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CNBC Broadcast: Financial Markets Manipulated By Washington?

(Hat tip, Signs Of The Times):

From CNBC feed out of Chicago this past Monday (2 minutes in):

SecretsOfTraders.com’s Larry Levin: This market continues to be propped-up by government intervention, and manipulation, and, unfortunately, as that continues to happen, I think this market can go higher. The government’s been doing a good job of keeping it that way no matter what the real underlying current is, unfortunately…

You’re gonna have to… right on Obama and his staff as basically trying to prop this market up on a daily basis. They’re doing a good job…

But it really is a situation where, every single day, we have some kind of backstop from the government. I mean, these markets are not free markets anymore. You know, this whole year has been absolutely ridiculous…

CNBC’s Rick Santelli: Well, I think Larry’s doing a darn good job. I tend to agree with most of what he’s saying…

Survivalists No Longer On The Fringe

Some time ago, I learned about a work of fiction that dealt with survival during a full-scale socioeconomic collapse… in America. Intrigued, I picked up James Wesley, Rawles’ Patriots: A Novel of Survival in the Coming Collapse last weekend. Some of you may have already heard of Rawles, who is also the editor of SurvivalBlog.com, the Internet’s most popular blog on family preparedness. I’m still working on the book (about to begin Chapter 20), but if asked what I thought about it so far, I would say “frightening.” So much so, that the day after I began reading the book, I sat around thinking to myself, if the kind of scenario which Rawles conjures up ever materializes, we are screwed. With a capital S. What scenario is that, you might ask? From the back cover:

America faces a full-scale socioeconomic collapse in the near future. The stock market plummets, hyperinflation cripples commerce and the mounting crisis passes the tipping point. Practically overnight, the fragile chains of supply and high-technology infrastructure fall, and wholesale rioting and looting grip every major city.

Not much of a stretch, considering the “progress” we’ve already made in bringing about something like this.

Even though the book is scary, it’s also gripping, hard to put down, and incredibly-detailed, especially when it comes to survival equipment and techniques.

Speaking of survivalists, I came across a piece by the Arizona Republic’s Ryan Randazzo that you might find interesting (hat tip Michael Panzner at When Giants Fall). Randazzo wrote Tuesday:

As the recession lingers, some Phoenix-area residents are shifting attention from their financial troubles, including falling home values and shrinking retirement savings, to stockpiling food and ammo.

They worry the economic turmoil could lead to skyrocketing inflation, food scarcity, even violence. To prepare, they are forming social-networking groups to discuss how to store grains, purify water, plant gardens and, if needed, shoot guns.

“Most of us feel that if things do get better, it will be a long way out,” said Jeff Rodriguez, a 26-year-old software engineer from Glendale. “I want to have some preparations in place.”

The economy has him thinking a lot more about things like where his food comes from, how much cheap oil is left in the world and how people in the blazing-hot Valley would survive a major economic failure.

He has carefully prepared a 12-row, 384-square-foot garden, stores a ton and a half of grain in his home, and is considering buying pygmy goats or chickens.

He also has researched solar electricity and a rainwater-collection system.

He is far from alone. Rodriguez belongs to a local network of like-minded people who include retirees, young mothers and successful professionals.

These people are joining thousands nationwide who are studying survival tactics far from the backwoods bunkers associated with “survivalists.”

At least two survival-related groups have formed in since December, and groups with varying outlooks and politics have sprouted nationally from Kentucky to New York.

Of course, it’s not unheard of for mainstream groups to prepare for emergencies. The Mormon Church, which reports 13.5 million members worldwide, has long counseled self-sufficiency and encourages families to keep a prudent supply of food on hand.

Disasters such as hurricanes and 9/11, and even perceived troubles like the Y2K bug, always increase interest in survivalism. The men behind the counters at U.S. Surplus Corp. in Phoenix see a crush of new customers every time tragedy strikes.

The newbies stand out from the military personnel and outdoor enthusiasts who stop in for rugged clothing, rations or canteens.

“They are the ones trying to fix up a cave to live in,” store manager Gary Pickering said. “They are asking a lot of questions and buying things they normally wouldn’t, like water purification tablets.”

Sales at the store haven’t slid with the rest of the economy, officials said. Preparing for a disaster makes sense only if people actually know how to use the equipment they are buying, said Cody Lundin, who runs a survival-skills school in Prescott and authored two books on the subject.

He says people should learn to care for themselves in case of emergency whether a disaster is pending or the economy is tanking.

Last year was among the best ever for his school, although it’s not always clear what motivates people to sign up.

“I’m seeing an influx of people simply calling to inquire what I think about stuff,” Lundin said. “They are probing the waters because they are getting freaked out.”

Professional counselor Rita Archambault said her East Valley clinic is treating more people with anxiety over the economy.

“I have not seen so much concern about the economy in my entire life,” she said.

If planting a garden, raising poultry or stockpiling ammunition makes people feel better about their situation, good for them, she said.

“If you are not hurting anybody and you are reducing your anxiety, what harm is there?” Archambault said.

The only danger is if people get so obsessed that they neglect their job or family, she said.

It’s not surprising that many of the people preparing for tough times are educated professionals, said Heidi Wayment, a social-psychology professor at Northern Arizona University who has researched disasters and anxiety.

“To understand the huge potential crisis that could come from economic collapse, you have to be educated,” Wayment said. “I wouldn’t say these people are crazy – far from it.”

Source:

“Survivalism grows popular in Valley”
Ryan Randazzo
Arizona Republic, June 23, 2009

Too Much Hopium?

If Washington, in its regulatory mood these days, wants to clamp down on something, it might want to take a good look at Hopium.

You’d be tempted to think the U.S. financial system and markets were back to “normal” after listening to what some had to say to the financial media today.

From Bloomberg’s Jeff Kearns:

“The market has run out of fantastic reasons to sell,” said Stephen Wood, who helps manage $136 billion as chief market strategist for North America at Russell Investments in New York. “Those Armageddon, Great Depression, worst-case scenarios being priced in a few months ago are now a low probability, and the recovery reflects that.”

“We think we’re in a recovery stage and there’s a lot of government support for growth,” said Hayes Miller, who helps manage $33 billion at Baring Asset Management Inc. in Boston. “When summer is over and we all come back in the fall we’re going to be seeing some positive economic news.”

Positive, or less-worse news? And from CNBC:

Federal Reserve Chairman Ben Bernanke deserves to be reappointed, because he did a great job in saving the US banking system from collapsing, Jack Welch, author of “Winning” and “Straight from the Gut,” told CNBC Thursday.

“I think he saved the system, I think he’s a national hero,” Welch said. “I think Bernanke seems to be a guy operating on a clear intellectual framework. This guy’s done a hell of a good job.”

“Abracadabra!”
Source: Inner City Press

I’m not so sure I’d like to watch a baseball game with Mr. Welch. He’d be calling the outcome of the game while it was still in the early innings.

Sources:

“U.S. Stocks Gain as Data Boosts Optimism Economy Is Recovering”
Jeff Kearns
Bloomberg, June 18, 2009

“Reappoint Bernanke, He’s a ‘National Hero’: Welch”
CNBC, June 18, 2009

Congress Scrutinized For Potential Conflicts-Of-Interest

Washington lawmakers are receiving more attention these days for possible conflicts-of-interest relating to the taxpayer bailouts and the proposed health care system overhaul. From the Washington Post’s Paul Kane and Carol D. Leonnig last week:

Top House lawmakers had considerable holdings in major financial institutions that took billions of dollars in taxpayer bailouts at the end of last year, according to annual financial disclosure reports released yesterday.

From stock holdings to retirement funds to mortgages, more than 20 House leaders and members of the House Financial Services Committee had large personal stakes in the Wall Street powerhouses whose collapse last year led to an unprecedented government intervention in the marketplace. In some instances those lawmakers, like millions of other investors, sold their holdings at steep losses while others retained the stocks at greatly diminished value.

House Speaker Nancy Pelosi (D-Calif.) and her husband lost hundreds of thousands of dollars investing in American International Group, which has received $170 billion in government loans and cash injections, making it by far the largest recipient of federal bailout dollars. Republican Whip Eric Cantor (R-Va.) and his wife held stock, retirement plans and other investments worth at least $183,000 and as much as $495,000 in firms benefiting from federal government rescue efforts, including Goldman Sachs and Morgan Stanley.

At least 18 members of the House Financial Services Committee — which oversees the banking and housing industries at the core of the economic meltdown — held stock last year in firms that received federal bailout assistance, according to a review of the forms that were available yesterday.

As President Obama pushes his universal health care program, more potential conflicts-of-interest involving lawmakers have surfaced. From the Associated Press’ Larry Margasak and Sharon Theimer last Friday:

Influential senators working to overhaul the nation’s health care system have investments and family ties with some of the biggest names in the industry. The wife of Sen. Chris Dodd, the lawmaker in charge of writing the Senate’s bill, sits on the boards of four health care companies.

