USD Poised to Fall…

This graph is worth a 1000 words.  For the first time in 26 years the US, the US has incurred a budget deficit for the fiscal year by the 4th month of the year!  This is directly attributable to the fact that tax revenue have fallen drastically from a year ago.  A deficit is bad, but what does it mean?  This could be an indicator or precursor to the next phase in the commodity bull market, especially for precious metals.  The easiest (only?) way the US Government can finance the debt is to issue more short term Treasury Notes.  As demand for US Dollars around the world continues to fall because of oversupply, it is likely the USDX will be testing the lows seen in the .71 to .72 levels in 2008.

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Sources:
http://caseyresearch.com/images/Recession%20Hits%20the%20Treasury.jpg

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The Depth of the Current Bailout

Here is an eye-opening video I found on reason.tv that shows through comparison the true magnitude of the bailout that were are experiencing…

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Markets were a Lagging Indicator

It is common knowledge that the stock markets are generally good predictors of economic activitiy over the coming year.  They are termed as “Leading Indicators” of economic activity.  What is interesting is that this time around, the markets seemed to have been late to the party.  The Dow Jones Index as well as the BKX banking index  followed the housing bust…

The question that is left now is: Does a market rally mean that the housing market will be turning around, or will the markets continue to follow the path of the housing…

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Sources:
http://www.ritholtz.com/blog/2009/04/are-markets-leading-indicators/

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Beginning of a New Bull Market or Just a Dead Cat Bounce…

Well I rarely watch financial news anymore, but I was watching CNBC today while working out and Larry Kudlow was touting the recent 25% rally in the US’s major stock market indices indicates that we are likely ready for the new bull market…  I was not even close to being convinced by his argument.  So I decided to research just a bit this evening to see what I could dig up.  Here is a great chart from “bonddad” that shows some technicals of SPY (SPDR S&P 500 ETF).  From it you can see that it is has passed through some short term resistance levels, but the real test will be the 200 DMA around 1000 for the SPX.

In another article, I found an interesting analysis of the current rally by David Rosenberg.  He indicates that history leans towards the currently rally being a false indicator.

David Rosenberg, the soon-to-be former Economist for Merrill Lynch, had a very prescient commentary last week about the 25% four week rally on Friday:

As for this 25% rally in three weeks – the consensus has swung to the view that this is a real inflection point. One warning. We saw this happen in late 2001 and early 2002 too … big, big rally; early cyclicals flew; the markets thought we were in for a V-shaped recovery … it was longer away than many at the time believed and many were burnt as a result. And keep in mind that the ‘second derivative’ on growth began to improve in the fourth quarter of 2001, and the S&P 500 still did not bottom for another year.

Currently, the equity market is priced for $70 on earnings on a going-forward basis, or a 75% rebound. And with retailing stocks up 30%, leisure/accommodation up 35%, and the homebuilders up 40%, the market is priced, amazingly, for a revival that is led by the consumer! (in fact, the only S&P sector that is now trading at P/E multiples that are at post-2001 highs is the consumer cyclical group). If we see that in the next year, we will be the first to hang up our Hewlett Packards. Being up 25% in a year and staying bearish … well, shame.

Achieving that in less than a month – come on. Too flashy for our liking.

In fact, let’s learn from history. The only times we have ever seen the stock market surge close to this much in such a short time frame were:

* December 1929
* June 1931
* August 1932
* May 1933
* July 1938
* September 1982

Only in September 1982 and in May 1933 was the equity market embarking on a new bull phase. But guess what? By the time the S&P 500 surged 25%, it had already crossed above its 200-day moving average. So call us when the S&P 500 crosses the 1,000 mark – another 20% to go. That is how deeply entrenched this particular bear market has been – that even after this massive rally, the onus is still on the bulls! Consider as well that on 4 of the 6 occasions that the equity market staged such a huge rally over such a short time period, it relapsed. So we are going to wait this out, acknowledging that we could be late to the party. We still feel the downside risks are too high to be involved.

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Sources:
http://www.ritholtz.com/blog/2009/04/rally-too-flashy-for-our-liking/
http://bonddad.blogspot.com/2009/04/market-mondays-is-this-real-rally_06.html

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Closer to a Housing Bottom?

Below is an interesting chart from Calculated Risk that shows the correlation of New Home Sales vs Recessionary periods.  From a technical analysis standpoint, it looks like we are near long term resistance at te 400k mark.  Although, from a fundamental standpoint, the credit markets are still shaky.  All of the federal incentives for first time homebuyers may help put a bottom in (at least a temporary one) this year.

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Federal Debt Held by Foreign & International Investors

This stuff is crazy.  These numbers represent the amount of US debt held by foreign investors.  You can see over the past 8 years the number has tripled!  This pattern cannot hold forever or the US Dollar will collapse.  This is evidence that supports all those that are bullish on gold and ther commodities and hard assets.  Note, these numbers are published by the US Department of Treasury!

