Here are the charts followed by a few comments below:

First of all we have seen a massive destruction in wealth that totals $7.7 trillion:

Mortgage debt is completely collapsing as the the number of new mortgages in total dollars is being dwarfed by the number of mortgage dollars that are defaulting:

The Fed and the TARP are powerless to overcome this massive loss of wealth:

My Take:
I want to highlight a few critical exchanges in this interview. I love how they put the economic stimulus in perspective. Ben Bernanke and Bubblevision are constantly touting that this isn't Japan or the Depression all over again because we are flooding the system with money. As you can see by this exchange, this is flat out wrong and it will not work:
"Jack: But many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.

Martin: In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin.

But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now.
But it did not end the deflation. And it did not prevent their stock market from making brand-new lows this year."
This is an absolute perfect answer as to why this is a bunch of bullshit.
Critical Point #2!
Here is another highlighted exchange about how the $ 8.5 trillion dollars in bailouts promised by the government is a bunch of smoke and mirrors:
"Jack: Still, most people think the government can just print more money at will. They're now talking about a total bill of $8.5 trillion. Your numbers don't seem to account for that.

Martin: Because those bigger numbers are almost entirely guarantees and swaps — not net new money added to the economy. Plus, please bear in mind one more thing: The wealth destruction we've been discussing today does not include the losses by financial institutions, corporations and governments."
100% right again. These are guarantees and do nothing to help the economy.
Bottom Line:
I would advise everyone to read this article in full. Their advice on getting through this debacle? Raise cash. Dollars will become much more valuable as this debt destruction continues. Your dollars will allow you to buy more and more as deflation destroys the value of all assets. Look at how much more gas you can get now versus a year ago with a dollar!
I could have written 5 pages on this because its the best piece of research I have seen to date. Things are going to get real tough, and this interview really helped put things in perspective. This is all falling apart at a much faster pace than I anticipated folks.
2009 looks pretty hopless in my view. We continue to party on for now in the markets. Up 1% as I speak. Play the tape!
Have a great holiday and safe New Years Eve!

Tuesday, December 30, 2008

GMAC Bailout Saves the Day!

Ben Bernanke's bailout binge(how do you like that tongue twister?) continued today as the Treasury committed $6 billion to GMAC which will enable them to reorganize into a bank holding company.

Here is the how the deal was done:

"Dec. 30 (Bloomberg) -- The U.S. Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., widening the government’s effort to keep the largest U.S. automaker out of bankruptcy.
The Treasury will purchase a $5 billion stake in GMAC and lend $1 billion to GM so the automaker can contribute to the lender’s reorganization as a bank holding company, according to a statement issued yesterday. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC
The fresh capital will enable GMAC to expand lending to car buyers and help save GM. The automaker’s U.S. sales plunged 22 percent this year through November after GMAC ran short on cash and limited loans to people with only the best credit. The Treasury stepped in after Congress failed to pass an auto- industry bailout earlier this month.

“The relationship with GM is probably a key reason it’s being bailed out,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. “Philosophically, I’m not very happy about the fact that the government has to save an auto-finance company because management ran it into the ground.”

In a statement, GMAC said it “intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles.” The lender financed about 35 percent of GM’s retail customers last year.

GMAC will modify its credit criteria for auto loans to include customers with a credit bureau score of 621 or above, relaxing a 700 minimum score put in place two months ago, the company said in a statement today. GMAC said it still doesn’t plan to finance higher risk transactions for buyers with credit scores of 620 or less."

My Take:

This bailout shouldn't be a surprise. God forbid anyone is allowed to fail!

What angers me here is how GMAC reacted after getting the money. They immediately announced that they will be lowering their loan qualification standards and start lending to borrowers with credit scores of 620.


Great idea guys! Lets make more bad loans! That's exactly what we need right now!

Perhaps we can now start a car bubble. Maybe I will go out and buy 10 cars and start trying to flip them for a profit. I can become a car speculator! Buy now at zero rates or be priced out forever!

I think the governments new goal should be to increase car ownership to 100% in this country!

Ok.... Sarcasm off.

