David Rosenberg's Latest

Hello Everyone!

Take a look at the latest economic report from Merrill Lynch's David Rosenberg. He is the best economist out there and completly nails everything in my opinion. Note that the losses in household wealth have now risen to $13 trillion dollars. Incredible.

Anyway Enjoy!

"Where can things go wrong in 2009?

All of a sudden, we are asked frequently as to whether we are now excessively bearish on the 2009 outlook, and what will cause us to change our mind. It’s rather amazing what a 20% bear market rally in equities, from a 12-year low in the S&P 500 that nobody ever saw coming to begin with, can do to alter perceptions about the entire year-ahead.

The consensus a year ago, and where we are today

A year ago, the widespread consensus was (1) the economy was in a soft patch; (2) the equity market was in a classic corrective phase; and (3) the Fed was nearly done cutting rates and bonds were a sell. Today, we are coming off lower levels of everything, but the common thread of renewed economic growth, bull market in equities and sell recommendations on Treasuries remains intact. To wit:

1) Consensus sees a second half economic rebound The economics community sees the recession ending as soon as 2Q09 and then a fiscally-led second-half economic rebound in real GDP: 1Q09 is pegged at -2.4% (at a seasonally adjusted annual rate), 2Q at -0.5%, 3Q at + 1.3%, and 4Q at +1.8% (as an aside, we do not see a positive print until 1Q10 at the earliest). This time last year, the consensus was calling for 1.3% annualized growth for 1Q08 (the actual was 0.9%), 1.9% for 2Q08 (actual was 2.8%), 2.3% for 3Q08 (actual was -0.5%), and 2.6% for 4Q08 (looks like it will be -6% or possibly worse). So, do you detect a pattern? Economists tend to build a story that things will always progressively get better every year and the irony is that the quarter that they thought was going to be the best in 2008 (the fourth quarter), turned out to be the worst.

2) No one is calling for another down year in equities The equity strategists in the latest Barron’s Roundtable collectively see 1,045 on the S&P 500 by year-end. Nobody is calling for another down year. We had this exact same situation a year ago when the Roundtable forecast was 1,640 on the S&P 500 for the end of 2008 (it closed at 903 – the experts as a group were only off by 45%).

3) Bond watchers bearishThe bond-watchers see the 10-year note surging nearly a percentage point to 3% on average. In the Barron's survey at the end of 2007, the consensus forecast was 3.8% for the Fed funds rate for the end of 2008 and get this – the consensus was 4-1/2% for the 10-year T-note (it closed at 2.2% -- the consensus was off by over 200 basis points!).

The risk is that the consensus may be wrong yet again

So, the answer is quite simple when asked the question where things can go wrong in 2009. Maybe the risk is that, yet again, the consensus will get it wrong just as this time last year in terms of being too high on economic growth, equity valuation and bond yields.

Household wealth declining at an unprecedented rate

What many pundits still do not seem to get is that as of 3Q08, over $7 trillion of household net worth dissolved over the prior year for an 11% plunge. We estimate that the cumulative loss of household wealth as of 4Q was probably north of $13 trillion based on what home prices and equity valuations did since the end of September. This would bring the total loss to over a 20% decline from the peak of mid-2007, which is unprecedented in the post-war era. To be sure, the 2001 tech bubble bursting was no picnic, but the peak-to-trough decline in household net worth back then was $4.2 trillion, or a 9.6% decline. In the 1975 deflation in asset values (this period represented the worst economic backdrop of the past five decades), the peak-to-trough decline was $160 billion, or -3.6% in household net worth.

Shock on personal savings rate will be substantial

As Chart 1 on household wealth strongly suggests, we are in a whole new zone where the good old-fashioned macroeconomic models are at risk of yielding the same flawed results as they did in 2008. We are coming off a record implosion of household net worth, and history shows there to be a 90% historical correlation between that and the personal savings rate, which is now on a discernible uptrend. The lagged impact from the unprecedented negative wealth shock on the personal savings rate is likely to be substantial and as we have said time and again, expectations that the Fed, Treasury or Congress have some magic wand are wholly unrealistic. At best, the aggressive policy stimulus will cushion the blow.

Aggressive stimulus will only cushion the blow

The Fed’s balance sheet has expanded to over $2 trillion and may soon exceed $3 trillion as the central bank plays the role of lender of last resort, not just for the Wall Street but for Main Street too. In addition, the Obama team may well be planning as much as a two-year, $850 billion fiscal plan. However, it is important to understand that these cushions are dwarfed by the aggregate wealth loss of $13 trillion posted so far (and this is far from over yet).

Aggressive stimulus will only cushion the blow

The Fed’s balance sheet has expanded to over $2 trillion and may soon exceed $3 trillion as the central bank plays the role of lender of last resort, not just for the Wall Street but for Main Street too. In addition, the Obama team may well be planning as much as a two-year, $850 billion fiscal plan. However, it is important to understand that these cushions are dwarfed by the aggregate wealth loss of $13 trillion posted so far (and this is far from over yet).

Process of saving more out of current income will intensify

To reiterate, this plunge in household net worth is virtually unprecedented and the lingering impact this is going to exert on household savings and spending patterns is going to be big story of 2009. What the decline in asset values means is that households, which have already begun the process of saving more out of current income, will intensify those efforts – especially among the boomers who are nearing retirement age.

A $1 trillion total drag on GDP

By our estimation, this trend toward income-based savings as opposed to asset-based savings is going to come at the expense of discretionary consumer spending, and could end up draining as much as $350 billion out of GDP in 2009. On top of that, the direct impact of job loss on personal income and the indirect impact on wages as the unemployment rate rises to new highs of over 8% will result in additional $650 billion negative swing on spending this year compared with the baseline trend in 2008, based on our our research. That is a $1 trillion total drag on GDP from the dual impact on consumer spending from the negative wealth effect on savings and the deterioration in the labor market on income.

