Saturday, March 7, 2009

Recession or Depression?

Good Afternoon Folks!

I think its time that we seriously need to start asking ourselves this question. I was looking at some charts this weekend, and I thought all of you would find this one from Doug at Dshort pretty interesting:



My Take:

As you can see above, the S&P is dropping as fast as the DOW did during The Great Depression. In fact, the S&P is actually lower right now than the DOW was at the same time of The Great Depression.

This collapse is making the 1973/74 recession look like a walk in the park. What's amazes me most about this crash is the lack of any serious bounces. When you look at the GD there was a serious rally after the first initial crash. This was followed by a series of several smaller sharp rallies until stocks finally reached a bottom in 1932.

A lot of market technicians have been calling for a rally since the beginning of the year. Many were thinking that there would be an "Obama" bounce once the president was inaugurated. The exact opposite has happened. The DOW is down over 20% since he got into office. We have dropped 10% in the last week alone.

Its pretty obvious that Obama's policies have been firmly rejected by Wall St. I think the reason for the latest collapse is a result of the escalating war between Wall St and Washington DC. Obama's policies of raising taxes on the rich have not sat well with the pigmen. Our president's lack of clarity around a rescue plan for our financial markets has also been a huge disappointment.

As I had said earlier this week, the market is going to take the financials to zero until it gets the transparency that it wants. The only other plan that the market would accept(albeit with a lot of pain) would be for our government to take the bad assets off of the banks books. The problem with this idea is I don't think we have the fiscal ability to do it without printing. If they decide to play this card, it puts a massive inflation/hyperinflation scenario on the table and I don't think the government is ready to go down that road.

As a result, the government is stuck. I wouldn't touch any financial stocks here until this is settled(if it ever is). The other huge issue facing the government is unemployment. Unemployment rose to 8.1% last month. We are shedding jobs at a rate of 600,000 a month. The revisions to the previous two months were horrifying! If this continues we are toast folks.

The bottom line here is the heat is steadily rising on Obama to do something because things are beginning to completely collapse. Take a look at Bloomberg today:

"March 7 (Bloomberg) -- The jump in the U.S. unemployment rate to the highest level in a quarter century last month suggests the recession is deeper than the Obama administration forecasts and additional measures may be needed to restart growth.

The jobless rate rose to 8.1 percent in February as employers reduced payrolls by 651,000, the Labor Department said yesterday in Washington. Losses have now exceeded 600,000 for three straight months, the first time that’s happened since collection of the data began in 1939.

Unemployment has already reached the average rate the White House projected for the whole year. The administration needs to keep its focus on repairing the banking system and implementing the stimulus rather than get diverted by other goals such as healthcare changes, said John Ryding, chief economist at RDQ Economics LLC in New York.

“They should be focused on stabilization” of financial firms “and stimulus -- and that should not only be ‘Job one,’ that should be the only job right now,” Ryding said in an interview with Bloomberg Television. “The question is, is it recession or is it something worse than recession?”

“We’re going to have to have a lot more jobs than 3.5 million” generated to get a “serious recovery” in the economy, Harvard University professor Robert Barro said in a Bloomberg Television interview. Barro calculated a 30 percent chance the U.S. will slide into a depression, which he characterized as at least a 10 percent drop in gross domestic product."

Bottom Line:

When the pundits are starting to talk about a 30% chance that we are facing a depression be afraid be VERY afraid. Isn't it amazing that we even have to contemplate the thought of a depression? Anyone talking about such a thing 4 years ago would have ended up in a straight jacket.

Obama, its time to be a leader and make the tough decisions. If you don't there will be a 100% chance of a depression. Time is running out.

Trading

This market has been brutal to navigate. I tried to get a little constructive yesterday because I think we are overdue for a bounce. I bought some Chesapeake Energy (CHK) $15 calls. I think going long on a few energy plays makes some sense here. My thought around CHK is how much worse can it get? Natural gas is now down under $4. More importantly, CHK's stock has been holding up very well recently despite the drop. It now sits at $14 which is down from $74 back during the commodity boom.

I could get burned here but I thought it was worth a shot. I continue to hold my Apple short. This worked nicely yesterday thanks to a downgrade. The stock was at $92 When I bought my $85 PUTS. Its now down to 86. I may cover this one soon. I sold my SPY PUTS on Friday. Still holding SRS.

Overall, I am kinda neutral here short term. Stocks never go straight down and I believe we are down 13 of the last 15 trading sessions. Who knows? Maybe this is a once in a lifetime bear that goes straight to the bottom. However, I think we are WAY oversold here so i decided to hedge myself with an energy play.

This being said, if the same recycled crap continues to come out of Washington I plan on getting out of the way on the long side. If Obama fails to act boldly and stand up the pigmen, Armageddon is on the table and we will never be the same.

Lets see what happens next week!

13 comments:

Joey said...

Nice job on the Apple Puts.

I personally think a 30% chance of a Depression is optimistic. We're basically already there when one looks at U6 (14.8% - friggin pathetic).

