Thursday, April 16, 2009

Has The Market Changed Forever?

I asked myself this question today.

Many people ask "What inning of this recession are we in?". My answer is simple: Who knows? The government has completely changed the rules of the game folks. How can anyone be expected to predict what inning we are in if you don't know what the rules of the game are?

Anyone that says they know is full of crap. The market for now is believing it will be over by next year. My question here is: SAYS WHO? WALL ST?

The reality here is this: No one has any real information confirming that the worst is behind us. Anyone calling a bottom here with a straight face is either a fool or a liar. If this person is from Wall St its most likely the latter.

Right now the combination of mark to market accounting suspensions along with the propping up of insolvent banks and companies by the government makes it IMPOSSIBLE to value anything.

Adding to the confusion here is the fact that the Fed has created $10 trillion out of thin air in a desperate attempt to fend off this financial collapse. WHO IN THE HELL REALLY KNOWS WHAT THE RAMIFICATIONS OF THIS ARE? I can answer that folks: No one.

Where is Nostradamus when you need him. Maybe he knows!

Despite all of this the market continues to drift upward as the bulls talk themselves into thinking that the worst is behind us. The total denial by Wall St. of the hideous problems in our economy has now reached an all time high in my view.

It seems the worse the news is the higher stocks go. SRS was a perfect example of this today. GGP which is one of the largest commercial REITS declared BK and SRS(short commercial) responded by hitting a 52 week low today! Has the market lost its mind??

I think that the bulls believe that its good that the numbers are collapsing because it means we are near the bottom. Pardon my french but this logic is retarded. When things are getting worse month after month the more logical conclusion would be to expect that things might continue to worsen!

Why would you think things have bottomed at a time in which the government won't let you see any companies REAL balance sheet? If we were really recovering then why does the government continue to allow this lack of transparency? It makes no sense.

Lets get real here:

The only information any investor has access to these days are the "fantasy land figures" that we get from companies that are allowed to hide all of their skeletons in their closet. I mean don't get me wrong: Are banks profitable right this second? Hell yes! The problem is they have trillions in losses that they are allowed to sit on without penalty.

This is total BS: If you were a tiny company that made $100 in a month but had $5,000 in debt that you couldn't afford to make payments on you would declare bankruptcy. This is how capitalism worked until a year ago. Not anymore.

My point here is EVERYTHING has changed folks. We are trying to save our economy by attempting things that have never been done before in this country.

The problem here is the things that we are trying to do have been attempted in other countries and the results have almost always been catastrophic. Go read up on how Japan's government responded to this same type of economic crisis. The similarities are frightening. Its like we are using their exact playbook.

IMO, any investor that attempts to invest into this new market using a dated investing strategy are going to get crushed. This crisis is different then anything we have seen before and its almost assuredly going to get worse.

Need proof? Check out the disasterous foreclosure news today:

"WASHINGTON (AP) -- The number of American households threatened with losing their homes grew 24 percent in the first three months of this year and is poised to rise further as major lenders restart foreclosures after a temporary break, according to data released Thursday.

The faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same time period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm. During the quarter, Ohio was the state with the seventh highest number of homes seeing foreclosure activity with about 31,600 receiving at least one filing, up 1 percent from a year earlier.

In March, more than 340,000 properties were affected nationwide, up 17 percent from February and 46 percent from a year earlier. Ohio had 12,600 homes receiving foreclosure notices during the month, 12 percent more than during March 2008.

Foreclosures "came back with a vengeance" last month and are likely to keep rising, said Rick Sharga, RealtyTrac's senior vice president for marketing."

Bottom Line:

Everyone on Wall St will tell you that we don't get out of this until housing stabilizes. As you can see above, we are not even close to seeing this happening. In fact, things are deteriorating.

Look at the numbers!

We saw 340,000 foreclosures in March alone! Yikes!