To be sure, if energy prices can manage to stabilize near their current levels in 2009, that would help provide a cash-flow offset of $125 billion, but would still leave a spending hole of roughly $875 billion. We’re not convinced that the federal government is going to be able to totally offset that contraction in spending in just one year.

Attitudes toward spending and debt have shifted

The reality, and this is just common sense, is that the marginal household is going to expend all its resources to ensure that monthly housing payments are met, that there is enough food on the table for the family, that the children’s education needs are looked after, and that the depleted retirement nest-egg is replenished. It still seems lost on so many pundits that there has been a generational change in terms of how households, at the margin, are allocating their budgets toward discretionary spending and how they are approaching the concept of credit. Attitudes toward non-essential spending and debt have changed; this is not just a cyclical development, but more likely a secular shift. The 2001-07 experience of no-doc loans, 0% financing, option ARMs and subprime credit has proven to be a nightmare for the marginal household.

Demand for credit remains weak

There is more than enough survey evidence from the Fed to show that it is not just the supply of credit that has tightened dramatically, but household demand for personal loans and residential mortgages has scarcely been as weak as today, despite the plunge in interest rates. Housing demand has continued to collapse even though homeowner affordability ratios are at their best levels in four decades. At the margin, people would rather rent than take on a mortgage to service a deflating asset.

Housing deflation has actually intensified

The Keynesian-influenced Obama economics team is planning a huge fiscal package that is likely to be legislated and signed in coming weeks. The selling pressure may have abated for the time being in the equity market (though it is not clear to us that the bear phase is complete), but the deflation in housing (real estate is twice as large an asset on the household balance sheet) has actually intensified over the past 3-4 months as the unsold new and existing inventory has reached new cycle highs.

Data points of post WWII era are of limited use

So, there is still substantial asset deflation, job losses continue to mount, and many companies are now facing severe shortfalls in their pension funds. This is going to require higher employee contribution rates and/or reduced benefits. A growing number of firms are also eliminating their matched 401k contributions for their workers. This will likely reinforce the trend toward higher personal savings rates going forward. As time goes by, it is becoming increasingly apparent that the data points of the post-WWII era are of limited use in forecasting through an epic collapse in credit and asset values. Ben Bernanke realizes this, which is why he no longer relies on classic monetary policy measures that helped revive the economy through the inventory-induced recessions of the past five decades.

A good sense of history is needed to tweak the forecast

This is not to say that we have abandoned our macro models, but in times like this, sound judgment and a good sense of history are necessary ‘tweaking’ ingredients in the economic forecast. Of all the books we read over the holiday season, the one that resonated the most was “The Great Wave: Price Revolutions and The Rhythm of History” by David Hackett Fischer. It is a true masterpiece that examines price revolutions back to the twelfth century. While they all differ in terms of duration and intensity, they share a “common wave structure” and “succeeded one another in a continuous sequence of historical change.” He adds “the study of history can never tell us what will happen next, but it gives us the benefit of much hard-won experience in the past”. http://csmres.jmu.edu/geollab/Fichter/GS....

With that in mind, we find that most economists are hinging their forecasts of a second half economic recovery on repeated bouts of government stimulus. But the benefit of history, as Fischer aptly points out, is that “monetary and fiscal tools,” while described as being “powerful weapons” are at the same time “very blunt and crude” and often “counterproductive” (as any impartial analysis of the New Deal will attest). And, Fischer makes the claim, again based on centuries of past experience that the “side effects” from government intervention are sometimes worse than the problems they are meant to solve.

Policy measures no match for a credit contraction

We are not quite as convinced as the rest of the economics community that the rounds of stimulus and government incursion into the economy and capital market are going to do much more than cushion the blow from the ongoing recession in the private sector. It is essential to realize that all the liquidity being created by the Federal Reserve and deficit spending by the federal government cannot be assessed in a vacuum. The policy measures, while increasingly aggressive, are still no match for the contraction of credit and the record deflation in asset values being incurred by the American household, which represents 70% of GDP and nearly 20% of the global economy. This is the reality that the bond bears and inflation-phobes are going to find themselves coping with in 2009 and perhaps into 2010 as well, in our opinion.


Deflation will be a more enduring theme than many realize

It is perfectly understandable to us, but still dangerous, to be clueless about the mechanism that determines whether we experience inflation or deflation. Even with the upcoming stimulus, this economy, which has been growing below potential since June 2006, will very likely continue to do so this year and well into next year as well. This means a sustained widening in the output gap. In other words, growth in available supply exceeding aggregate demand, higher unemployment rates and lower capacity utilization rates, are likely to be a reality as far as the eye can see. The deflation story is going to prove to be a much more enduring theme than many realize, in our view.

At least another 15% downside to home prices

To be sure, there is currently a healthy debate as to whether the equity market has hit a fundamental bottom. The selling pressure peaked in October-November, but we remain skeptical since our own metrics suggest that we are barely past the 40% mark of this recession, and the equity market typically bottoms 60% of the way through. But even if we are wrong in our bearish assessment of the equity market, we remain convinced that there is at least another 15% downside to nationwide home prices as the problems on the coasts migrate to the financial centers in the Northeast. The latest data were horrific, despite the fact that the builders have taken new construction schedules to all-time lows, demand for housing is so moribund that the total inventory overhang has risen above 11 months’ supply in both the market for new and existing homes. This is nearly double a typically well-balanced market and is a sure sign to us that real estate deflation will remain an enduring theme and a constant drag on confidence, credit, net worth, credit and discretionary spending.