Members of both parties have industry connections, including Democrats Jay Rockefeller and Tom Harkin, in addition to Dodd, and Republicans Tom Coburn, Judd Gregg, John Kyl and Orrin Hatch, financial reports showed Friday.

Jackie Clegg Dodd, wife of the Connecticut Democrat, is on the boards of Javelin Pharmaceuticals Inc., Cardiome Pharma Corp., Brookdale Senior Living and Pear Tree Pharmaceuticals…

Other publicly available documents show Mrs. Dodd last year was one of the most highly compensated non-employee members of the Javelin Pharmaceuticals Inc. board, on which she has served since 2004. She earned $32,000 in fees and $109,587 in stock option awards last year, according to the company’s SEC filings.

Mrs. Dodd earned $79,063 in fees from Cardiome in its last fiscal year, while Brookdale Senior Living gave her $122,231 in stock awards in 2008, their SEC filings show. She earned no income from her post as a director for Pear Tree Pharmaceuticals but holds up to $15,000 in stock in Pear Tree, which describes itself as a development-stage pharmaceutical company focused on the needs of aging women.

Sources:

“Lawmakers Invested in Bailed-Out Firms”
Paul Kane, Carol D. Leonnig
Washington Post, June 11, 2009

“Key health care senators have industry ties”
Larry Margasak, Sharon Theimer
Associated Press, June 12, 2009

Roubini, Shiller, Whitney: No Economic, Housing Recovery Just Yet

Green shoots, or deceptive weeds? From Reuters this morning:

A rebound in key U.S. economic indicators masks an underlying malaise that will likely hamstring growth for many years and keep housing and banks in a rut, several top economists said Monday.

Nouriel Roubini, president of RGE Monitor, said a recovery in risk assets like stocks and emerging markets would not last, since it had been based on unrealistic expectations for a global economic rebound.

“I see subpar, anemic, below-trend growth for the next couple of years,” Roubini said on a panel sponsored by Time Warner.

Housing expert and MIT Professor Robert Shiller was equally pessimistic, saying, with regards to the four-year housing downturn: “This thing is not over yet.”

Banking analyst Meredith Whitney said she was even more bearish than her fellow panelists, saying that better bank earnings would eventually be challenged by the toxic assets on their balance sheets.

Wonder if there’ll be more “money manure” coming from Washington down the road…

Source:

“More Pain Ahead For US Economy: Roubini, Shiller”
Reuters, June 15, 2009

Foreign Investors Growing Tired Of American Assets?

The month of April saw waning demand for American assets by overseas investors. From Bloomberg’s Vincent Del Giudice this morning:

International purchases of American financial assets grew more slowly in April as China, Japan and Russia pared demand for Treasuries, underscoring the danger of U.S. reliance on foreigners to finance its fiscal deficit.

Total net purchases of long-term equities, notes and bonds rose a net $11.2 billion, compared with buying of $55.4 billion in March, the Treasury said today in Washington. International holdings of Treasuries increased a net $41.9 billion, compared with the $55.3 billion gain in March. Including bills, the holdings fell a net $2.6 billion…

Including short-term securities such as stock swaps, foreigners sold a net $53.2 billion of U.S. financial assets, compared with net buying of $25 billion the previous month…

Foreign investments in U.S. agency debt slumped for the eighth time in 10 months, by $2.5 billion in April. Net purchases of American equities slowed to $4.6 billion in April from $13.2 billion the prior month. Holdings of corporate bonds tumbled a net $9.7 billion, the biggest decline since November.

China, the largest holder of U.S. Treasury securities, cut back their holdings to $763.5 billion in April from $767.9 billion in March. Japan, the second largest holder of Treasuries, reduced theirs to $685.9 billion from $686.7 billion a month earlier. China’s holdings of Treasuries represent about 10% of America’s publicly-held debt.

Bloomberg’s Del Giudice noted:

Waning demand for Treasuries may exacerbate a jump in yields that threatens to make it harder for the U.S. to pull out of its deepest recession in at least half a century. Yields on benchmark 10-year notes have climbed more than 1 percentage point since mid-March, contributing to an increase in mortgage rates that’s counteracting Fed efforts to aid the housing market.

Source:

“International Demand for U.S. Assets Slowed in April (Update3)”
Vincent Del Giudice
Bloomberg, June 15, 2009

Boom2Bust Turns Two Years Old

Memorial Day Weekend 2007. Sure seems like yesterday….

Friday, May 25, 2007.