I did a little math here. Lets say the bank averages a $100,000 loss on each foreclosure in March. This sounds reasonable considering foreclosures sell at a 40% or so loss right?

When you add this all up the totals are mind boggling: The banks took a $34 billion dollar hit in March alone if each house takes a 100k loss. Multiply that out for the year and it adds up to $408 billion.

Pretty frightening isn't it? Now ask yourself: What if the losses are 200k per house and the number of foreclosures rises to 400k a month? Then ask yourself: How many foreclosures are sitting on the banks books and haven't been reported!!!!

Add this all up and throw in all of the credit card losses and the numbers are simply daunting. Anyone thinking this will all be cleaned up by next year simply isn't being rationale.

The rationale thing to do here is to continue and raise cash in case this whole economic "science experiment" blows up. Buy this market after we get transparency and get a chance to see what the real undervalues of these companies are.

Remember, you can't blow yourself up by sitting in cash. You can blow yourself up by investing in companies that are temporarily being propped up by the government.

Until next time!


opportunistic said...

I believe the game has changed because the reality is too frightening to be made public. The gov't is scrambling to solve a problem that can't be fixed. Your numbers are conservative and are off the charts as far as agregate losses for the banks, not $10 trillion, but thats another post.

Here in Southern California it is bad. Among myself and 5 neighbors are 2 pink slips, 2 layoffs and 1 reduction in hours. Foreclosures, short sales, free rent are the norm. Yet there are still people chasing houses because they were priced out during the craze and think they are geting a bargain now.

Anonymous said...

Working and living in the Silicon Valley (San Jose), I can see how bad the economy. Normally the traffic is very heavy during rush hours. But now I can take off work around 6PM and drive through the 880 freeway with no traffic jam. It is bad!

Jeff said...


Good point

I think the reality is too much for the public to handle. It cracks me up to see Obama go out and buy a dog. Anything to "distract" J6P from reality.

Yeah I tried to stay conservative on the numbers. I am sure some would argue the other way. I swear when I see this kind of data I just want to cringe.

Sorry to hear about you and the neighbors. I am seeing it with my friends too. Everyone is struggling. Its a very tough business environment out there.

Good luck with everything.

Jeff said...


At least your rush hour problem has been cured!

YEah I think everyone is seeing the anecdotal signs out there.

If you watched CNBC all day you would think we were in a new bull market!

Jeff said...

Everyone needs to read this from nobel prize winning economist Joseps Stiglitz.

Washington and Wall St are in bed together. Recovery plan doomed:

April 16 (Bloomberg) -- The Obama administration’s plan to fix the U.S. banking system is destined to fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

sandeep said...

While I agree with lot of things you say and read you every once in a while, note
1. banks have nothing to do with a very vast majority of foreclosures as they sit in securities banks do not own, so you 34BN number is off by order of magnitude
2. SRS at 52 week low does not mean, talk in IYR terms - these ultras are completely fucked up and have no memory.

Jeff said...


I agree on both points.

I recently wrote a post around buying puts on the iyr instead of buying srs. I was just making a point around the absurdity of the market right now.

As for the 34 billion. The losses may be worse than I explained because these losses have been sliced and diced into cdo/mbs's . This could actually magnify the losses because it potentially lowers. The value of a cdo that has performing loans.

Either way the losses are massive.



John Maynes said...

Will you be posting today, Jeff?

Jeff said...

its up!

johndaniels said...

word is china is moving out of US debt and into industrial metals now... like copper. they are finally wising up; they are planning 50 years pllus in advance, their resources go towards real production, technology, and resources... ours goes to teh fucking bankers. go figure; its like a systematic design by our political system to collapse the US.

bet accordingly.

Jeff said...



I saw that.

FYI the other word I am hearing is this potentitial global currency threat is negatively effecting gold.

Be careful around the yellow stuff. Gold is a really tough call here.

Check out Fleckenstein on gold: He thinks it goes to 6-9k an ounce if currencies move back to the gold standard: