Daily Investment Interpretations

March 14, 2009

2009-3-14:  If Fed eased liquidity, why's the economy still a basket case?  This article concludes that the Federal Reserve has had success in restoring liquidity and security to the financial markets, enticing private capital back into the commercial paper markets, laying to rest worries about the solvency of money market funds, lowering mortgage rates, and other beneficial liquidity boosts. 
    On the flip side, "D
eepening fault lines in the U.S. economic landscape mean the Fed programs have only gone so far in dealing with the broader problems. 'The larger question -- has this prevented a collapse in real activity such as in consumer spending and employment -- then no, all those things are going down,' Mueller said. 'The Fed can create liquidity, they can't create solvency," Mueller said. 'They can't take a bad loan and make it into a good loan.'"
The Fed's Successes
    In my opinion, this article does a good job of explaining that the Fed has had many successes so far in thawing the credit markets since they seized up last fall. Also, it seems to me that the Fed's rescue of the $3 trillion money market funds with "only" $50 billion set aside to pay indemnify money market investors against loss is an example of how a relatively small amount of money can restore normal functioning to a far larger pool of money.
Where the Fed Hasn't Yet Been Able to Reach
    On the other hand, money market funds are entirely sound except for a minute amount of money around the fringes. Last fall's threat of a stampede was basically a failure of trust. By contrast, toxic loans and credit default swaps (insurance policies paying off if the debtor defaults) are real threats, and their monetary value is huge. Also, the appetite for credit that characterized the last few years depended upon consumers borrowing money to consume more, and industry borrowing money to expand its capacity to serve these high-rolling consumers. Now the consumers have switched from spending more than were earning to saving a small part of what they are earning because, I think, of fear of unemployment and/or an uncertain economic future, and because of a recognition of their need to save for retirement. Industry has lost its appetite for credit (other than for short-term commercial paper) because it now has surplus capacity, given the decline in (debt-fueled) demand. Furthermore, many of the consumers and companies that now seek to borrow do so because they're in a financial hole. And banks avoid like the plague loaning to any person or corporation that needs the money, since they're the ones that are in the greatest danger of defaulting.

    What do those who called the downturn think now? presents the predictions of  four financial experts who predicted the current market debacle.  
   
Economist Gary Schilling predicts the housing prices have somewhat farther to fall before they stabilize. He doesn't expect this current recession to end until at least early 2010. He thinks that the S&P 500 might bottom this summer at around 600 (11% below last Monday's close of 677 or 10% below last Friday's intra-day low of 667), with a long, slow recovery.
   
Options Specialist Larry McMillan is waiting for the VIX to shoot up into the 60's and then fall back, as a signal that capitulation has occurred.
   
Technical Analyst Sandy Jadeja expects the Dow to retest the 6,400 level. If it falls through, then 5,300 would be his probable low, occurring in 2010, or even 2011 or 2012. However, Elliot Wave and Fibonacci analysis may point toward 3,700-3,800 as the ultimate bottom.
   
"The Chartist" publisher Dan Sullivan sees a retest of Monday's close at 676 occurring sometime this summer, with either a market bottom or a new buy signal.
    All four of these prognosticators agree that the current market rally doesn't represent a major market bottom. 
    The first and last of the four (Gary Schilling and Dan Sullivan) see the stock market registering a major bottom sometime this summer. Gary Schilling suggests the same
600 level on the S&P 500 that Minyanville's Todd Harrison is anticipating. (Todd Harrison will commit 25% of his money to the stock market if the S&P hits 600.)
    The second of the four (Larry McMillan) isn't setting any time scales but is looking for the panicky capitulation of the bulls, with a
VIX above 60, that marks a major market bottom (But not necessarily the bottom of this bear market... witness the spiking of the VIX to 90 last October.) (The VIX has reached 53 twice within the past month.)
    The third of the four (Sandy Jajeda) suggests a bottom for this multi-year bear market this year if the Dow successfully retests its
6,400 low, and in 2010, 2011, or 2012 if the Dow falls through its 6,400 low. In the latter case, he anticipates a low of about 5,300, although a low of 3,700-3,800 might be in the offing.
   
