Monday, May 4, 2009

Has Wall Street Lost Its Mind?

In good times such as the post-Cold War victory and rise of the Internet and bad times (collapse of the Internet bubble, accelerating financial and economic crisis H2 2008), things usually make some sense on Wall Street. From the micro to the macro, there is real discordance here.

Micro: DoctoRx recently has been traveling from one non-industrial glamorous area to another.
In Miami Beach, FL, the major street into town from the mainland is littered with closed storefronts. Armed break-ins of ground-level businesses have begun. The major remaining offices are medical and legal, 2 chain drug stores, a few fast food restaurants, and a bunch of banks of varied financial health. Hotel occupancy stinks. A friend in the business of providing entertainment for weddings, bar mitvahs and the like is experiencing Depression-like conditions. There is virtually no backlog, though presumably next year there will be weddings and mitzvahs.

Having arrived in Santa Barbara, where there has been no overbuilding and the city is the seat of county government and contains a mega-university and a large city college, along with the most beautiful real estate almost anywhere, DoctoRx embarked on a shopping spree at Macy's and Sears. The latter was virtually empty, representing a change from 6 months earlier.
Macy's had some service and some customers. Having purchased a bed, he enquired of the sales clerk whether the store was seeing any green shoots. The expectation was of some improvement or at least stabilization. The response was swift and negative. Business was said to be down the past two months, especially for big ticket items. Compared to six months, no doubt about it. Down.

On the macro level, consider the Fed's Feb.-April survey of loan conditions. Essentially no improvement was seen from an extraordinarily bad scene the prior quarter (Nov.-Jan.). This is terrible, considering all the money thrown at the credit system in that period. No green shoots there, as you can see:

In the April survey, the net percentages of respondents that reported having tightened their business lending policies over the previous three months, although continuing to be very elevated, edged down for the second consecutive survey. In contrast, somewhat larger net percentages of domestic banks than in the January survey reported having tightened credit standards on residential mortgages. The net percentage of domestic respondents that reported having tightened their lending policies on credit card loans remained about unchanged from the January survey, whereas the net percentage that reported having tightened their policies on other consumer loans fell. Respondents indicated that demand for loans from both businesses and households continued to weaken for nearly all types of loans over the survey period, an exception being demand for prime mortgages, a category of loans that registered an increase in demand for the first time since the survey began to track prime mortgages separately in April 2007.

In response to the special questions on the outlook for loan quality, a significant majority of banks reported that credit quality for all types of loans is likely to deteriorate over the year if the economy progresses according to consensus forecasts. In response to the special questions on international trade finance, the majority of domestic institutions that provide such credit and a substantial fraction of foreign institutions reported having tightened standards over the previous six months.

Next, Dr. Krugman gets into the "bad deflation" and "ell-shaped recession is hell" point of view in Falling Wage Syndrome. It's worth a read. The Economic Cycle Research Institute and other forecasters of the turn in the economy they foresee have to contend with the Krugman-Roubini point of view that the absence of a continued descent into a Great Depression 2 does not mean that this economic banana is soon turning into true good times.

Domestically, just as Mr. Obama has channeled Mr. Bush with his unending bailouts of the financial industry, Congress continues to appropriate "emergency" funds for the wars in Iraq and Pak-ghanistan. Give us a break! This was supposed to end when the White House changed hands . . . but, no. Unfortunately, Econblog Review foreshadowed much of this on a Dec. 31, 2008 post titled: "Ring in the Old".

Geopolitically, Iran has now bombed in Iraq and Pakistan continues to look fragile. For a good look at Pakistan, please see, a leading Pakistani English-language daily newspaper. Please see: Pakistan Is Facing Galloping Talibanisation: Ahmed Rashid.

Meanwhile, from a deeply oversold condition, the stock market is soaring, led by the bank stocks. Yet, there remains no leadership with fundamental strength. Gold is down but not out, and the same is true for Treasuries. MCD and WMT remain becalmed; AmEx is now trading at over 20X estimated 2010 earnings and about 4X tangible book value. The NASDAQ has gone up a near-record 8 straight weeks.

May you live in interesting times.

Copyright (C) Long Lake LLC 2009

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