Rising savings rate acts as a drag on discretionary spending

Lingering house price deflation would also ensure that the savings rate remains on a secular uptrend. This would be a dead-weight drag on consumer discretionary spending, but may actually end up being good news for municipal bonds and high-grade corporate bonds since the boomers will be craving relatively safe income-generating securities during this expansion of the personal savings pool; 0%-yielding cash is not an option, in our view, and we wonder aloud how investor appetite for equities is going to be whetted because the painful memory of two major bear markets seven years apart is not likely to fade anytime soon.


Switch out of deflation hinges on a positive credit cycle

As house prices continue to deflate, the ability on the part of private lenders to extend credit likely will remain impaired as more losses become exposed and write-downs are taken, and few households are going to be willing to borrow in order to finance an asset that is in a secular deflation (based on our macro forecast, total credit losses will come to $2 trillion this cycle, so it is tough to make the assertion that we are even past the half-way mark on the write-down phase). While the Fed will continue to boost the supply of money, we are not convinced that velocity will reaccelerate in time to generate a return to inflation in 2009 or 2010. The switch out of a deflationary backdrop, as we saw in 2003, hinges on a return to a positive credit cycle, which is a proposition we find untenable considering that the aggregate level of private sector debt relative to GDP is still near a historic peak of 172%, and only began to correct in 1Q of last year.

Process of unwinding excess credit is very deflationary

As Chart 2 illustrates, this household and business debt/income ratio is still 50 percentage points above the long-run pre-bubble norm. So, it is difficult to believe that we can actually embark on a new credit cycle when the level of outstanding private sector debt remains $6 trillion beyond the bounds of what the economy has traditionally been capable of handling.

Deflation cycle may have another two years to go

As we saw in the past year, the process of unwinding this excess credit is enormously deflationary, and the Fed, Treasury, Congress and the incoming Obama team have the daunting task of ensuring that this transition phase toward debt elimination is as orderly as possible. Their job is to promote social stability during this deflationary period, which is why bailouts have become a regular event. Our job is to forecast the future for our clients as best to our ability. Interest rate forecasting and GDP forecasting hinges, and corporate profit forecasting critically hinges, on the outlook for prices. If history is any guide, this deflation cycle may have another two years to go, and that assumes there are no significant policy missteps along the way."

TARP Terror!

Boom! Booom! Boom! Boom!

Yup, there I go again, banging my head against a wall.

I wanna talk TARP today folks. Barney Rubble oops! I mean Frank came out with a new proposal that calls for stricter rules on the second half of the $350 billion TARP that is about to be released:

" WASHINGTON (Reuters) - A senior Democrat proposed legislation on Friday to tighten the rules of the government's $700-billion financial bailout program and channel a large portion of it to home foreclosure prevention.

With Congress growing increasingly concerned about fixing the bailout program and stabilizing the financial system, House Financial Services Committee Chairman Barney Frank said he will hold a hearing on Tuesday on the bill he is proposing, with a House floor vote possible on Wednesday or Thursday.

Known as the Troubled Asset Relief Program, or TARP, the Treasury Department's bailout has so far devoted about $350 billion to capital injections into major banks and smaller amounts to aiding automakers and a major insurer.

Approved in October, the program's focus has shifted repeatedly under the direction of Treasury Secretary Henry Paulson, raising concerns among lawmakers about its future.
Under the original TARP legislation, the White House must ask Congress for the next $350 billion of program funding. Frank's bill would set conditions for release of that money, which would impose tougher standards for the bailout.

Under his bill, Treasury would have to devote at least $40 billion to reducing home foreclosures via a plan that it must develop by March 15 and start funding by April 1.
Treasury would also have to give small banks more access to the TARP and require quarterly disclosure by TARP participants about their use of TARP funding.
Other provisions of the draft bill would constrain the use of TARP funds in bank buyouts. TARP fund recipients could not buy other depository institutions without a Treasury finding that a deal "reduces the risk to taxpayers or ... could have been accomplished without funds provided under the TARP."

The bill would standardize limits on the pay of executives employed by TARP recipients, regardless of what sort of aid received under the program. It would also make wider pay provisions retroactive to existing program participants.
"If they don't like it, they can give the money back," Frank said, referring to the retroactive limits on pay.

In an attempt to encourage more modification of troubled mortgages to help distressed homeowners, the bill would give a legal safe harbor to mortgage servicing companies seeking to modify loans under their supervision.

The Frank bill would require Treasury to develop a program outside the TARP to stimulate home buyer demand and urges this be done by ensuring affordable mortgage rates.

Finally, the bill would clarify that Treasury can use the TARP to support consumer, student, vehicle and commercial real estate loans, as well as markets for mortgage-backed securities, municipal bonds and auction-rate securities."

My Take:

Great idea Barney! This is just what the market needs. More intervention and a continued changing of the rules. Folks, the one thing the market hates more than anything else is uncertainty. Unfortunately, our politicians appear to specialize in creating it!

We have a major problem with confidence in the markets right now. The government is making things much WORSE by coming out literally everyday and announcing a new plan on how they plan on fixing the economy.

They all need to shut the hell up. The market is totally confused because the government's "solution" changes on a daily basis. Is it just me or is the TARP becoming a total cluster F**K! This may go down as the worst economic solution in the history.

Whats it going to be Barney? Cramdowns or 3% mortgage rates? Are we going to quantatatively ease or throw more money into the "black hole" that we like to call our banking system? Its quite obvious to me that the government is in a total panic and has no idea what to do.