Seriously though, the loose money/easy lending is what got us into this mess. Doing more of the same does not fix the problem. You don't give an addict another giant shot of heroine when you are trying to get him to stop. What really pisses me off here is they creating this lending sham with my taxpayer dollars.

I get so furious over this stuff. When are we going to put a stop to all of this? One day the credit markets are going to blow up because every country in the world is going to realize we are nothing but a bunch of debtors with an economy that doesn't have the ability to ever pay back the money.

This is all going to end very badly folks. Mark my words.

Bottom Line:

The stock market of course loved the news today. All of the major indices ended up around 2%.

Meanwhile, the economic news was horrendous.

Consumer confidence hit its lowest level ever:

"Dec. 30 (Bloomberg) -- Confidence among U.S. consumers unexpectedly dropped in December to a record on growing anxiety over the lack of jobs, raising the risk that spending will keep weakening into the new year.

The Conference Board’s index of consumer confidence fell to 38, the lowest level since records began in 1967, from 44.7 in November, the New York-based private research group said today. Another report showed declines in property values accelerated."

The Case Shiller Housing Index also came out today and was hideous:

"Dec. 30 (Bloomberg) -- Home prices in 20 major U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in the year through September. The gauge has fallen every month since January 2007. Year-over-year records began in 2001."

Alright, so let me get this straight:

- Confidence is at an all time low.

- Housing is now down 18% and dropping at the fastest rate in history.

Isn't it amazing how the bubbleheads can take stocks higher after hearing such news? The new spin by these ass clowns is this: "Investors will be forced out of treasuries and into the market because they won't accept a zero return on their money".

Funny, if this is the case bubbleheads, why were treasuries were selling like hotcakes again today? We had another auction today that was immediately gobbled up at practically no yield. Perhaps the smart money would prefer to preserve capital at zero yield versus losing another 20-30% by putting it into equities that are filled with companies with earnings that are plummeting. The stock market isn't going anywhere long term until we can get a better idea of how bad this downturn will be. The "bubbleheads" stupidity is beyond belief.

That being said, trading at this point is very dangerous. The market is once again ignoring the news. I am worried we could rally for a little while here.

I always get very nervous on the short side when the market ignores bad news. Here are a few reasons why I think we could see a rally:

- The risk of additional blowups in the near future(within a few weeks) seems very low.

- The Fed in the short term simply refuses to let anyone fail.

- We have a president who will do everything in his power to get out of the White House without any major blowups.

- The S&P closed at 890 which is a break above the 50 day moving average. This is bullish from a TA perspective. If the S&P holds above 890 tomorrow morning look out. Stocks could move higher.

This makes the short side risky. I sold my QID PUTS at a nice profit today. I bought some (SSO) calls today to hedge out my shorts. I may hang on to these for awhile. I am also playing fairly small and keeping a lot of cash on the sidelines.

The next major market mover is Obama. The market wants to know what his agenda is for the country going forward. We will see a little volatility in between as we start hearing about how dismal the 4th quarter was. I am guessing that this is pretty much a "given" in the eyes of the market so it might be somewhat ignored unless the data is way worse than expected which is possible.

Be careful here folks. Its going to be all about Obama over the next few weeks.

Once we get past the inauguration, hold on tight because its going to get ugly.

Monday, December 29, 2008

Yawn! Retail News Continues to Worsen

Good Afternoon Folks!

Just a quick entry tonight. Today was a quiet day in the markets as bad news from the Middle East and retail sales took its toll on stocks. The DOW rallied toward the end of the day to close down about .3% while the NASDAQ closed down 1.3% for the session.

The REITS took a pounding today as the retail story continues to worsen:

"Dec. 29 (Bloomberg) -- U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.

Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers. Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.

More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.

“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.

Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the ICSC said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy’s Inc. are among retailers that will report December results on Jan. 8."

My Take:

Pretty bleak isn't it? The prediction of 73,000 store closings was a shocker to me. I also didn't realize that total retail sales for existing stores was twice as bad as expected with sales dropping 2% versus the 1% that was expected. That's a huge miss.