 
Fed Facing the Free Fall
    In this article, Fed Chairman Bernanke in his recent testimony before Congress announced that the Federal Reserve now thinks that GDP will fall
0.5% to 1.5% in 2009, unemployment will peak at between 8.5% and 8.75%, and inflation will run between 0.25% and 1.0%. O-o-o-oh K. Let's crunch some numbers.
    First, let's note that the stock market, if it bottoms in March, would be pointing toward a turnaround in the economy in August, with a recovery of some sort underway the last four months of the year.
    The unemployment rate, which ran
681,000 in December, 655,000 in January, and 651,000 in February will total 650,000 to 1,000,000 for the rest of the year. (It seems improbable that employment would pick up before the end of the year, even if, in retrospect, the economy flattens out and, in retrospect, were to start a slow recovery in the last quarter of this year.) 
    The GDP decline, which is estimated to run
1.25% to 1.5% this first quarter, will be as much as, or more than we'll see for the year as a whole (with a fourth-quarter rise in GDP offsetting any further fall in GDP after the first quarter).
    But if this is the case, then the recovery is already baked into the cake. There's no need for a
$770 billion fiscal stimulus package that won't have a significant effect before next year. And why is Lawrence Summers warning of the dire impact of an additional drop in GDP on the national debt? Why has the risk premium on U. S. Treasury bonds seven-folded over the past year? Why has the World Bank warned just a few days ago that the global economy will contract (for the first time in 80 years--since 1929) 5% this year, with a 15% drop in industrial production?
    I don't believe these numbers, and I don't think Chairman Bernanke believes them, either. I believe these numbers are designed for public consumption. At the same time, I'm getting a faint scent of panic in the air... that the anxiety level among the congnoscenti might be far higher than most of us are aware. (Senator Arlen Specter's warning last Monday that, "
Our economic problems are enormously serious _ more serious than is publicly disclosed. And I think we're on the brink of a depression.'" "'Had there been no stimulus, I think we'd have gone right off the edge,' he said. 'I think we're pretty close to the edge anyway, to be very brutally blunt about it." comes to mind.) This is no more than a filmy premonition and it may be wrong. I'll be watching closely for other spoor.
    There are some excellent charts in the above article.
GDP

Job Losses

Change of Prices in Existing Single-Family

Stock Price Indexes

ConsumerConfidence.jpg

Retail

Change in Chain Type

Prices of Oil and Nonfuel

U.S. Dollar Nominal Exchange

    One factor to consider in assessing commodity prices is the exchange rate for the dollar. Since mid-2008, the dollar has appreciated by about 20% against a basket of other currencies. This has contributed a little to the falling price of commodities (denominated in dollars). The nosedive in commodity prices has far outpaced the 20% improvement in the dollar, but nonetheless, this has contributed about 20% to the lowering of commodity prices. 

2009-3-13:   The markets eked out another gain today. The NASDAQ increased 5.40 (0.38%) to 1,432. The Dow gained 53.92 points (0.75%) to 7,224, and the S&P 500 added 5.81 (0.77%) to end the day at 751. Oil closed at $46.05, while Gold added $6.10 to reach $930.10. The VIX rose 0.2 to 42.38.   
    One of the most significant news items today (March 13, 2009) was a public statement by Chinese Premier Biggest holder of U.S. debt. that China is "worried" about its investments in the United States and wants assurances that they are safe. (Is this  associated with the fact that the risk premium for U. S. Treasury bonds has seven-folded over the past year: U.S. sovereign-credit spreads jump?) China has invested $696 billion in U. S. Treasury bonds as of December 31, 2008. (China has $1.95 trillion in foreign reserves.) Another article explores the Limits to U.S. borrowing. To get an idea where the U. S. stands with regard to its national debt, the national debt at the moment I'm writing this (08:46:57 GNT--5:46 p. m., EDT-- on March 14, 2009) is $10,990,803,332,734.77... in other words, $11 trillion. This is approximately 77% of the estimated 2008 U. S. GDP of $14.58 trillion (CIA - The World Factbook -- United States). The highest ratio of national debt-to-GDP of which I'm aware occurred in 1946, when it reached about 1.2 (120% of GDP). Today, 120% of our $14.58 trillion GDP would be about $17.5 trillion, or about $6.5 trillion above where it is at this moment. However, the "recession" is reducing the GDP, so far by about 2% (about $300 billion), reducing our distance to the ceiling to $6.2 trillion: Not a Depression, but signs are grim. White House economic advisor Lawrence Summers gave a speech today in which he said,
US would need more borrowing if deflation sets in: Summers  "If deflation sets in, if the GDP (gross domestic product) collapses further, if the consequences of that collapse for the financial system and even just the insured parts of the financial system, if that happens, the magnitude of the federal borrowing as large as it is today will be dwarfed, will be far, far larger," he said at the Brookings Institution.

Q&A: How Today Is -- and Isn't -- Like the Great Depression

    In Overrun by the Bull?, Minyanite Bennett Sedacca says, "
I rarely watch financial TV shows, but I tuned in today, and one thing I've noticed today is the extreme bullishness about credit. This is very alarming to me." Since the first of this year, with all of the administration's new borrowing, combined with the drop in GDP, "credit market debt/GDP about to sail towards 400%. So much for deleveraging. In fact, the economy is getting more leveraged." "Once again, macro trumps technicals."
   

    Todd Harrison seems remarkably prescient to me in this address, Keynote Address From Vail: Minyanville, he gave on August 16, 2006.
    The article, Milestones in global crisis, affords a snapshot of the various stages of awareness of the gravity of this crisis that attended the onset of this economic storm.
    Another article, Global trade collapsing, quantifies the attenuation of global trade that has accompanied this economic crisis.
    The article, Silver's discount to gold sticks out like a sore thumb, gives reasons why silver is selling at an unusually low discount to gold right now.