The Dow Jones Industrial Average closed out the week at 13,507.28. The S&P 500 index finished up at 1,515.73.

The median house price is $222,700, according to the National Association of Realtors.

Family net worth is at an all-time high of $64.36 trillion for the quarter.

The number of unemployed persons is 6.8 million and the unemployment rate is 4.5 percent.

Total public debt outstanding in the United States is $8.8 trillion.

Talk of the “Goldilocks economy” rules the day, and Washington and Wall Street are in “don’t worry, be happy” mode.

Federal Reserve chairman Ben Bernanke doesn’t believe the nation will slip into a recession, and he rejects the notion raised by his predecessor, Alan Greenspan, that the economy’s expansion could be in danger of fizzling out…

The Fed chief testified on Capitol Hill amid growing concerns that problems with risky mortgages and a painful housing slump could send the economy into a tailspin. Greenspan recently said there’s a one-in-three possibility of a recession this year.

But Bernanke — while acknowledging there are risks — told Congress’s Joint Economic Committee that the Fed does not see such negative forces pushing the economy into a recession.

“I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end,” Bernanke said. “I don’t think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long.”

-Associated Press, March 29, 2007

…a new SUV in every McMansion’s garage

Fast forward to today…

The Dow Jones Industrial Average closed at 8,473.49. The S&P 500 index finished up at 910.33.

The median house price in the first quarter of 2009 is now $169,000, according to the National Association of Realtors.

Banks and businesses worldwide have lost $1.47 trillion in write-downs and credit losses in the past 22 months stemming from the collapse of the subprime-mortgage market.

Household net worth dropped a record 9 percent in the fourth quarter of 2008, pushing total net worth down to $51.48 trillion. It was the sixth straight quarterly decline from the peak of $64.4 trillion in the second quarter of 2007. Also, the drop in net worth in the fourth quarter of 2008 was the largest drop in dollar terms on record, going back to 1951, when the U.S. government began keeping quarterly records. The 9 percent drop was also the largest drop as a percentage change on record.

In April (the last month data is available for), the number of unemployed Americans reached 13.7 million persons and the unemployment rate was 8.9 percent. According to the Bureau of Labor Statistics, 5.7 million jobs have been lost since the recession began in December 2007.

The total public debt outstanding in the United States is now $11.3 trillion. Furthermore, as Bloomberg’s Mark Pittman and Bob Ivry pointed out on March 31:

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Goldilocks made a fine meal for the bears.

But I’m convinced our fuzzy friends still want more.

Thank you all for reading and contributing comments to Boom2Bust.com, and for inspiring me to post about some of the financial research I come across on a daily basis.

Personally, I think that while we may get out of this recession soon enough, I fear all the additional obligations accrued since 2007 will only have made the house of cards that is the U.S. financial system weaker, thereby setting ourselves up for more pain when the eventual crash comes.

You can only kick the can down the road for so long before you have to call it a day.

Year three, here we come!

Christopher E. Hill
Editor

‘Fear Gauge’ Returns To Pre-Banking Crisis Levels

The VIX, a measure of market volatility that some associate with investor confidence, has returned to levels not seen since before the collapse of Lehman Brothers last fall. From MarketWatch’s Nick Godt this afternoon:

The Chicago Board Options Exchange’s volatility index, otherwise known as the market’s fear gauge, has slumped to levels unseen since before the collapse of Lehman Brothers…

On Tuesday, the VIX (VIX 28.61, -1.63, -5.39%) slumped 3% to 29.33, a level last seen in early September 2008, just days before Lehman Brothers shut down. The announcement had sent the VIX sharply higher, a move up that continued through December…

According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October, as panic gripped markets worldwide. From 2003 to July 2007, readings below 20 were the norm.

Steven Sears wrote on Barron’s website today that a related volatility index had also pulled back. Sears pointed out:

VIX’s big brother — Realized Volatility — who almost no one but the options insiders mention because he complicates the investor-sentiment conversation — has been edging lower and lower. Implied volatility — essentially a view of the future — is influenced by what happens in the past, which is realized volatility. Like VIX, realized volatility has steadily declined since October, making it possible for implied volatility to decline, too.

So, will we soon be seeing big money returning to Wall Street? Maybe not. Sears added:

Volatility analysis is very complicated. The genius of VIX is that it expresses something very complicated into a simple number that anyone can understand.

But investors need to fight the urge to view VIX as the ultimate red or green light in the investment world…

One of the least understood parts of VIX is that it only offers a 30-day snapshot of expected volatility, which is a lot different than a flashing neon sign of oversimplified investor sentiment.

