Daily Investment Interpretations

February 17, 2009

2009-2-17 (Slightly Later):    Dr. Krugman has published three additional news briefs tonight. In the first, Permanent Link to Apocalypse now, he draws attention to the "fiscal catastrophe now unfolding in California. Years of neglect, followed by economic disaster--and with all the reasonable responses blocked by a fanatical minority. This could be America next."
    In the second, Permanent Link to What I learned listening to Larry Kudlow, he observes that Lawrence Kudlow "has adopted the full Treasury View--the view that government spending can't raise demand because every dollar the government spends comes at the expense of private spending." He continues, "So the Conintern the vast right-wing conspiracy has settled on a misunderstanding of the meaning of accounting identities as the basis for its opposition to, you know, actually doing anything to prevent Great Depression 2.0."
    In the third, Permanent Link to The Geithner delay, he notes that the vagueness of Tim Geithner's announcement last week stemmed from the fact that he realized that the Obama team's approaches to financial rescue were unworkable. Dr. Krugman asks why it took so long, given all the public discussions that had been hashed out last fall.
    The bottom line for us, or at least for myself as an investor, is that it looks more and more to me as though we
might be facing a protracted downturn, not because our experts don't know better, but because economics is sufficiently politicized that they're blocked from doing their job. Even at best, avoiding a long, painful economic contraction is something that wasn't successfully accomplished either in the US in 1929 or in Japan in 1989. 
    But it's still early.
    Here's Kevin Depew's Five Things: Markets Lose Faith. Minyanville's Bennett Sedacca has published what at least to me is an excellent article: Assets in Free Fall. One point he makes is that this is the first month in which adjustable-rate mortgages are resetting. last December, 28% of all adjustable-rate mortgages defaulted. Given "the brutal one-two punch of job losses and rate resets", the author is looking for a default rate in excess of 50%. With respect to commercial-property loans, "Moody's stated that 'property values declined sharply in 2008, and we anticipate further declines over the next 12 to 24 months.  ...delinquencies on Commercial Mortgage-Backed Security loans are also on the rise, and we expect the pace to accelerate as macroeconomic pressures take a toll on property cash flows.'" Bennett Sedacca continues,
    "It's worth noting that the cuts and downgrades are in a broad arena - hotels, vacation properties, shopping malls, etc. It shows just how deep this deleveraging is, and why it will take more than a quickly cobbled together bailout plan and what's left of TARP (the Troubled Assets Relief Program) to cure it."
    Mr. Sedacca also mentions the possibility of further problems with money market funds, and mentions that he has his money in government-backed funds.
    This article underscores for me the precariousness of our economic situation, and of money market funds. I had transferred my cash into a Treasury-backed fund, but when I found I couldn't trade out of it, I transferred my money back to the cash reserves. But maybe it's time to return to the Treasury-backed fund.
    Here's another article from Minyanville, this time dealing with the technical picture after today's action: MV Weather Report: Tornado in Global Equity Markets.
    Stock futures tonight are somewhat positive.

2-17  The markets closed sharply lower today, retesting their November lows. The NASDAQ was off 63.7 points (-4.15%) to close at 1,471,. the Dow fell 298 points (-3.79%) to 7,553 (0.29 points above its November 20th low), and the S&P 500 contracted 37.67 points (-4.67%) to end at 789. Oil fell $2.58 a barrel to $34.93 a barrel, and gold added $25.30 to 967.50. The VIX added 5.73 to end at 48.66
    How meaningful these moves were will depend upon what happens over a longer time frame. The S&P closed at 752 on November 20, 2008, and dipped to 740 before closing up at 800 on November 21, 2008.
    In the meantime, Michael Ashbaugh issued his public analysis: U.S. markets venture into sky-is-falling territory.
    It looks to me as though the stock market is, maybe, retesting its November lows this morning. The S&P 500 is (so far) holding at its 804 resistance level. If it successfully retests these lows, then it should clear the way for an "upside breakout". (Bear in mind that it closed on November 20, 2008, at 752.44, and then closed the next day at 800.03.) Today is the day when Michael Ashbaugh releases his public technical analysis, so that should appear later today. In the meantime, here is a link to his The Technical Indicator: S&P 500 ventures into sky-is-falling territory. In it, he concludes that "the current technical story is incredibly straightforward. Namely, the S&P 500 faces important support at the January low of 804, and on a close under that level, further downside, on the order of 10%, looks likely." A 10% drop from where the S&P is now would put it in the 720 range. Bear in mind that on November 21, 2008, its intra-day low was 740, so a 10% decline from here wouldn't be totally catastrophic. The real danger is going to come when the market rallies, and we have to decide whether the rally represents the beginning of a new bull market or another trap within an ongoing bear market.)
    Other information regarding the breadth of this decline will be important. For example, is this pullback being led by bank stocks or is it broader-based?
    And of course, the market may turn around and charge back up today or tomorrow.
    The VIX has jumped six points to 49.
Earlier: Stocks put lows to a re-test.