Daily Investment Interpretations

March 30, 2009

2009-3-30:   Today, the markets fell further. The NASDAQ gave up 43.40 points (-2.81%) to close at 1,502, the Dow dwindled 254.16 (-3.27%) to 7,522, and the S&P 500 fell 28.41 (-3.48%) to close at 788. Oil shrank to $48.73, and gold dipped $7.60 to $917.70: Stronger dollar dulls gold. The VIX jumped 4.5 to 45.54.
    After reading the two articles just below, I've come down on the side of the bears. I think the analogy that fits is that of picking up pennies and nickels in front of a steamroller. Irrespective of what the market does from here, it would appear from the articles just below that the financial lobby continues to overpower the government, and that the intermediate-term-to-long-term outlook is for deeper distress, and ultimately, lower market indices.

3-30 (Afternoon):   Randoms: And You Wanted to Be a Trader!
    In this discourse, Todd Harrison reaffirms his warnings that what we've been experiencing is only a bear market rally.
    (I presume that brokerage houses have been raking in some badly needed commissions the last few weeks.)
    In his latest offering, he links to: The former IMF Chief Economist tells it like it is... and it ain't too purty
    In this linked article, Simon Johnson, former Chief Economist for the International Monetary Fund for 2007 and 2008, explains that in emerging market countries, there is usually a financial "power elite" who become overly ambitious and corrupt, who overreach, and who then turn to the IMF as the lender of last resort. (A current example would be Russia, which has  borrowed a lot of money on the strength of its oil revenues.) The IMF has learned the hard way to refuse aid to such a country until it becomes desperate enough to accept reforms in its financial systems against the wishes of the country's politically powerful ruling junta. Simon Johnson states that since President Reagan took office at the beginning of 1981, the U. S. has gone down this same road, and now, he says, the Obama Administration is too impotent to stand up to the financial lobby that is seeking to continue looting the country. He suggests a Depression 2.0 that's greater than the Great Depression. Like Paul Krugman in today's op-ed article, America the Tarnished, Simon Johnson sees us being in the same kind of grip of oligarchic control as failed third-world countries before they're desperate enough to take on their financial elites. The difference is that the "
U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.
    An alternative scenario
"goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment."
    Then, he says, we might be willing to change.
    He concludes,
he conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late."
Op-Ed: Bank CEOs Take Page from Madoff Playbook
    This is a rouser--a must-read! What the authors of this Minyanville article pull out from under a rock is the bait-and-switch that J. P. Morgan Chase CEO Jamie Dimon, Bank of America CEO Kenneth Lewis, and Citi CEO  Vikram Pandit worked on us gullible investors on the 10th, 11th, and 12th of this month (March). All three of these CEOs announced in 1-2-3 succession that they had had a profitable January and February, and that things were looking good for the quarter. This was received with some skepticism because mark-to-market write-downs should have led to major losses for the quarter. But basically, the extremely oversold market bought it, sparking the rally that we've just experienced. The article continues, "
So they offered up their self-serving nonsense regarding January and February, buying just enough time for Ben Bernanke and Congress to badger FASB (Financial Accounting Standards Board) into changing mark-to-market rules - and for Geithner to roll out his private-public partnership plan. Now whatever losses the banks can't hide with revised accounting treatments, they can simply fob off on taxpayers via the partnerships."
    The article explains that last Friday afternoon, CEOs James Dimon and Kenneth Lewis both said that that March had been a little tougher than the first two months. (I'd be surprised if the CEOs of these three companies weren't ingenious enough to find a way to clandestinely pile into bank stocks just before their March 10, 11, and 12 parade of profit announcements, and surreptitiously short bank stocks before last Friday's announcements.)
    The article concludes,
This is all of a piece. The longer policymakers (viz.: Fed Chairman Bernanke and Treasury Secretary Geithner) collude with CEOs to delay loss recognition, the more time they have to invest ridiculous leverage schemes (more money printing, more government borrowing to fund "stimulus", more FDIC "guarantees") to inflate those losses away - and to continue looting the public's wealth.
    "But losses aren't going away. Trading smaller, private liabilities for larger, public liabilities in order to artificially inflate asset prices does nothing to repair the economy's aggregate balance sheet. At the end of the day, we're still just lending more and more against a dwindling pool of real equity. The unwind is coming. Adding more leverage to delay it will only increase the pain.
    This is one of the more brazen scams I've read about. What's shocking is what it says not only about the banks and their chicanery, and about their collusion with our government officials, but what it also says to me about Mark Mobius, Barton Biggs, Sam Stovall, and a host of other financial gurus who have been flogging the notion that  this March, 2009, rally marks the beginning of a new cyclical bull market.
    A take-home message in the above two articles is that painting this debt elephant white probably isn't going to hide it very long. My bones are saying that there's a horrific economic train wreck lurking not terribly far ahead. 
    I've been wondering which camp would win out: the bulls or the bears? Short-term I don't know, but intermediate-to-long term, as of today, I feel more strongly than ever that it will be the bears.
    We've been lucky to be presented with such a cogent warning.
    Is it time to short the markets?
    I think we all need to remember that in April, 2008, David Walker, the Comptroller-General of the United States, resigned early from his post and joined the Peterson Foundation in order to warn the U. S. public (that's us) about the financial collapse that's looming dead ahead.
Explosion of optimism
    This article, by Mark Hulbert, discusses that fact that optimism among individual investors has rocketed upward over the two-week period that ensued, from 18.9% on March 9th, to 45.1% a week ago Friday. He states,
This is not what typically has happened at past major stock market lows, according to contrarians. On those occasions, in contrast to today, pessimism and despair were so widespread and so stubbornly held that the new bull markets' beginnings were met with a healthy dose of skepticism."
Jeff Saut: Bulls Get Corralled?