Whats even more of a joke is they act like $350 billion will fix this mess. What a joke! We have thrown $300 billion to AIG and Citigroup alone! When are they going to realize that they don't have the resources to stop this debt bubble from bursting?

They need 10,000 TARPS in order to fix this mess.

The only solution to this crisis is to put the TARP's away and allow the bad debt to default. If there are massive failures throughout the financial system as a result than so be it. Next time the banks will realize they shouldn't be giving $500,000 liar loans to people who make $10 an hour.

Enough of the press conferences! I believe the confusion and inconsistency coming out of Washington was just as responsible for the selloff in the markets today as the jobs number was.

Congress: You are forcing America to hide in a corner with this constant mixed message. No one wants to buy a home when the rules constantly change. No one wants to buy a TV if they think their job might be gone in a month. Your actions are forcing the public to do the exact opposite of what you are looking for.

The public is spooked by all of the hysteria! Obama is on TV on a daily basis warning of 11% unemployment and pleading that we need to act before this turns into a horrible financial crisis. Hell I am spooked after listening to this guy. Joe6pack is going to continue to stuff cash in his mattress and not spend as long as this crap continues.

There is no need to use fear in order to get your stimulus Obama! Stop the politics now. Congress will be more than happy to give you your stimulus package so that you can throw money out of helicopters. Its pretty obvious they don't know what in the hell to do. However, the one thing they do well is spend money so don't worry, your pockets will be filled with soon to be worthless US dollars.

Obama, its over bud. The Ponzi debt scheme has peaked. It was a nice 25 year run. I am sorry this was thrown into your lap. However, please do the right thing and get out of the way. If you plan to stand in the way, be consistent with their thoughts and ask Congress to do the same. DC is slowly scaring us all into a depression. If you stand for change then follow through with your promise but be consistant. "Change" can't happen everyday with a different idea.

Bottom Line:

I didn't cover the jobs report because I figured it was old news by now. Unemployment now stands at 7.2%. We lost another 525k jobs. The markets really sold off at the end of the day today. The financials look very sick and acted terribly.

So is it time to head into the abyss? Was the 20+% retrace we saw last week the peak before the crash? Good question. From a confidence standpoint I think we are close. Santelli said the bond market was filled with fear today. No one has found a way out of this. Thats because there is no way out! The debt bubble must pop and prices must tumble. They will never be able to stabilize housing until prices fall another 30% or so.

Its simple math folks. Why the government doesn't understand this is beyond me: The cost of paying off our debts leaves us with nothing left to spend. When housing prices drop by 50% and get back in line with incomes, we will be able to consume again and the economy can begin to recover. This is the only answer PERIOD.

Cheaper financing and attempting to blow the bubble back up is not the answer. The longer we try to fight this the more painful this crisis will be. Washington is filled with a bunch of buffoons as far as I am concerned. Their stupidity is beyond belief.

Once the market realizes this we are going to plunge to new lows. I am guessing 4-5k on the DOW if the bailouts and interventions continue.

If this selloff gets legs we may be on our way to new lows. Lets get real: The $350 billion in the TARP should be good for a few more bailouts. Obama's stimulus will be next. I am sure we will burn right through that money in a matter of months and they will come back for more.

Meanwhile back in the world of reality, the public will continue to not consume as they come to terms with losing $8 trillion in wealth in the past year.

We are inching closer to a climax here folks. Its just a matter of time. Today was a prelude of things to come.

Stay Tuned.

Taxpayer "cramdown"

Boom! Boom! Boom! Boom!

If you are wondering what the noise is its my forehead slamming against my desk.

Ughhhhh.....Welcome to the mortgage "cramdown"!

Bend over taxpayers. Its time for you to bail out the housing bubble!

Citigroup announced today that it has agreed to a senate proposal that will allow BK judges to modify mortgage loans. Here are the details:

"Citigroup became the first major bank to support a controversial plan to let bankruptcy judges alter mortgages in a effort to prevent more housing foreclosures.

Until now, banks have been ardently opposed to the proposal, which key Democratic lawmakers hope to attach to President-elect Obama's economic stimulus legislation.

The so-called "cramdown" proposal has been backed by Democrats over the past year as a potential solution to the foreclosure crisis.

Under the change, bankruptcy courts could alter the terms of mortgages, subject to certain conditions:

1) Only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment. All loans, and not just subprime, are eligible.

2) Borrowers have to show they made a “good faith” attempt to work with the lender before considering this bankruptcy provision. Bankruptcy cannot be the first option, and borrowers have to prove it wasn’t.

3) Bankruptcy judges can strip away a lender’s credit or rights if they violated the Truth in Lending Act or other state and federal laws.

The agreement with Citigroup to support the legislation was announced in Washington by Senators Richard Durbin of Illinois, Charles Schumer of New York and Christopher Dodd of Connecticut.

Durbin tried last year to win passage of his proposal, but it failed in the face of opposition from lending and housing groups that warned giving bankruptcy judges power to erase mortgage debt would increase costs for future homeowners."

My Take:

Sickening isn't it? The banks vehemently opposed this when it was brought up last year. why wouldn't they? If a BK judge does a "cramdown", guess who gets crammed? The banks of course. The fact that both Citi and the NAR agreed to this tells you how bad the situation is in housing.

This whole thing smells like a big pile of dog doo. Why on earth would any bank accept these terms? This is what happens when you allow Uncle Sam to put a collar around your throat. When you take $120 billion from the taxpayer via the government I guess you need to listen when they threaten you with your life!

Remember folks, the government bailed out all of these large institutions. Without Uncle Sam they do not exist. Why do you think the TARP was crammed down our throat in a matter of weeks? The banks were all toast and Paulson knew it.