Sources:

“Is lack of fear such a good thing for stocks?”
Nick Godt
MarketWatch, May 19, 2009

“Don’t Get Euphoric About a Falling VIX”
Steven M. Sears
Barrons.com, May 19, 2009

Robert Prechter Sees Stock Plunge, Deflationary Depression

If Marc Faber’s prediction that the U.S. government will go bust didn’t start your weekend off on a positive note, how about Robert Prechter’s forecast that U.S. stocks will plummet in advance of a deflationary depression? From Reuters (UK) yesterday:

Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that’s akin to the Great Depression, he said.

The U.S. S&P 500 stock index’s rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

“It’s not the start of a new bull market,” said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. “Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932,” he told Reuters in a wide ranging interview. “It’s a very rare event,” he added.

“I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety,” he said.

As in his 2002 book “Conquer the Crash,” which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills…

“Deflation is coming, it’s going to lead to a depression. We’re not at the bottom yet,” Prechter said. “I think we are going to have bouts of deflation separated by recoveries.”

Source:

“Stocks still face deflationary collapse: Prechter”
Haitham Haddadin, Ellis Mnyandu, and John Parry
Reuters (UK), May 14, 2009

NYSE CEO Says Traders Behind Stock Market Rally

Those of you pinning your hopes on the recent Wall Street rally to resurrect the value of your stock portfolio might end up being disappointed. From CNBC staff today:

Wall Street’s stunning six-week rally has been fed more by traders looking to take advantage of quick swings in the market than investors with a long-term view, NYSE Euronext CEO Duncan Niederauer told CNBC.

Because of that, the rally likely is to run out of steam as low volume eventually comes back to the bite the market, he said.

“It feels to me we’re in a trader’s market and not an investor’s market,” Niederauer said in a live interview from the exchange floor.

Markets are likely to near their March lows after an upswing that has sent the major indexes more than 20 percent higher, he said.

“The volume in March hasn’t convinced me that it’s the kind of volume that you need to see to believe it was the real beginning of a turnaround,” he said. “Instincts tell me we’re going to retrace one more time and the rally I believe is the summer rally.”

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Niederauer believes that investors are sitting out this rally. From the piece:

“I think the real-money investors are still watching because I don’t think the fundamentals are in place yet where the people feel like they can do good fundamental homework,” Niederauer said. “So the feeling I’ve got talking to a lot of investors is they’re still watching and waiting.”

Niederauer called the current rally “too much, too soon,” and said investor confidence remains fragile.

“There’s no doubt that a lot of the … equity investing attitudes have been damaged and I think it remains to be seen whether that damage is irreparable,” he said. “They’re certainly not just going to come running back.”

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Source:

“Traders, Not Investors, Fueling This Stock Rally: NYSE Chief”
CNBC, April 17, 2009

Jim Cramer Says Depression Over, Expects New Bull Market

Have you heard the latest prediction from CNBC television personality and best-selling author Jim Cramer? From Jeff Poor of the Alexandria, VA-based Business & Media Institute last week:

It came and went – and some might not have even noticed it – despite the seriousness of its use. On April 2, CNBC’s Jim Cramer proclaimed the Depression over.

Throughout that day, the “Mad Money” host told viewers of MSNBC’s “Morning Joe,” CNBC’s “Street Signs” and finally on his own program that the Depression was over and that we were on the verge of a bull run for the financial markets.

“We have reached the land of a thousand bull dances – phoney maroney, why? Because the market swallowed its Prozac,” Cramer said on CNBC’s “Mad Money” April 2. “And right now, right here on this show – I am announcing the Depression over!”

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Poor pointed out that the former hedge fund manager credits rhetoric from U.S. President Barack Obama for the predicted turnaround in the economy and financial markets. From the piece:

“And then today, we got the second big positive – President Obama praised, what did he praise? The stock market! This is a total 180 from his position a few months ago. You got to admire a president who can change his mind, especially after eight years of George W. Bush’s laissez-faire philosophy – that almost led rapacious late-stage capitalism to devour itself.”

Cramer attributed his new bullishness to a change in Obama’s rhetoric from proredistribution to pro-stock market.

“The Depression is over and now we have a president who has gone from bear-in-chief to bull-in-chief, and that’s why we now like him,” Cramer said. “He’s change his genus, if not his phylum. We keep ours and now Obama knows if he kills your 401(k), IRA and 529 plan, he can’t make it up by taking some money from the rich and just giving everybody a G or two.”