3-30 (Noon):   Here are three Minyanville articles:
Monday Morning Quarterback: As The World Turns! summarizes the conflicting currents in the weeks and months ahead.
An Even Bigger Bite Out of GDP? The author, former Merrill Lynch chief economist Jack Lavery, predicts an annualized drop in GDP of 7% or greater, to be reported in April, for this first quarter.
Prieur Perspective: A Bear-Market Correction? Dr Prieur du Plessis quotes Kevin Lane, technical analyst at Fusion IQ who states that the S&P 500 can still rally up to the 850-860 level, but that at that point, it would be time to take come money off the table to be reallocated when the market is lower. Prieur du Plessis suggests a 50% retracement of the market's March gains (which would take the S&P to 750)>
    Mark Mobius, executive chairman of Templeton Asset Management, has announced that the new bull market has begun.
    Barton Biggs, former chief global strategist for Morgan Stanley, predicted the S&P may jump by 30% (to 1,050-1,100) to 50% (1,200-1,250).
    Jaff Saut, at Raymond Jones, argues that the “odds are pretty good stocks have seen their lows".
    Richard Russell remains bearish.
    In the meantime, emerging markets (see below) have soared from their lows last November (but it might be worth considering the possibilities of increased protectionism).

Dr. du Plessis concludes, "
I believe stock markets are in a bottoming phase, but that this may take a while to play out. This isn't a juncture at which one should go all-out bullish or bearish. Taking 1 step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then, a clearer picture should also start emerging on the results of the Fed’s medicine, and whether credit markets are thawing and confidence is beginning to improve."

3-30 (Morning):   The markets didn't waste any time heeding my message, did they? (:-)
    Mark Hulbert mentioned two weeks ago that the market would probably re-test its March 6th intra-day low of S&P 500 = 667. Maybe this is the excuse it will need.
    Did I sell today what I recently bought, as I said I would below? No, actually I bought a little more Aluminum-Corporation-of-China shares, ACH, recommended last week by the Cabot's China and Emerging Markets Newsletter, because they've fallen below the $15 recommended price threshold. Also, the dab of QLD I own is more than offset by the QID I own. 
    News-driven market fluctuations tend to be ephemeral, but the temporarily overbought condition of the stock market (having had the third-highest monthly percentage rise in history), combined with the speed with which so many investors have embraced the new-bull-market story, suggests to me that this hiccup could possibly be an excuse for further market deterioration. But we'll see. 
    Here's an interesting article by 24/7's Doug McIntyre: Still bluffing on bankruptcy threat. 
    Paul Krugman's Monday morning op-ed piece is: America the Tarnished. In his column, Dr. Krugman cites a lecture that White House advisor Larry Summers gave in 2000 in which "
Mr. Summers pointed to things that the crisis countries lacked — and that, by implication, the United States had. These things included 'well-capitalized and supervised banks' and reliable, transparent corporate accounting. Oh well." And in his last paragraph, Dr. Krugman says,
The financial crisis has had many costs. And one of those costs is the damage to America’s reputation, an asset we’ve lost just when we, and the world, need it most."
    The crux of his article is that the world has got to recover collectively, and deficient as the U. S. answers to this financial crisis might be, they're still better than the European responses. Now, as the world's 20 leading financial countries head for the G20 summit, respect for U. S. financial solutions is needed as never before at a time when our financial system has just been revealed to be a Bernie-Madoff fraud.