I expect the rest of the big boys that accepted TARP money to follow Citi's lead. Instead of "lead" maybe I should term this Citi's "death march". The way I see it, this is the final nail in the coffin for the banks. What will end up happening here is this: Millions of homeowners will go to court and get their loans modified. The losses will then be taken by the banks via "cramdowns". The losses will then be crammed down the taxpayer's mouth as the government uses our money to infuse the banks with capitol so that they can offord to take the losses.

So isn't this just special. We the taxpayers: Who were prudent and lived within our means, must now go ahead and bailout everyone that took outrageous risk and bought homes that they knew they couldn't afford. By doing this, we also bailout the banks who were stupid enough to give them the money in the first place!

Boom! Boom! Boom!

Man I am going to have a headache if I keep doing this. I can't help it! Its the only way to release the anger after reading about this cramdown. I either do this or I grab a housing speculator by the throat and throw him out a window! The head smacking thing sounds like the wiser choice.

I have a question here: I wanna know when we "the taxpayers" get a chance to do our own version of a "cramdown". Perhaps the same judges that do these mortgage modifications can force the CEO's of these banks to line up on their knees(side by side) and allow each taxpayer to cram a sock down each of their throats. That's the cramdown I want to see!

Bottom Line:

What can I say folks? I get more angry and sickened by the day as I watch the government make such stupid mistakes.

Again I get back to "moral hazard". Who won't want a cramdown if they go ahead and do this? Anyone that bought a house within the last 6 years is going to want this deal. Why would anyone pay their bloated mortgage payment for 30 years if they have this option available?

If I was stupid enough to buy one of these McMansions, I would be the first guy on the phone to Citibank. "Sorry guys, can't afford it. Made a mistake. Lets go to court and work this out."

My oh my this is going to end ugly. I would avoid any investment in the financials until the smoke clears on this debacle. If the government goes through with this, the banks will essentially be nationalized. Their balance sheets will be hit with billions of losses. Their will have no earnings for years.

God forbid anyone in this country is forced to take a financial hit. The entitlement in this country has gotten completly out of hand.

Each day I get more and more angry with myself that I didn't act like a buffoon and go out and spend like a drunken sailor over the past few years. If I knew the country was going to bail me out, I would have bought a boat and a McMansion and partied until it was bailout day.

No trades today. I was too busy banging my head against my desk.

Thank You Gregory.....

Hi All

I loved this response to the Big Three. I think its great. Gregory says it all.

Enjoy:

"This is being passed around the trading desks. Thought I would share here:

ear Employees & Suppliers,

Congress and the current Administration will soon determine whether to provide immediate support to the domestic auto industry to help it through one of the most difficult economic times in our nation's history. Your elected officials must hear from all of us now on why this support is critical to our continuing the progress we began prior to the global financial crisis...... ......... ....... As an employee or supplier, you have a lot at stake and continue to be one of our most effective and passionate voices. I know GM can count on you to have your voice heard.

Thank you for your urgent action and ongoing support.
Troy Clarke
President General Motors North America
++++++++++++ +++++++++ +++++++++ +++++++++ +++++++

Response from:
Gregory Knox, Pres.
Knox Machinery Company
Franklin, Ohio

Gentlemen:

In response to your request to contact legislators and ask for a bailout for the Big Three automakers please consider the following, and please pass my thoughts on to Troy Clark, President of General Motors North America.

Politicians and Management of the Big 3 are both infected with the same entitlement mentality that has spread like cancerous germs in UAW halls for the last countless decades, and whose plague is now sweeping this nation, awaiting our new "messiah", President-elect Obama, to wave his magic wand and make all our problems go away, while at the same time allowing our once great nation to keep "living the dream". Believe me folks, the dream is over!

This dream where we can ignore the consumer for years while management myopically focuses on its personal rewards packages at the same time that our factories have been filled with the worlds most overpaid, arrogant, ignorant and laziest entitlement minded "laborers" without paying the price for these atrocities this dream where you still think the masses will line up to buy our products for ever and ever.

Don't even think about telling me I'm wrong. Don't accuse me of not knowing of what I speak. I have called on Ford, GM, Chrysler, TRW, Delphi, Kelsey Hayes, American Axle and countless other automotive OEM's throughout the Midwest during the past 30 years and what I've seen over those years in these union shops can only be described as disgusting.

Troy Clarke, President of General Motors North America, states: "There is widespread sentiment throughout this country, and our government, and especially via the news media, that the current crisis is completely the result of bad management which it certainly is not.

"You're right Mr. Clarke, it's not JUST management, how about the electricians who walk around the plants like lords in feudal times, making people wait on them for countless hours while they drag a** so they can come in on the weekend and make double and triple timefor a job they easily could have done within their normal 40 hour work week. How about the line workers who threaten newbies with all kinds of scare tacticsfor putting out too many parts on a shiftand for being too productive.

(We certainly must not expose those lazy bums who have been getting overpaid for decades for their horrific underproduction, must we?!?)

Do you folks really not know about this stuff?!? How about this great sentiment abridged from Mr. Clarke's sad plea: "over the last few years we have closed the quality and efficiency gaps with our competitors." What the hell has Detroit been doing for the last 40 years?!? Did we really JUST wake up to the gaps in quality and efficiency between us and them? The K car vs the Accord? The Pinto vs the Civic?!? Do I need to go on? What a joke!

We are living through the inevitable outcome of the actions of the United States auto industry for decades. It's time to pay for your sins, Detroit.