With regard to the long awaited rally, I think we're getting closer but we may have to slide a little more before the 'value boys' step in.

If 660'ish doesn't hold, I hate to think it, but 475-450'ish could be in the cards. While it would be devastating to 'Main Street", for traders (and investors - whatever that means anymore), it may present the long opportunity of a life-time.

The only way we'll see 14K (or even 12K for that matter) on the DOW again is through hyper inflation, imo.

In closing: Whatever happens from here on out, we're still screwed for years to come; financially speaking. However, I do expect quality of life to improve for those ingenuitive enough to take advantage of the chaos.

Jeff said...

Wow

The breadlines have started already. This was an eye opener:

http://www.myfoxatlanta.com/dpp/news/dpgo_Bread_Lines_Seen_in_California2239009

Jeff said...

Thanks. Great insights as always Joey.

I see the same 400's scenario as you do. I have a tight stop on my long.

I agree we will survive, but a 400 S&P is going to put millions out of work.

What scares me is if you look at the charts there really is ultra strong resistance on the DOW until 1000. 1982 is when all fo this crap started and that was where we were on the DOW

I would have considered this to be impossible a year ago but I think it at least has to be on the table.

There will be a buying opportunity of a lifetime once the market clears like you said. The question is where is the bottom. I have no intentions of trying to find it myself.

I will miss a little on the upside to confirm it before I put serious money to work

johndaniels said...

long? lol. The DOW is worth less than zero.

Informative radio interview (max kaiser) the truth about the shadow banking system: http://www.youtube.com/watch?v=1cUFABlYhkc&feature=channel_page

6 parts, very informative

Consider how the banks have operated for the past several decades. Money has been created by debt; i.e. promises to pay. In most cases, when the money was borrowed, the borrowed money was not removed from the banks existing assets, but was created by digital entry; they simply typed it into a computer! The newly created debt notes were used to expand lending capacity, and promissory notes were added to the bank lending reserves as deposits. The Federal Reserve has condoned this activity, therefore the banking system has continued to create this fraudulent money supply.

Just imagine for a moment how deep this goes, and you'll realize there is no recovery for the banks. Right now, Bank of America stock is hovering at $3 bucks a share. Citigroup? just above $1 per share. Fact is, there is no way these banks can survive; there's no coming back from these prices. The business model for bank earnings is nearly nonexistent without vast counterfeit debt money creation. With these dangerously low stock prices, they simply have no room to maneuver. Within just the last year, we have seen the demise of historically significant investment houses like Lehman Brothers and Bear Stearns. Merrill Lynch should be considered bankrupt as well. Now, JP Morgan is languishing around 16; where it was as high as $50 within the year. There is more and more speculation that JP Morgan is weighted down with trillions of dollars in counter-party risk derivatives. Some economists believe that when JP Morgan goes, the entire financial system will collapse and the long awaited run on the dollar will finally occur.

The point is, there is no 'driving force' to pump the stock market back up; all these companies are now gone. As companies leave the DOW and go bankrupt, there are no IPO's or new companies to replace them. Creative investments like ETF's and Powershares are losing credibility; and it has become a general assumption that these issues don't hold what they say they do.

The Government is now attempting to replace the investment houses in propping up the stock market, but they have no idea how to go about it. As a result, they just keep writing huge checks to banks, on the taxpayers. Our government mantra? "In the Federal Reserve we trust". But the Federal Reserve is a private institution, it is not a government agency. Therefore, our government is putting all its faith into an international banking cartel that is acting on their own self interests, not the American people. The government and its representation 'by and for the people' has been confounded by the Federal Reserve; as well as American sovereignty. It is in fact the most grossly vivid example of incompetent management ever witnessed in modern history.

This strategy by the government to depend on the Federal Reserve for answers only means continued banker manipulation, as they hoard the bailout capital. This is similar to the great depression; the banks called in loans and purchased assets for pennies on the dollar. In fact, the Great Depression was really the Great Banking Heist. FDR was himself a banking insider: he covered up the manipulation of the banking cartels, as the American people picked up the tab through labor and taxation.

Cultural impacts, lost corporate earnings, debt compounding, and government intervention could define the true value of the DOW at less than 0. Cultural impacts include the Baby Boomer retirements that will lead to increased demand for liquidation. There is no significant wealth beyond the Baby Boomers to replace this capital. That's not mentioning the compounding consumer credit debts, and the high likelihood that unsecured credit card debt will be defaulted as the modern depression takes hold. Housing cannot recover with unemployment growing; and the rapid downturn will discourage speculation. Commercial real estate is the next major shoe to drop, along with unsecured debt; all probably to happen at the same time! In other words, we really haven't seen anything yet...