2001-06-30  1000.5
2001-09-30  1005.5
2001-12-31  1051.2
2002-03-31  1067.1
2002-06-30  1135.4
2002-09-30  1200.8
2002-12-31  1246.8
2003-03-31  1286.3
2003-06-30  1382.8
2003-09-30  1454.2
2003-12-31  1533.0
2004-03-31  1677.1
2004-06-30  1739.6
2004-09-30  1798.7
2004-12-31  1853.4
2005-03-31  1956.3
2005-06-30  1879.6
2005-09-30  1930.6
2005-12-31  2036.0
2006-03-31  2084.5
2006-06-30  1979.8
2006-09-30  2027.3
2006-12-31  2105.0
2007-03-31  2196.7
2007-06-30  2193.9
2007-09-30  2237.2
2007-12-31  2352.9
2008-03-31  2507.5
2008-06-30  2634.2
2008-09-30  2848.2
2008-12-31  3125.0

Note: These numbers are in billions, so as of Q4 2008 the US has $3.125 Trillion in outstanding foreign debt!

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Sources:
http://research.stlouisfed.org/fred2/data/FDHBFIN.txt

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Should We Nationalize Banks? Sorry, already happened…

The big debate right now is whether or not we should “nationalize” banks…but, in my opinion it has already happened.  A quick look at bailout numbers over the past 7 or 8 months courtesy of New York Times running tally:

These numbers do not even include the $500B+ in note guarantees to keep US banks solvent. There truly is a lot of money on the line and without it, our banking system would have collapsed already. The fact that the government had to step in and invest money in non-performing assets to to keep them solvent pretty much defines “nationalization” to me. I am not making a judgment on whether this is the right or wrong decision, because I am not an economist, but I do believe we should label things as they are.

Instead of calling what has been done up to this point in time “nationalization”, it is called something different by the US Government (credit Barry Ritholtz):

…why don’t we call it by a more accurate, precise, and less scary name: FDIC mandated, pre-packaged Chapter 11, government funded reorganization.

That is an accurate description of what occurred with Washington Mutual (WAMU) now part of JPM Chase, and Wachovia, now part of Wells Fargo. The Feds step in, seamlessly transfer control of the assets to a new owner, while simultaneously wiping out the debt, the shareholders, and giving a huge haircut to the bondholders.

Let’s look at each of these in turn:

• FDIC mandated: What does that mean? Well, by law, the FDIC is required to handle the liquidation or reorgs of insolvent banking institutions. We have prevented that normal process thru the application of trillions of dollars in bailout monies;

• pre-packaged The entire process is mapped out in advance so as to make it fast and seamless. WAMU depositors did not notice a single change over the weekend their FDIC mandated, pre-packaged Chapter 11 workout, government funded reorganizatio occured. The only observable difference was that WAMU customers were no longer charged an ATM fee when they went to Chase ATMs, as it was now the same company;

• Chapter 11 The full bankruptcy protection applies — meaning employees still get paid, secured creditors do not suffer, and debtor in possession financing (DiP) is available to the bank;

• government funded The source of the DiP funding;

• reorganization Just what it sounds like — new board of directors, management transitions out to a new team, recaptalized, bad debt taken off of the books, toxic assets spun out.

What emerges is a clean bank, no debt, well capitalized, and free of deadly toxic assets. You can see why so many people would find this state of affairs utterly objectionable.

In all seriousness, I understand the objection by shareholders — already down 90% — who would be wiped out by this. I fail to see the merit in the save-the-banks-at-any-cost arguments so many are proferring and preferring.

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Sources:
http://projects.nytimes.com/creditcrisis/recipients/table
http://www.ritholtz.com/blog/2009/02/nationalization-the-new-n-word/

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The World's Worst Investment

Well, the US Government has not been know to be the best fiscal operator and they have proven the same in the world of investing by claiming the world’s worst investment last year, which is about to get worse (possibly).  Barry Ritholtz summarized the losses and status of the investment to date, check it out below:

Losers double down.

That’s the classic trading rule which the USA is about to violate in an enormous way. According to trading maven Dennis Gartman, one should “never, ever, ever, under any circumstance, add to a losing position.”

And yet that is what we are about to do.

To review: Former Treasury Secretary Hank Paulson made a terrible investment on behalf of the taxpayers by purchasing a 7.8% stake in Citigroup (C) for an initial $25 billion dollars. He further put the US on the hook by guaranteeing against 90% of future losses on $301 billion in assets. Subsequently, we (the taxpayers) injected another $20 billion dollars.

At the time, Citigroup had a market cap of about ~$50 billion dollars. Today, its worth ~$13 billion.

So for about 100% of the market value of Citi, plus insurance guarantees worth of as much as 500% of its value (~$275 billion), we got less than 1/10 of a company that in total was worth 1/5 of our investment.

Pretty good deal, eh?

That $45 billion dollar stake now has a market value of just over a billion.

And, its about to get even worse.

Rather than do what is the FDIC-mandated-by-law thing, we will instead convert the nearly worthless common into preferred shares. The taxpayers stake will rise to near 40% of Citigroup.

NYT:

“Under the terms of the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock. It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said.”

What does this do for us? Well, the higher investment stake creates an enormous incentive for John Q. Public to continue to pour money into Citi, regardless of valuation. The inept banking giant then has access to infinite amount of capital, courtesy of you, the 1040 filers.

Its just another example of why these insolvent banks should be nationalized, or for you squeemish free marketers, FDIC mandated, pre-packaged Chapter 11, government funded reorganization.

If Obama continues to listen to the god-awful advice of Larry Summers and Tim Geithner, he will doom his presidency, and finsh marginally ahead of George W. Bush on the list of worst presidents.

This is not change we an believe in . . .

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Sources:
http://www.ritholtz.com/blog/2009/02/worlds-worst-investment-to-get-worse/

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Layoff Comparison and Jumbo Loan Defaults

According to the US Bureau of Labor Statistics (BLS), this recession has far surpassed the amount of layoffs seen in the tech bubble by over 50%.  The positive note that I am seeing from this chart is that if the current layoff pattern follows the previous pattern, then we could be near the worst of the layoff hit.  The major difference with this recession though is the huge drop in consumer spending and deflation of real estate markets.  The continued pressure from lack of spending may lead to more layoffs in the coming months, it’s hard to say.

Another chart from the Wall Street Journal that I found interesting is this one below.  First the mortgage default problem started with Subprime loans, then moved to Adjustable-rate.  Now the Jumbo loan market default rate (generally $750+) is starting to trend upward as layoffs are affecting higher paid execs as well as business owners.

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State of the Economy Update

One of my hobbies has been attempting to forecast the future of the economy from a macroeconomic perspective, and I am fairly decent at it.  The problem with macro-economic analysis is that it is not easily actionable unless you have large amounts of money to invest in multi or international investments or hedges.  So, for the most part, nearly all of the time I have spent reading and analyzing has been un-actionable (i.e. a waste of my time).  After reading the 4HWW, I am going to continue with this hobby, but I am going to apply Pareto’s principle to it and only do the least amount of research required to still make an effective “guess” on the state of the economy.  For whatever reason, doing economic research and attempting to forecast what is coming makes me feel slightly more in control of my destiny…  I am working on the elimination stage of things to better streamline my life.  Many things in my life need to be eliminated, although some hobbies can become useful later, and I hope this one may, so I’ll keep it in a limited capacity.  So here is my latest update from my minimal research this morning.

US Economy – The positives

1. Crude Oil Futures have fallen to below $46, this has slackened the inflation felt by the average consumer considerably
2. Mortgage rates have fallen to 3 year lows (near 5.5%) and have caused mortgage refinance applications to soar relative to last year
3. $7+ Trillion bailout has a good chance of preventing the US from going into a deflationary recessions reminiscent of the Great Depression

The Negatives

1. Unemployment hit 6.7% last month and total jobs lost last month was 533,000
2. Foreclosure rates hit 10% of outstanding mortgage applications
3. $7+ Trillion monetary expansion has a dangerous possibility of creating a stagflationary, or hyper-inflationary recession

My Analyis

1. A spike in unemployment is my biggest concern here as I posted about 2 months ago
   • The likelihood of seeing rising unsecured debt defaulting increases significantly
2. Selective allocation of bailout money by the government may not produce the intended consequences
   • Is the government the right entity to decide which sectors of our economy “deserve” to be bailed out, or should the market determine who fails and who prospers?
3. Housing inventories are still high, and many still backwards on their mortgages, I don’t think we are quite out of the woods yet in the housing market…
4. The dollar (USDX) has been trading extremely high on the futures market in the $86 – $88 range over the past two months.  My opinion is that this is unsustainable, and we will likely see a drop in the value of the dollar in 2009.

Final Thoughts

Unfortunately, I think we still have further to correct before things get better.  I am not basing this on the “value” of the the Dow or S&P indices either.  Keep in mind, historically speaking, that the stock market generally bottoms about a year before the economy recovers, but sometimes longer.  In my opinion, the two key factors to watch are the Unemployment rate, and the USDX.  I believe the fundamentals for my long term recommendations are still solid despite my porfolio getting destroyed in the past 6 months.  I remain bullish in precious metals and the Chinese economy in general, and bearish the US Real estate market and US Dollar in the medium term.  Precious metals and Chinese stocks have comprised about 80% of my paper asset porfolio for the past 3 years (which is not worth much for full disclosure, lol).  I am pretty much done with paper assets for the time being, but I still will track the accuracy of my analysis as a hobby.  As we successfully build businesses, I hope to be able to apply better analysis to determining what business models will be successful, so we can some day venture into areas that provide a better information advantage for the investor.  In our case, I think it would be fun to explore Angel Investing as well as Real Estate when we get some capital to play with in the future.

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