I attended an economic summit last week where brilliant economist, Alan Beaulieu, from the Institute of Trend Research, surprised the crowd when he said he would not have given the banks a penny of "bailout money". "Yes, he said, this would cause short term problems," but despite what people like politicians and corporate magnates would have us believe, the sun would in fact rise the next day and the following very important thing would happen where there had been greedy and sloppy banks, new efficient ones would pop up that is how a free market system worksit does work if we would only let it work"

But for some nondescript reason we are now deciding that the rest of the world is right and that capitalism doesn't work - that we need the government to step in and "save us"Save us my a**, hell - we're nationalizing and unfortunately too many of our once fine nation's citizens don't even have a clue that this is what is really happening. But, they sure can tell you the stats on their favorite sports teams yeah - THAT'S really important, isn't it.

Does it ever occur to ANYONE that the "competition" has been producing vehicles, EXTREMELY PROFITABLY, for decades in this country?... How can that be??? Let's see Fuel efficient Listening to customers Investing in the proper tooling and automation for the long haul.

Not being too complacent or arrogant to listen to Dr. W. Edwards Deming four decades ago when he taught that by adopting appropriate principles of management, organizations could increase quality and simultaneously reduce costs. Ever increased productivity through quality and intelligent planning. Treating vendors like strategic partners, rather than like "the enemy". Efficient front and back offices. Non union environment.

Again, I could go on and on, but I really wouldn't be telling anyone anything they really don't already know down deep in their hearts.

I have six children, so I am not unfamiliar with the concept of wanting someone to bail you out of a mess that you have gotten yourself into - my children do this on a weekly, if not daily basis, as I did when I was their age. I do for them what my parents did for me (one of their greatest gifts, by the way) - I make them stand on their own two feet and accept the consequences of their actions and work through it. Radical concept, huh. Am I there for them in the wings? Of course - but only until such time as they need to be fully on their own as adults.

I don't want to oversimplify a complex situation, but there certainly are unmistakable parallels here between the proper role of parenting and government. Detroit and the United States need to pay for their sins. Bad news people - it's coming whether we like it or not. The newly elected Messiah really doesn't have a magic wand big enough to "make it all go away." I laughed as I heard Obama "reeling it back in" almost immediately after the final vote count was tallied", we really might not do it in a year or in four". Where the Hell was that kind of talk when he was RUNNING for office.

Stop trying to put off the inevitable folks. That house in Florida really isn't worth $750,000. People who jump across a border really don't deserve free health care benefits. That job driving that forklift for the Big 3 really isn't worth $85,000 a year. We really shouldn't allow Wal-Mart to stock their shelves with products acquired from a country that unfairly manipulates their currency and has the most atrocious human rights infractions on the face of the globe.

That couple whose combined income is less than $50,000 really shouldn't be living in that $485,000 home. Let the market correct itself folks - it will. Yes it will be painful, but it's gonna' be painful either way, and the bright side of my proposal is that on the other side of it all, is a nation that appreciates what it has and doesn't live beyond its means and gets back to basics and redevelops the patriotic work ethic that made it the greatest nation in the history of the world and probably turns back to God.

Sorry - don't cut my head off, I'm just the messenger sharing with you the "bad news". I hope you take it to heart."

Gregory J. Knox, President
Knox Machinery, Inc.
Franklin, Ohio 45005

Jobs! Jobs! Jobs! Where are they?

Apparently not in America!

What an ugly day today in the markets. The stock sell off today was fueled by Intel's profit warning and ADP's shockingly horrific December jobs report.

Lets get right to ADP:

"Jan. 7 (Bloomberg) -- Companies in the U.S. eliminated an estimated 693,000 jobs in December, the most since records began in 2001, a private report based on payroll data showed.
The drop in the ADP Employer Services gauge was larger than the median estimate of economists surveyed by Bloomberg News. Today’s report is the first to reflect methodological changes that ADP says will narrow the differences between its calculations and the government’s payroll numbers.

Companies are accelerating the pace of firings as the recession plaguing the world’s largest economy heads into a second year. The Labor Department may report in two days that employers slashed jobs in December for a 12th consecutive month, putting total job cuts at 2.4 million for 2008, according to a Bloomberg survey median.

The ADP report was forecast to show a drop of 495,000 jobs, according to the median estimate of 24 economists in a Bloomberg News survey. Projections ranged from declines of 250,000 to 550,000. "

Quick Take:

As you can see, nearly 700,000 jobs evaporated in December according to ADP! Gone! Poof! Just like that! The scary thing here is ADP has consistently been light numberswise versus the government print that we will see on Friday. Supposedly ADP claims that they have fixed the discrepancy. Yeah OK. I will believe that when I see it.

This was way worse than expected and the market sold off almost immediately. What I find amusing is how shocked everyone is when these terrible economic reports come out. I was not surprised the losses were this bad.

Here is my question, How can these economists be so consistently wrong on the bullish side month after month regarding everything around the economy? I almost feel like plugging my ears anytime I hear an economist speak! Whats troubling is most of these economists graduated from the finest universities in the country. Yale, Harvard, and all the other ivy's should be embarrassed!

Who are teaching these brilliant economists? Dick Fuld and Madoff?

The bottom line here is consumers without jobs cannot continue to consume or pay mortgages. I am almost afraid to hear how bad the jobs number will be on Friday.

Tomorrow we get December retail #'s. I am sure those will be just rosey.

Trading Thoughts

The ADP number ruled the day in my opinion. I wanted to share a few thoughts around the market:

I took some profits today on a few shorts. I sold some QID and all of my TBT. I held onto all of my financial shorts even though I see no price action here. The only reason I keep them on is because I pretty much hate this sector with a passion. These greedy pigs have possibly destroyed this country and our way of life. They can all rot in hell as far as I am concerned. I will keep these shorts on based purely on principle. They are small positions, and I hope someday they will payoff when these bloated pigs finally are forced to admit they are broke.