Eveblast.tv Video Link

Time will tell, right folks? I’m still waiting to see if Jim Cramer’s prediction that the U.S. housing market will reach a bottom by June 30, 2009, pans out. Although, I must admit, I’m somewhat skeptical about Cramer’s abilities as a financial prophet. Reason being? Who remembers this classic? Back on July 30, 2008, Cramer said:

I am indeed sticking my neck out right here, right now, declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15, and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside… Stop waiting, buy the next dip because I think it might be the last big one.

For the record, the Dow Jones Industrial Average closed at 10,962.54 and the S&P 500 at 1,214.91 back on July 15, 2008.

Today (April 6, 2009), the Dow stood at 7,975.85 and the S&P 500 at 835.48 at the end of the trading day.

Source:

“Cramer Declares End of ‘Depression’; Credits Obama’s Rhetoric, not Actions”
Jeff Poor
Business & Media Institute, April 3, 2009

Friday Freebie: The “A-Letter”

I love free stuff. And I bet a lot of you do as well. Which is why I’m starting a new series called “Friday Freebie,” where every so often I’ll introduce you to some free, yet possibly useful, finds of mine related to topics covered in this blog, starting with this post.

One of my favorite free newsletters that I like to read on a regular basis is the “A-Letter” that’s published by The Sovereign Society. The “A-Letter” is their “free offshore financial e-newsletter containing late breaking news, commentary and ground breaking advice about everything effecting the ‘offshore world’ delivered straight to your email inbox, six times per week.” Anyway, I thought the April 1 edition of the “A-Letter” was a real keeper— and thought-provoking. Here’s an excerpt from that issue:

2009 seems to be working out to be the “year of the fool” judging from headlines like…

 The Social Security Surplus is already gone…fini…no more. “Expected” to last through 2017, thanks to rosy estimates from the bean-counters in Washington, the surplus was annihilated in last year’s stock market crash…meaning the U.S. government will likely need to raise hundreds of billions more in Treasury sales in the coming years…aside from the trillions already scheduled, of course.

 Apparently dissatisfied with only causing the biggest bankruptcy in recorded history, a former Lehman Exec decided to gamble with 44 million American pensions. Former Lehman Managing Director Charles Millard – acting as head of the Pension Benefit Guarantee Corp. (PBGC, the federal government’s safety net for pensions) – boldly moved a substantial portion of the PBGC’s funds out of “boring” bonds and into promising stocks…all in hopes of avoiding a future government bailout. Unfortunately, he started this plan mid last-year, and his picks were already down by 23% at the end of September ‘08. Oh yeah, and he was almost a trillion in deficit when he started.

 Obama says Detroit Bankruptcy Restructuring is “inevitable,” after the latest round of media back-and-forth that pushed Waggoner out the door with a US$20 Million+ retirement package. I can’t tell you how glad I am that we gave these yahoos US$17 Billion last year just to stall the bankruptcy process for a few months. What a great investment that was.

 And on a similar note (wink wink) “The administration of President Obama is suffering very, very strong pressure from sectors affected by the U.S. economic recession,” (ed.: *cough* UAW *cough*) “and that is preventing it from acting correctly,” said Mexican President Felipe Calderon in a recent interview. A look at the list of Obama’s biggest campaign contributors suggests that Felipe was right on. Change? Well, I suppose changing from a neo-conservative puppet of an oil-man to a “bought and & paid for” cog in the Chicago machine does count as “change.”

 And just when you thought hypocrisy couldn’t possibly raise itself to new heights in Washington, President Obama nominated yet another tax dodger to his cabinet in Kathleen Sebelius, his nominee to Health and & Human Services. She owes US$7,000 in total due to some “unintentional mistakes.” Funny thing is, when I make an “unintentional mistake” on my returns, I tend to get whacked with fees, calls and threats from the IRS. Good thing she’s a member of the “Washington Club.”

 Housing Prices are Falling Faster than any other time on record, at least according to Case Shiller’s highly reliable statistics. The 20-city average decline hit 19% in January, muffling any speculation of a bottom forming in the housing market.

 Banks are Refusing to Take Ownership of Properties at the End of the Foreclosure Process in cities all across America, because the cost of the process is higher than the rapidly-declining value of the underlying real estate. But homeowners aren’t off the hook…they’re still obligated to take care of their mortgage and handle any maintenance and repairs that occur in the months after they vacate due to foreclosure.