This is pretty pathetic considering that many stores were practically giving things away at 60-70% discounts.

SRS had a nice day today rising about 10%. Congrats to the longs out there!

Treasury Auctions

There appears to be no end in sight for the demand of treasuries:

"WASHINGTON (AP) -- The interest rate on six-month U.S. Treasury bills dropped to its lowest level on record at the weekly Treasury auction, the government said Monday.The Treasury Department said it auctioned $27 billion in six-month bills at a yield of 0.25 percent, an all-time low. That's down from a rate of 0.285 percent last week.

Treasury rates have fallen to historic lows as the worst financial crisis in 70 years has triggered a rush by investors to the safety of government securities. Higher demand for such securities pushes their yield, or interest rate, down.

The lower rates make it cheaper for the government to borrow money, just as the federal deficit is set to balloon due to the rising cost of aid to banks, increased spending on unemployment insurance and lower tax revenues.

The department also auctioned $26 billion in three-month bills at a yield of 0.05 percent, up slightly from last week's 0.04 percent. That matches the rate from two weeks ago and is the highest since three-month bills averaged 0.15 percent on Nov. 24."

Quick Take:

The treasury bubble continues to blow up. I spoke to a banker over the weekend and the story is simple here folks. There is capital out there, but the big private equity boys that hold it have no desire to put it to work right now because this crisis isn't anywhere close to being over.

Assets are still too overvalued in the eyes of the distressed debt buyers. Keep an eye on these auctions because there will be a point in which this treasury bubble will burst. I

What could cause it? A bond market dislocation would do the trick. So would a dumping of treasuries by the major buyers of our treasuries like China or Russia as they continue to worry about our economy and the ability for us to pay back our debts.

I my eyes, an emerging risk to treasuries are hard assets like homes and commodities that have been flattened by price deflation.

Home prices still need to drop more, but the early "bubble" markets are starting to get appealing. Perhaps the smart money will decide that owning homes at .30 on the dollar is a more appealing option than owning paper treasury IOU's that our government can't afford to payback.

The treasury market will burst just like every other bubble. Its a matter of when not if.

Bottom Line:

I am still short FAZ, BEARX, and SRS(at $85 ouch!). I see no reason to cover. The holiday trading is light so you can't read too much into the moves this week. I believe things should stay fairly flat unless the Middle East spirals out of control.

In fact, at the lows of the session today I bought some QID $60 Jan PUTS to hedge out my shorts. They will most likely be gone by tomorrow. They are already green, and I do not hesitate to take profits in this volatile market. Tech seems a little overdone here in the very short term IMO. I am hoping to exit on an early bounce before the consumer confidence number comes out tomorrow at 10 AM.

Keep an eye on oil. (DXO) which is 2x long oil will be a great trade in the near future. It was up 14% today. The problem is the price action was really piss poor in reaction to the Middle East saga until a few minutes before the close. Oil pulled back after the news and was actually almost back to even at one point. I didn't like that at all. I think oil still goes lower for a little while due to demand destruction. Longer term, oil will be a nice long play. If DXO dips back to $2 I plan on jumping in.

Stay Tuned!

Harry Dent: Depression and Demographics

Hey Folks

I thought everyone would enjoy these videos from Harry Dent of HS Dent. Harry is a Harvard business graduate who has developed an interesting economic model that emphasizes demographics.

Harry predicts that we will see a depression and a possible low of 3800 on the DOW as the great bull run comes to an end. I thought his insights on how the demographics of the baby boomers will impact our economy as they head into retirement was very interesting. Not sure about his $200 oil call though!




Sunday, December 28, 2008

SRS Warning: Commercial Bailout is Next!

Good Evening Folks!

Its pretty quiet on the news front this weekend.