Folks, from a trading perspective the financials are DEAD. I am going elsewhere for trading ideas. No one wants to buy financials and no one wants to sell financials.

I have come to the conclusion that the market doesn't view this area of the market as tradeable anymore. Everyone knows they are all insolvent but the government won't let them fail. They also continue to refuse to admit their losses. I think the market has totally lost interest and confidence in this area of the market as a result.

There are way better places to trade in my view. I am even starting to question SRS at this point. You cannot do TA on this one because it settles at the end of each trading session, but the traders seem to have commercial on ignore as well.

In my view, no one wants to play in these stocks because they have been so manipulated via government interventions, fraud, and lack of transparency. Placing bets on the financials at this point is pure gambling. You better know someone at the Fed if you plan on making money trading here.

The area that is starting to get hot again is commodities. They are volatile as hell which makes them a traders dream! I continue to own CHK which held up well today considering the selloff. Gas inventories are out tomorrow so this one should move depending on the #. I am out on a nice pop. I think oil got a little too pricey at $50. I am not surprised to see this selloff today.

So where are we now? I think shorting the hole here is dangerous. Obama is out with a big economic speech tomorrow. I gotta say folks: This guy is smooth as silk. I am really impressed with his presence. His stimulus will never work, but he sure makes it sound like it will when he speaks! The retail #'s will be terrible tomorrow, but I don't think the market reacts to it much unless the numbers are way worse than expected.

I plan on sitting on my hands on Thursday. I think the next opportunity to trade is following the jobs report on Friday. If the jobs number is ugly but within reach of ADP, I plan on taking a little long position following any drop at the open. I may make this trade a larger position if we sell off again tomorrow because the entry point will be even more yummy.

Guys and Gals, I don't think this corrective bounce in the markets is over yet. There was some buying at the end of the day today. Obama continues stay in the news each day preaching hope and government stimulus. For now, it seems the both Americans and the bond market are buying it.

Eventually, this hope is going to turn into anger and despair as the job losses continue to mount.

This psychological shift is rapidly approaching, but I don't think we are quite there yet.

Stay Tuned!

Housing Continues to Deteriorate

Good Evening Everyone!

Well, today was the same old story: More bad news and higher stock prices. Ahhh... you gotta love the psychology of Wall St. The combination of hope and denial can make investors do crazy things (like buy stocks that are about to fall of a cliff).

Here is a perfect example of the buying insanity that currently dominates Wall St. Take a look a press release from commercial real estate developer (GRT):

"Glimcher sells Kansas mall for $20.5MTuesday January 6, 12:41 pm ET Glimcher Realty Trust sells mall in Kansas City area for $20.5M as part of plan to sell assets COLUMBUS, Ohio (AP) --

Mall owner Glimcher Realty Trust said Tuesday it sold a Kansas City-area mall for $20.5 million as part of a plan to sell off non-strategic properties.The real estate investment trust sold The Great Mall of the Great Plains in Olathe, Kan., to Great Olathe Center LLC. Glimcher said it applied the proceeds toward a $30 million mortgage on the property."

Quick Take:

So lets do some simple math here people. They had a $30 million mortgage on a mall that they sold for $20 million. Thats a 33% loss. You would think that (GRT) would get pummeled after this press release right? WRONG! (GRT) rose a whopping 30% today on the news.

This reaction is insane. Why did this dog move higher on the news? Are we supposed to be relieved that they were able to sell a property at a 30% loss? How many others do they have to dump at a similar loss or MORE. Does anyone look at fundementals anymore? IS this an attempt to front run a bailout? I see it as pure gambling and nothing more.

Its price action like this that killed SRS today. We are now down into the 40's on SRS. I plan on buying some more of this very shortly. I can't see this going much lower. However, I have been saying this for days so until I see a break in the trend, I see no reason to front run it. I still believe the REIT's are trading higher based on the premise that we will see further interventions into the credit markets by the government which would theoretically loosen lending as this crisis deepens.

Wall St continues to pump this "credit markets are thawing" thesis since the Fed got involved in the credit markets.

This is a bunch of hogwash IMO, and I see no signs of increased lending. This perception/window dressing has pushed many commercial REIT's and home builders much higher for no other reason other than hope. The reality is housing continue to see no bottom:

"Jan. 6 (Bloomberg) -- Fewer Americans signed contracts to buy previously owned homes in November as credit markets seized up and a deteriorating labor market signaled the housing slump will extend into a fourth year.

The index of pending home resales fell 4 percent to 82.3, the lowest level since the series began in 2001, from a revised 85.7 in October, the National Association of Realtors said in a report today in Washington. Pending sales fell in all four regions.

A financial crisis that worsened in the final months of 2008 deepened the economic recession, extending the slump in home sales and prices. President-elect Barack Obama has pledged to enact measures to ease foreclosures and save or create 3 million jobs to boost the economy.
“The housing stress just doesn’t end,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York."

Quick Take:

Oh yeah, those credit markets sure are thawing. Look at all of the homes that are selling! This number was an all time low since this index started in 2001. What a crock.

Here is another example of how things are thawing

Manufacturing continued to severely retract in December:

"Jan. 6 (Bloomberg) -- The U.S. economy ended the year in a steep decline, with factory orders, home sales and service industries all contracting further, reports showed today.

The Institute for Supply Management’s index of non- manufacturing businesses was 40.6 for December, a higher-than- forecast reading that was still the second-worst on record. The National Association of Realtors index of pending home resales fell 4 percent in November, and the Commerce Department said orders at U.S. factories slumped for a fourth month."

Quick Take:

Wow the bulls are right! Things are thawing! In fact the economy is starting to sizzle!