 Commercial Real Estate Lenders are hesitating to push borrowers into bankruptcy for reasons ranging from misguided optimism to the harsh reality of having to write those debts off. As evidenced by companies like General Growth Properties and Centro, CRE borrowers are staving off bankruptcy for much longer than they would in any other situation. Apparently wishful thinking still qualifies as a business plan in some circles.

 And now the OECD is pleading the EU to begin Quantitative Easing, aka “printing money and throwing it at the problem.” Germany’s so far been vehemently against the idea, for reasons including the problems Eric highlighted with QE in the EU.

So…Which One was the Joke?

Could you figure it out? Which one of the above was a joke?

Well…you’re right. None of them were; they’re all real. I suppose that’s the joke…albeit a very morbid and existentialist joke. But hey, I work with what I’ve got.

And what’s worse; following this crisis as it unfolds on a daily basis, watching every blip of news and trying to decipher what it means for you and I – I’m starting to feel like the joke’s on us.

Us the taxpayers…us the voters. Even us the dollar holders, because the “inflation tax” that will surely follow Washington’s blundering bailouts will bushwhack the value of everyone’s dollars…no matter whether you’re American, Mexican, pink, purple, green or some lily-livered presidentially-appointed tax-cheat.

Hey, who said there was no such thing as a free lunch?

Source:

“In 2009, Every Day is April Fool’s Day!”
“A-Letter” Newsletter
Matt Collins
Sovereign Society, April 1, 2009

Recession Almost Over? Show Me The Evidence

Here’s a cheery headline making the rounds today:

“New signs emerge that recession may be near bottom”

Too bad the “evidence” put forth in the accompanying article isn’t exactly what I’d call compelling. The Associated Press’ Christopher S. Rugaber wrote today:

New signs that the recession could be nearing a bottom emerged Thursday, as factory orders were far better than expected and the Dow industrials surged over 8,000 for the first time in two months.

The Commerce Department said orders for manufactured goods rose 1.8 percent in February, reversing six straight monthly declines and easily beating estimates of another drop. Other economic indicators came in better than expected Wednesday, including construction spending and pending home sales.

The Associated Press piece suggested the recession could be near a bottom based on “far better than expected” factory orders that were up 1.8% in February from the previous month. Pulling up Commerce Department data for orders of manufactured goods from the beginning of this recession (December 2007) reveals that since that time, orders for manufactured goods were up a total of 7 out of 15 months for which data is available for. Factory order levels even went on a tear and went up month-over-month from March through July of last year. In fact, February’s reading of 1.8% was surpassed back in December 2007 and June 2008, which saw increases of 1.9% and 2.1%, respectively.

All of this during the ongoing recession.

Based on these findings, I find it hard to argue that a one-month increase in factory orders means we’re near a bottom.

The AP piece also suggests we could be nearing a bottom based on surging stock prices. Long-time readers of this weblog might remember something I wrote back on October 14, 2007:

Wall Street As An Economic Barometer

The Wall Street Journal’s Economics Blog caught up with Merrill Lynch economist David Rosenberg back on October 2 as he examined the effects of Federal Reserve interest rate cuts on the U.S. stock market. Rosenberg found that the stock market always rises in the first month after an initial interest-rate cut, and the average increase is almost 4%. It’s interesting to note that since the federal funds rate cut back on September 18, the Dow Jones Industrial Average and the S&P 500 are up 2.6% and 2.8%, respectively.

Rosenberg also looked at whether or not recessions happen while the stock market is booming. In looking at the 1990-91 recession, he saw that the S&P 500 peaked on July 16, 1990, after rising 3.4% over the previous month. The recession also happened to start that July. Looking back further, Rosenberg studied the recession of the early 1980s and found that the stock market peaked on February 13, 1980, even though a recession had started the month before.

As Rosenberg’s findings demonstrate, surging stock prices don’t exactly correlate with a robust economy. Stock indexes may even peak— just as the economy starts to nosedive.

Once again, the Dow Industrials heading over 8,000 for the first time in two months isn’t a convincing argument that we’re about to see an economic turnaround.

Rugaber also threw in two more indicators for which I had problems seeing a correlation. He wrote:

Other economic indicators came in better than expected Wednesday, including construction spending and pending home sales.

Take a look at the following chart for U.S. construction spending from the beginning of the recession:

Source: New York Times

As you can see, monthly construction spending actually improved month-over-month in March, May, August, and September of last year. And still, recession. I’d be hesitant to declare a bottom is near from one month of “better than expected” construction spending data.