The DOW is going much lower, no matter what bear market rally's we may have, or what the financial news sources say. In fact, the prediction this website made early last October that we'd see DOW 6,250 in a short time has almost come to pass. Now we need to be concerned that the debt against corporate DOW components is greater than the equity. In this case, liquidation vs outstanding debt would render the DOW Jones Industrials net less than 0. Is this possible? Consider the lending and monetary creation policies of the banks; and realize that these money mechanics were copied in some form or another by investment houses (which are nearing extinction) and large corporations (Like Bank of America, Citi, GE, and GM). Yes: it is possible... especially when you consider there is no tangible way to establish a base value beyond debt for digital assets, outside of the digital system itself (URED.com).

johndaniels said...

in other words, just go to vegas; you'll get free drinks.

Jeff said...

JD

Interesting stuff.

I never said go long financials! I think they are dead as you described.

However, I think a DOW 0 is way over the top. If this scenario that you described does play out, you better sell your gold first.

Gold is nothing but a backstop in a horrible depression. YOu can't eat it and you don't know if someone will accept it for payment.

If you own gold you better own it in coins.

Remember, if everyone is broke, gold cannot sell at $3000 an ounce. Do the math.

If the scenario you described above happens, buy farmland, a gun, and grow and hold things that you can sell.

Gold is a great "fear" hold. HOwever, in a mad max scenario it may be worthless.

In this scenario, I would want to own tradeable goods such as food and energy.

johndaniels said...

i never mentioned gold.

my point is that the system that has created liquidity for traders is becoming questionable; i think the stock market collapse is reflective of the implosion of liquidity for digital assets. How do you determine the value of a share of GE? you cant trade it for anything on the street.. its value is solely in its liquidity amonst your stock brokers... which are becoming increasingly obsolete and are simply disappearing. as JP Morgan disappears, and other hedge multination companies like GE BAC C GM disappear, the liquidity for stocks and digital assets will wane further. do you expect the government to liquidiate your positions for you? im sure its the TAXPAYERS that are allowing your trades to go through, when you want cash for equity; stock liquidity is now government subsidized... how much faith will you put in that?

since you mentioned gold, it will be far more liquid and tradable than digital assets. yeas, i can stock 3 years worth of food for 10 grand, and buy guns and ammo with another 5. then what? need to get out of dollars at some point, because this currency is not backed by anything but circulation and unimaginable debt.

Jeff said...

JD

I am with you on GE. I think that stock is a zero as far as I am concerned.

I totally agree with you on the liquidity of the financials that you mentioned. This area is a nightmare.

JP, C and the others have zero liquidity.

I have no desire to participate in the equity markets for the most part.

I went long on one positon in energy because people can't live without it.

You make some solid points.

I thnik certian stocks have liquidity. Microsoft and Apple have billions in cash. They are full of liquidity but their valuations are way too high(Perhaps Microsoft isn't).

Valuations will get attractive at some point.

We are now around 10-1 P/E ratio. In the '73/74 recession we were at a 7-1 PE and in '82 we were at a 6-1 P/e. This is why I shorted Apple. They have liquidity but the stock is way overvalued.

AS a result stocks still aren;t cheap.

AS for gold, I think its a sucker bet if out currency collapses.

If you own an ounce of gold what are you going to do with it? Are you going to peel a slice off to buy food?

I would buy gold coins and avoid bars of bullion. I think many other tangible good will be easier to trade for value.

Food, energy, and things that allow you to survive will be more in demand.

JD, I just hope we never get to this point.

HOpefully we pull a rabbit out of a hat and somehow keep a lower standard of our way of life.

MAd Max is something I have zero desire to live through.

johndaniels said...

i would expect one day traders will wake up, try to sell their positions and get a "trade cannot go through". Or "system down at this time, try again later"

ooops!

you can bet a trader holiday will come if things get too dire, now that the percentages are lower we could see trading cessations with much lower point drops.

god forbid all the bums on wall street will have to get real jobs!

johndaniels said...

i understand i am being a bit extreme about it. i think its just anger about whats happened overall, and a lot of contempt, which i know you share.

oh, i am long on USO, its prob a buy now even though i bought at a significantly higher price. problem with bear market rally;s, if it goes up significantly i will just sell it off... as im sure many baby boomers are plotting.

Jeff said...

JD

Yup

We are both frustrated by this whole thing.

It seems like there is no place to safely hide.

Thats what drives me crazy.

BTW, USO is on my radar bigtime as well. Haven't picked any up yet but I am about to do so.

Like yous said, you need to sell on any rally. This is a traders market and you need to take profits on positions.

I don't hold anything long term except SRS. Commercial real estate is dead IMO.

Anonymous said...

Jeff,

One slight correctly. You said,

"As you can see above, the DOW is dropping as fast as it did during The Great Depression. In fact, the DOW is actually lower right now than it was at the same time of The Great Depression."

Actually it's not the DOW but rather the S&P500. All the bears are based on the S&P500 EXCEPT the Great Depression which is based on the DOW.

Also a hat tip to Doug over at Dshort.com would be appropriate.

Also my opinion on market bottom is anything between DOW 3-5K would not surprise me and a S&P500 at 300 is my target.

Jeff said...

anon

Thanks for the correction.

I picked this up on a forum so I will certianly add a tip to Dr.

J