Keep in mind here folks that this is December data which means the economy continued to contract despite the "quantitative easing" by the Fed. Don't believe the hype on Bubblevision folks.

Things are not getting better. There will be no second half recovery in 2009. This 40.6 was the second worse number in history preceded only by last month! Remember folks, anything under 50 means the economy is contracting.

Bottom Line:

What can I say. The Obama hope rally continues. I stayed on the sidelines today.

There was some bad news among the financials today:

There was a S&P downgrade on Wells Fargo debt after the bell today.

BofA's merger with Merrill Lynch is turning into a disaster. Merrill's head guy in the brokerage side just quit today. He apparantly was adored by the 16,000 Merrill brokers. Some are now questioning the viability of this merger including S&P who came out with a statement saying that they were concerned about the developments with the merger today.

The market bounce started to look a little fatigued to me today on the long side. It appears the 930 area on the S&P has been tough to break through which is a bad sign for the bulls. Its also been a problem for the bears because it seems to be holding every time the market comes down and tests it.

I am going to most likely sit on my hands until the jobs number on Friday if we continue to trade like we have the past few days. If we get back up to 1000 on the S&P before the jobs report, I will jump on the short side.

Stay Tuned!

Blah Monday

Good Evening Folks!

Just a little commentary tonight.

Stocks closed mildly lower today as traders continue to worry about the severity of the recession. Volume was very light and the news flow was very quiet.

I think its interesting how much the market has quieted down since the beginning of the December. Watching the market right now is just a tad more exciting than watching paint dry after watching all of the action last year especially this fall. I mean 1000 point swings in one day were not uncommon there for a little while this fall. Daily 500 point trading ranges started to become norm. Now when you see a 100 point drop, it feels like the markets were flat for the day!

It appears we have hit a crossroads right now in the markets. We have rallied about 24% on the S&P from the lows which is a significant bounce. Traders seem a bit confused as to what to do next.

The question being asked now is this: Will the Obama stimulus be enough to to kickstart the economy in the second half of the year? I can answer that one: NO FRICKIN WAY! Many are also trying to figure out how bad this recession is going to be. We start getting some answers this week. Some retail numbers are due out this week as well as the big jobs report on Friday.

Enjoy the quiet day today! I expect the market to be back to its bipolar self once we start getting some data from the 4th quarter by the end of the week.

Financials

I still continue to hold FAZ. I think we could possibly see another leg down in the financials in the near term. There was an interesting research report that was released on JP Morgan by a very well respected analyst:

"JPMorgan fell $2.10 to $29.25, the steepest drop in the Dow. Deutsche Bank AG analyst Mike Mayo expects the bank to earn 18 cents a share for the fourth quarter, a drop of 53 cents from his previous estimate. The number includes a one-time gain of about 19 cents per share from the ending of the New York-based bank’s Paymentech joint venture, he said in a research note yesterday.

Separately, CNBC on-air editor Charlie Gasparino said JPMorgan may report a fourth-quarter loss, citing unidentified analysts."

Quick Take:

Mike Mayo is one of the guys the street really listens too, and he took JP's earnings estimate down to .18/share from his previous estimate of .53 a share for the fourth quarter. This is a huge adjustment folks. I continue to be convinced that there are many huge writedowns that the banks haven't been taken yet. Their balance sheets are all based on home values, and they will be forced to take more and more write downs as long as housing prices continue to plummet.

One thing I have noticed during this rally is the financials are hardly participating(other than GS). This is something to take notice of. One analyst I listened to today made a great point:

The market usually doesn't recover using the stocks that drove them into the bear market. For example: Tech stocks were not the catalyst that got us out of the tech bust. It was housing and the financial stocks. My guess is it will be another sector that eventually gets us out of this currentdownturn.

One thing is for sure. The 40-1 highly leveraged finance bull market is toast!

Who knows what will trigger the next bull? Could it be alternative energy? Perhaps, but for now, I think its easier to short the stocks that got us here versus trying to find the next bull market because I think we are years if not a decade away from finding that catalyst.

For now, the banks in my eyes are nothing but walking zombies. They have no business model, No one wants loans because they are already in debt up to their eyeballs. The credit market remains frozen so there are no IPO's or CDO securitizations. Mergers and Aquisitions continue to remain at very depressed levels. A lot of venture capital is on the sidelines waiting to buy up distressed debt IMO. I simply see no way for the financials to make much money.

I also don't see this changing anytime soon. Many of these stocks have bounced back up considerably since they were bailed out. I think we could very well see another leg down once people realize these capital injections from the Fed did nothing but allow the banks to repair their balance sheets.

Repairing bloated balance sheets is not profitable folks!!! The sad thing is, I still don't think their balance sheets are even close to even being fully repaired! There are trillions of dollars of bad loans continue to sit on their books. I expect nothing but continued writedowns for the next several quarters.

I plan on staying short via FAZ for a long period of time. I may start to look into some PUTs on a few individual names. Wells or GS perhaps?

Bottom Line:

Those are my thoughts today. You could hear crickets on the trading floor this afternoon. The big three December auto sales were horrific. Sales were down anywhere from 30-50% for the month.

I did add a new position today. I bought some (CHK) Feb $20 calls. This is a natural gas play. I like this one for a few reasons: Geo-political instability in the Middle East, Russia's fight with the Ukraine on natural gas along with Russia's reduced shipments to Europe, and a potentially brutally cold winter here in the US. The stocks been acting quite well. Lets see how this works out.

That's about it for today.

Stay Tuned!

Anyone Want to Buy a Car?

Good Morning Folks!

Car inventories are soaring!

This is another sober reminder as to how bad the economy is. The consumer is tapped out!