Finally, we come to pending home sales. From an AP colleague of Rugaber’s, Alan Zibel, on Wednesday:

An index that tracks signed contracts to purchase previously occupied homes rose in February from a record low a month earlier as buyers took advantage of deeply discounted prices and low interest rates.

The National Association of Realtors said Wednesday said its seasonally adjusted index of pending sales for previously occupied homes rose 2.1 percent — in line with expectations — to 82.1 in February from January’s record low of 80.4.

Typically there is a one- to two-month lag between a contract and a done deal, so the index is a barometer for future home sales.

However, Zibel dispelled the notion of a U.S. housing market recovery taking place anytime soon when he wrote:

Prices, however, are expected to keep falling for at least another year. Tens of thousands of homes are tied up in the foreclosure process and not yet for sale. Plus, as the recession deepens and job losses mount, many buyers are likely to stay on the sidelines.

The Realtors estimate that 45 percent of existing home sales are now foreclosures and other distressed properties.

Pending home sales up? Yep, but almost half are being sold at deep discounts. Not exactly the sign of a healthy real estate market, or offering hope for a consumer spending rebound, if you ask me.

Folks, I hate recessions as much as the next guy. But if you’re going to tell me we’re coming close to a bottom, you darn well better have better evidence than this.

And before I forget, Rugaber also wrote the following in a separate piece today:

Fresh signs that factories are coming back to life and a bank CEO’s encouraging outlook fueled more hopes Thursday that the economy may soon emerge from the cellar, briefly lifting the Dow Jones industrials over 8,000 for the first time in two months…

Bank of America CEO Ken Lewis also bolstered the financial markets when he told CNBC that the recession is “getting close to the bottom.”

You remember Ken Lewis, don’t you? Back on June 21, 2007, I wrote on Boom2Bust.com:

In an interview with Bloomberg on Tuesday, Bank of America’s Chief Executive Officer Kenneth Lewis said the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to say that the housing market will begin to improve in the next month or two, forestalling a recession, according to Bloomberg. Lewis believes that job growth will lift home prices and reinvigorate construction by early 2008.

That was summer 2007. A year later, on July 21, 2008, I wrote:

This morning, I read a piece by Marshall Eckblad of the Dow Jones Newswires on the CNN Money website. Bank of America Corp. Chief Executive Ken Lewis shared his outlook on the U.S. economy and housing market earlier today, after which Eckblad wrote:

Chief Executive Ken Lewis said Monday that the U.S. economy would see “sluggishness” through the rest of 2008 but eventually would stabilize this year and then begin its recovery in the early part of next year. Lewis made the comments during a conference call with analysts to explain the bank’s second-quarter earnings results…

Lewis said one component of those optimistic forecasts is his projection that the peak of the housing crisis is growing closer. “We see housing price depreciation being mostly over this year, maybe going into next year,” Lewis said.

I’ll leave you all with the following excerpt from that July 2008 post:

The Wall Street Journal’s Mark Gongloff pointed out yesterday that some individuals keep calling for a turnaround in the economy, housing market, what have you, only to be proven wrong time and time again. Gongloff said:

Like Chicago Cubs fans always looking to the next season, there are analysts who have been calling for a turnaround for months despite evidence to the contrary, yelling their hearts out for what so far has been a losing cause.

According to their theory, this has all been a fever dream, a midcycle slowdown like the one the economy suffered in 1998, when stocks briefly swooned, but the technology bubble quickly went right back to inflating. This is the same crowd who dismissed the collapse of the housing market because it’s just a small part of gross domestic product and who said the subprime mortgage meltdown would be no big deal.

And now, $400 billion in losses and one bear market later, they’re still calling for the rosy outcome…

Sources:

“New signs emerge that recession may be near bottom”
Christopher S. Rugaber
Associated Press, April 2, 2009

“US Factory Orders-STATS-Historical, New Orders”
FXStreet.com, April 2, 2009

“Pending home rise 2.1 percent in Feb. from Jan.”
Alan Zibel
Associated Press, April 1, 2009

“More signs of economic hope; grim jobs report due”
Christopher S. Rugaber
Associated Press, April 2, 2009

How Main Street Is Coping With The Economy

This afternoon I happened to catch an interesting video on the MarketWatch website in which reporter Stacey Delo and her colleagues talk to people on Main Street all over America, and how they’ve been dealing with falling asset prices and an economy in recession.

The segment is 4 minutes and 4 seconds long.

“Postcards from the Stock Crash”
MarketWatch Video Link

Source:

“Postcards from the Stock Crash”
Stacey Delo
MarketWatch, March 24, 2009