Monday, January 5, 2009 Monday Market Commentary

Our proprietary Bloomberg video contrary market indicator is once again bearish:

Editor's video picks:
1. Clermont's Morgan says U.S. equities are 'very cheap';
2. Darda (MKM) says stimulus plan would be 'cushion' for economy;
3.'s Caldwell says U.S. auto sales near bottom;
4. Enderle says Apple needs a strong CEO succession plan.

Also, "Sorrentino sees opportunities in corporate bond market".
Only the CEO Spotlight is negative (Virgin Atlantic to shrink- though not really news)

Elsewhere on, two articles need criticism:

First, 'Banks' Catatonic Fear Means Consumers Don't Get TARP Relief':

Per former Fed vice chairman Alan Blinder:

“With the banks in a state of catatonic fear now, they’re just sitting on the capital,” Blinder said in an interview. “I don’t fault the banks one bit, since this shows Wall Street they’re safer, but then this doesn’t get you much improvement. If you’re taking money from the public purse, we should get something in return, and we’re really not.”

"Jeffrey Garten, a professor of international trade and finance at the Yale School of Management in New Haven, Connecticut, and a Commerce Department undersecretary during the Clinton administration, says banks should be forced to increase their lending or risk having taxpayer money taken away."

“The government isn’t acting aggressively enough to demand a quid pro quo,” Garten said. “The public good is the key to the private good in this case. It’s not the other way around.”

Blinder supported TARP. In Missing the Target with $700 Billion in a December 20 article in the New York Times, he bemoans Paulson's judgment.

Here is my judgment: this bill was a disaster from conception onward. Naturally, the $700 Billion wasn't enough for Congress. Congress conspired to have the House not pass it at first, so that it could go to the Senate which then "had" to attach it to a languishing spending bill, then send it back to the House where the purpose was changed, as Prof. Blinder very well knows, to allow stock purchase rather than asset purchase, and where the spending total was much above even $700 Billion. This is a Congress that was elected on anti-war fervor and disgust at earmarks and deficit spending, and provided to provide every war dollar that the Administration wanted, lied about implementing "paygo", and ignored its anti-earmark campaign rhetoric. For Blinder and other Establishment figures to whine about Paulson doing this and that is stomach-turning. What he/they should do is admit that the bill stank from day one and stank worse in its final form, that he/they were wrong to have supported any version of it, and that this amazing transfer of resources from the people to the powerful should stop pronto.

Perhaps the most sensible quote in the article comes from the most unsympathetic figure, the spokesperson for the banks:

Diane Casey-Landry, chief operating officer of the American Bankers Association, a trade group in Washington, said that bank profitability had to come ahead of any demand to ease lending.
“Taxpayers should get a return on their investment,” Casey-Landry said. “We have to go back to a time when we realize not everyone is entitled to get a loan. What is going to get us out of this recession is sound lending to people who are going to pay it back, not throwing money at people who can’t.”

The main criticism I have of Bloomberg is the title of the article. Banks are in no way catatonic. Catatonia is a psychotic state (to use outdated terminology). Banks are corrupt, stupid, and greedy, but they are not catatonic. They aren't lending because this is a terrible recession and credit-worthy people like me lend them money because we never believed in debt other than for a mortgage, and people unlike me are in over their heads. So while the article is a thorough one, the title provides the wrong message.

The other "big picture" article in about the economy is:

"Engines of Recovery Flame Out as Economy Seeks Obama-Fed Rescue"

The first paragraph is way too gloomy:

Jan. 5 (Bloomberg) -- The engines that have lifted the U.S. economy out of every recession since World War II will be of little help this time around.

Note the absolute tone. Then note the "may"'s in the follow-on paragraph:

Inventory rebuilding, household spending, home construction and payroll growth -- the forces that powered, to a greater or lesser extent, each recovery since 1945 -- may remain missing for much of 2009. A glut of unsold properties may keep housing depressed, while shriveled savings will discourage consumers. Companies may be reluctant to restock and rehire while their profits are squeezed.

Whenever you see this sort of writing, you should consider stopping reading. It's like the predictor of stocks a year out who can't possibly have a clue.

Finally, here's a current update from the best market economist, Nouriel Roubini of RGE Monitor (subscription), who "called" 2008 as if the script had been provided in advance. In a post today and one last week, he is unequivocal. Forget about recovery this year. In his view, it's happy talk. Worse, a month ago he was calling the chance of a long-term Japan-style flat-line economy following the downturn to be approx 10%. He has now upped this to 33%. When Roubini gets more gloomy, so do I.

Assuming he's right on trend (a good assumption for many months), anything economy-sensitive should not have your investment dollars.

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