The one development was further noise around a potential government bailout of commercial real estate. This was one their headline economic stories today. The heats on the Fed's to get this one done IMO. Here is the article from the New York Times:

"Commercial real estate groups have been meeting with members of Congress, the Federal Reserve, the Treasury, the Federal Deposit Insurance Corporation as well as Mr. Obama’s transition team, to press their case. And they say they have a compelling one. Commercial real estate is a significant industry, accounting for $549 billion in construction-related spending and nearly five million full-time jobs in 2007, according to the National Association of Industrial and Office Properties. It also contributes to state and local coffers.
Although commercial real estate remains in better shaper than some other industries — there is a good balance between supply and demand, vacancy rates are modest and loan default rates have so far hovered at a rock-bottom 1 percent, according to trade groups — industry leaders warn that the sector faces significant problems. In particular, tighter credit policies are making it harder for real estate companies to refinance. An estimated $400 billion in loans are expected to come due in 2009 alone, and more than $1 trillion over the next three years, according to industry estimates based on Federal Reserve data.

“We have profound risk on our hands at the moment,” said Bruce Mosler, the president and chief executive of Cushman & Wakefield, a commercial brokerage firm.

Jeffrey DeBoer, the president and chief executive of the Real Estate Roundtable, an industry group based in Washington, agreed. “Commercial real estate debt will be the next major problem that policy makers need to address,” he said
The commercial real estate industry relies on a steady stream of relatively short-term financing; loans are refinanced every several years or so. With the two main sources of commercial funding — bank lending and commercial mortgage-backed securities — effectively shut down, hundreds of billions of dollars worth of loans are in jeopardy of defaulting.

The bulk of the loans coming due, industry executives say, were originated two or more years ago to help finance a rash of deals in office towers, hotels and industrial buildings, many of which are generating healthy cash flow today. “We’re talking about performing loans — that’s the rub,” said Thomas J. Bisacquino, the president of the National Association of Industrial and Office Properties.

Of course, there were also speculative, highly leveraged deals at the height of the economic bubble, when rents and property values looked as if they would rise indefinitely. As vacancy rates climb and values drop, many of these loans will need to be restructured.
Existing properties are only half the problem. New development has also ground almost to a halt because of a lack of financing.

Real estate executives say Treasury officials the transition team to a new Obama administration have been listening. “There’s an openness to serious consideration of all of these things,” said Steven A. Wechsler, the president and chief executive of the National Association of Real Estate Investment Trusts.

The Obama team will have a lot on its plate, but executives were hopeful that measures will be taken early next year."

My Take:

Now that the automotive bailout has been completed its time for the TARP to move on to its next bailout. It appears commercial real estate is next.

This is getting disgusting isn't it?

It looks like the commercial industry is going to follow the automotive playbook: Scare the hell out of Congress by screaming Fire! Fire! Fire! It appears the commercial industry is going to try and one up the automotive industry by warning that 5 million jobs would be lost versus the paltry 3 million in automotive if they don't get their piece of TARP PIE.

Bottom Line:

I think this bailout is going to happen folks. It will be done because the banks can't afford another $1 trillion hit. There are $400 billion dollars of loans that must be rolled over in 2009 alone

Another reason this will be done is because commercial now has zero ways to get financing right now. This is a different lending game folks. You don't get 30 year fixed loans in the commercial market. You refinance and roll over your debt every 3,4, or 5 years. If the banks no longer want to lend to them, and the CDO securitization market is no longer available, these REIT's have zero options for funding. There will be financial chaos if something isn't done here.

The problem here is many of the loans done in 2004-2006 were done using terrible lending standards. This is another mess ladies and gentleman.

The Fed must find a way to allow these loans to get refinanced or there will be no retail in this country. We all know that's not going to happen. Expect the Treasury to extend some type of lending program to the commercial that allows them to roll over their good debt.

It will be interesting to see wha they do with the bad loans. Do the taxpayers once again take the hit so that these REIT'S that made poor decisions don't go under? My guess is of course! Why would their bailout mentality stop now? God forbid anyone's allowed to fail anymore in this country.

The possible bailout here makes SRS unplayable right now in my book. Its too risky. If the REIT's get a sweet deal, SRS is going to get pummeled. If the government decides to send a message of "no more bailouts" or severely damages them via warrants, SRS could soar.

The only trade I see here is to buy SRS on any dip if a bailout is announced.

Enter this sucker at your own risk.